Avoiding taxes or minimizing their impact on your estate is an essential part of comprehensive estate planning. Compared with other provinces, Ontario has a particularly high estate administration tax. However, there are strategies that a lawyer can help you implement in order to minimize your estate’s tax burden.
First, it is important to understand that the estate tax is calculated based on the total value of the estate at the time of death. The taxable assets could include bank accounts, business assets, vehicles, stocks, real estate and other investments. It is therefore necessary to obtain an accurate estate valuation.
Important tax-related note about real estate: a person’s principal residence is considered to be sold when the owner dies, and there is no income tax on the sale; however, Ontario considers the residence to be part of the estate and thus applies the estate tax to the property.
Depending on the circumstances, it may be possible to keep the principal residence out of the estate by establishing joint ownership, but it is best to speak with a lawyer before implementing this strategy, as there are risks involved.
If the deceased purchased life insurance, then it will also be taxed unless a family member or friend has been designated as a beneficiary. Naming a life insurance beneficiary effectively removes the insurance from the estate upon the death of the policyholder, so the insurance is not covered by the estate tax.
Setting up a trust is another way of minimizing an estate’s tax burden. For more on the rights and obligations of trust beneficiaries and trustees, please see Hagel Lawfirm‘s overview of trust administration.