How to minimize tax on the estate

I’ve never met anyone who desires to pay more tax than they need.  During tax time we think about marginal tax rates and the tax we pay year to year on our income.  Tax season is a time when we think about tax planning and tax preparation.

One of the areas around tax that we do not think about enough is the area of tax and estate planning.  How much tax will we have to pay when we die?  Actually we don’t have to pay any tax because we are not here but your executor will have to file a final tax return for your estate.

Part of estate planning is know how the estate is taxed and how to minimize the taxes.  Here are a bunch if quick ideas on how to minimize the tax on the estate.

Die broke

The big joke in estate planning it to die broke . . . bounce the cheque to the funeral home.  It’s a joke because it rarely happens.  As much as some may desire to die broke, the reality is we can’t because we never know when we are going to die and our greatest fear in life is to be broke and still be living.

As much as it is a joke, it would be a good strategy to pay little to no tax at death.  No RRSPs, no rental properties, no recreational properties, no investments . . . just nothing.

A couple of practical strategies around the idea of dying broke are spending money while you are alive and also giving money to beneficiaries with a warm hand and not a cold one.

Always have a spouse

The advantage of having a spouse at death is there are provisions to have many of the assets transferred to your spouse without tax.  Having a spouse does not eliminate tax but it defers the tax into the future.  The definition of a spouse has broadened to include common law as well as same sex couples.  Some strategies include putting your spouse as a joint owner of assets including investments and property.  Rolling over the RRSPs to your spouse is also an effective tax deferral strategy.

Joint title

When assets are held in joint title with rights of survivorship, the assets goes to the surviving owners and does not form part of the estate which can save money in probate fees.  Joint ownership with a spouse, can also be very powerful form of tax deferral.  Joint ownership with kids and people other than spouses can be very problematic so it’s important to be careful.  Here’s two common examples:

Using trusts

Many people don’t know much about trusts because they can be intimidating, technical and complicated.  Don’t worry because there is really nothing to fear.  Trusts, as a legal concept, have been around for hundreds of years, and are well understood by experienced Will, estate, and trust lawyers.  Many textbooks have been written about all aspects of trusts, but here is the briefest of introductions to the concept – Understanding the power of trusts.  Trusts can be a powerful way to reduce taxes on the estate.

Put all your money in 4 things:

There are few things in Canada that are not taxed.  That being said, there are 4 things in Canada that are tax free to the estate so if you want to minimize tax on the estate, put all your money into these assets.

  1. Tax Free Saving Account (TFSA)
  2. Principle residence
  3. Life insurance
  4. Cash

Charitable giving

Giving money to a charity not only makes people feel good about social contributions but it can also help to reduce the amount of tax you pay.  Since the estate has to pay tax as well, giving money to a charity can also minimize taxes at death.  Here are some articles for more details:

Do you have other ideas on how to minimize taxes on the estate?

 

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

One Response to How to minimize tax on the estate

  1. I have to admit that I don’t think enough about estate tax planning. Then again, at the moment, I don’t have much of an “estate”. 😀 But as I do grow my estate, this is something to keep in mind, and not just at tax time! Thanks for sharing!

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