You’ve worked hard – and probably most of your lifetime – to accumulate as much wealth as possible. Whether your nest egg is big or small, there are strategies every Canadian can use to make sure their wealth passes smoothly and tax-effectively to their heirs. Here are three of the smartest ways to do so.
1. There’s cash in your cottage
The most common appreciating asset is the family cottage or vacation property. For many older Canadians, owning a cottage comes with huge maintenance expenses which may drain one’s cash flow. The equity tied up in this property could be put to better use to fund retirement, take a lifelong dream vacation or indulge in a hobby or recreational activity. By transferring the family cottage to your next of kin during your lifetime, you’ll free up time and money. And doing so will shift all future gains into their hands. Since the cottage will not form part of your estate when you pass away, probate fees will not be charged on the value of the property after your death. (Note that probate fees do not apply in the province of Quebec.) However, selling the cottage now to your children does mean that tax will be due on any appreciation in value to this point – unless you claim the principal residence exemption to shelter you from the tax on this gain.
2. Beneficiary designation
Another strategy is naming a beneficiary on registered assets such as your Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) and Registered Pension Plan (RPP). If the beneficiary is a “qualified beneficiary,” meaning a spouse, common-law partner, or a financially dependent child or grandchild who is dependent due to physical or mental incapacity, then the proceeds can pass tax-free to the beneficiary. Your loved ones will avoid a big tax bill on the value of your RRSP or RRIF upon your death.
3. Maximize the value of your company
For business owners, you can maximize the value of your company when it passes to your children or grandchildren by employing the following strategies • Make full use of your lifetime capital gains exemption: $813,600 in 2015 which equates to a $406,800 lifetime capital gains deduction • Consider an estate freeze: a strategy which allows to you to retain control over your business while freezing the value of your interest in the company, so you can pass the future growth on to the next generation • Consider purchasing life insurance within the company to fund a future tax liability in your estate, or to buy out the shares of the deceased key person of your business. The business can then carry on without claims from the estate of the deceased Remember, it’s not how much money you make that counts but what you do with it. The bottom line is, leave your assets where they belong: in the hands of your heirs.
Emerita Mercado, CFP, TEP specializes in trust and estate planning issues. She helps clients protect their assets by setting up family holding companies, private foundations and family trusts as a means of intergenerational wealth transfers. Emerita also collaborates with families and executives to create dynamic total wealth management solutions.
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.