When a person dies, his or her debts must be paid before any estate assets are passed on to a spouse or heirs. Common debts that must be settled are funeral expenses, taxes on Registered Retirement Savings Plans, taxes on capital gains and the estate administration tax, which in Ontario is about 1.5 per cent of the estate’s value.
There are ways, though, to limit your family’s tax and other financial burdens after your death. For example, if you take steps to plan and prepay your funeral, the cost will already be accounted for, and your family won’t have to make funeral-related decisions.
Naming a beneficiary to your life insurance policy is another cost-effective way of transferring wealth to loved ones. The value of the policy is not considered part of the estate, so the money can be transferred outside of the probate process. That means the money is not calculated for the estate administration tax.
Establishing joint ownership of an asset — a home, for example, — can also help limit the estate’s exposure to probate fees. A joint owner can generally receive the asset automatically after the other joint owner’s death. However, before you establish joint ownership, it is important to understand the possible drawbacks.
For example, if your adult child owns half of one of your assets, then creditors could still seek to claim the asset if your adult child declares bankruptcy or otherwise encounters financial difficulties. Likewise, if your adult child gets divorced, then the other spouse may try to claim part of the asset that you own jointly with your child. Their may be tax implication on the transfer.
If you’re wondering how to develop a specific strategy for protecting your estate now and in the future, then speak with an inheritance planning lawyer. Dorothy Hagel, of Hagel Lawfirm, provides inheritance planning and estate planning services to clients throughout the GTA area.