not contemplating the significant tax burden that may accrue on an asset over many years of ownership

This point may sound too obvious to even mention but it is a “miss” in a lot of estate planning. Lurking among some people’s assets may be a building or even a business that was bought or started 40 or 50 years ago. Sometimes the only discussion about it, even with the advisor, is that when the first spouse dies, the taxes will be deferred until the death of the last spouse to die. If no further thought is given to it until the person’s death (or the last spouse’s death), the tax bill can be staggering.

This can throw off the plan for a couple of reasons. First and most simply, since the tax wasn’t properly considered, the person’s estate can wind up leaving far less to the beneficiaries than he or she had planned. Second, if the idea is to pass on the asset rather than sell it, a provision in the will directing that to happen may not be possible if the estate is not able to pay the taxes from other estate funds. In that scenario, the asset would need to be sold to cover the taxes.

This point provides a perfect segue into the next one, which is . . .

giving assets to specific beneficiaries and being unclear about who pays the related taxes

In the prior point, we mentioned that sometimes people just don’t think about the taxes that may be payable on an asset that has gone up in value. An additional problem arises if the asset is specified in the will as going to a particular beneficiary and the tax treatment (i.e., who will be responsible to pay the tax?) is not clear.

For example, if a farming couple has two significant assets, their homestead property and a registered retirement savings plan, both assets will most likely have a tax bill associated with them when the last spouse dies. Who is to pay that tax? What will be left “net” to each child after the taxes? How is the RRSP going to be directed to the child who will receive it—through the will or by a direct designation on the plan? The answers to these questions and others will determine if the two children are treated equally or not by their parent’s will.

The solution is not to get out the calculator and the Income Tax Act when you and your advisor sit down to prepare your will. Between the date of your will and your death, chances are good that the Tax Act will change, in terms of both its application of tax and also the available exemptions, and so will the value of the assets. Far better to have your will drafted in a way that ensures equality of the beneficiaries on an after-tax basis, assuming equality is your intention. Your intention may not be equality on a value basis; your intention may simply be that you want certain beneficiaries to receive specific assets. Great. You still need to address the basic question of who is going to be responsible for the tax.

There is no right answer because it all depends on what you are trying to achieve. If you want a certain niece to get a parcel of land she has always loved and that is her entire gift, then likely your desired approach is that the estate pays any capital gains tax arising on the land rather than make your niece responsible for the tax owing before she can receive the gift. On the other hand, if your goal is to attain an equal (value-wise) distribution among a group of beneficiaries, such as your children, then your advisor may recommend dividing the entire “residue” equally among that group. If one of the beneficiaries really wants a particular asset in the estate, then that can be arranged on a fair market value but in a way that ensures that equal distribution takes place.

Your advisor will have solutions for any issue that you raise or distribution that you want to discuss; our point is to make sure that these issues are raised and discussed.

missing the available planning techniques that defer taxation until the last spouse dies

Leaving everything you own to your spouse or partner is the most common estate plan going and lines up nicely with the law’s requirement that people look after people who depend on them financially. Further, and perhaps most important, you can take advantage of a tax deferral that is available in Canada, often called a spousal rollover, which allows you to roll your assets to your spouse and defer the payment of tax on those assets until your spouse’s death.

However, for one reason or another, sometimes a will leaves an asset to someone other than the deceased’s spouse and the result is that the taxes on the asset end up being paid earlier than need be. If this is being done with full intention and awareness of the tax consequences, that is fine, but usually when this happens in an estate, everyone involved suspects that it was a mistake.

The most common occurrence of this is when a parent leaves his or her registered retirement savings plan (RRSP) to an adult child instead of to the surviving spouse. This can be done by naming the child directly as the plan’s beneficiary on the plan itself, or by a separate clause in the will. Either way, because the RRSP is not being rolled over to a surviving spouse, the taxes payable arise at the first spouse’s death rather than the last spouse’s death. As well, unless the will says otherwise, the tax on the RRSPs is payable by the estate and this may leave the surviving spouse strapped for cash at a time when he or she needs money the most.

Not all assets have a lurking tax bill waiting to be paid. For example, if you leave an adult child a gift of $10,000 in cash or your fishing equipment, no tax would be payable. On cash, you have already paid the tax, and most personal effects do not appreciate significantly after we buy them.

The point is, be good and sure that you don’t leave someone who isn’t your spouse an asset that will create a premature tax bill in the estate. If you do want to do this, at least do it knowing the tax consequences.

not addressing foreign ownership or foreign citizenship of the person preparing the will, a beneficiary or a beneficiary’s spouse

When speaking to estate lawyers and tax accountants, we heard about these problems a lot! Somehow the foreign citizenship of a person preparing a will or the foreign citizenship of a beneficiary can get glossed over in the estate-planning process, so that the relevant planning for these factors is neglected. Or, perhaps even more commonly, Canadians buy foreign real estate with the same approach as they buy Canadian real estate (with a casual purchase and sale agreement, maybe a mortgage), not realizing that professional advice is required on how to best hold the property from a tax and will-planning perspective.

As one chartered accountant put it, people buy and sell Canadian real estate all the time and don’t think too much about how they do it or the tax impact of it. But when it comes to buying real estate outside of Canada, the stakes are higher, and before you buy foreign property you really need to get professional advice on how to do it.

Buying foreign property, particularly real estate, means that you will be affected by the tax regime of not one country but two: as Canadian residents, we are assessed tax on our “worldwide income,” but the country where we own the property may also tax us due to our ownership of property within their borders.

For example, the estate taxes applicable to American citizens and to citizens of other countries who own American property are both complicated and constantly evolving. But although we most often think about foreign property ownership as the homes owned by Canadian snowbirds from Florida to California, advisors spoke often about the diversity of Canadians’ foreign property ownership. Whether the property is in Naples, Florida or Paris the advice is the same: run—don’t walk—to an advisor with cross-border experience to determine if:

• the way you are holding the property makes sense;

• your will adequately addresses the treatment of the foreign property at your death; and

• your will needs to be reviewed by a lawyer in the foreign country.

The last point about the will being reviewed by a lawyer in the country where the property is located can be extremely important. It is important to understand the other country’s laws on matters such as who can inherit and in what manner, how a valid will is prepared, witnessed and signed, and who can be an executor. A clear understanding of these concepts helps to ensure the desired distribution of your property in that country upon your death.

Trust officers spoke to us about having the experience of sending good, solid Canadian wills over to other countries where the deceased person had owned property, only to be told that the will or its contents were invalid. Roadblocks like that in an estate administration can cost the estate months of time and thousands of dollars in legal fees.

points to take away

• Start with a clear idea of your goals (equality; certain assets to certain people; sufficient cash in the estate to pay the tax) and then be sure your estate lawyer knows your goals and is fully aware of all of your assets, how their ownership is held by you and where the assets are located.

• If you or your loved ones are foreign citizens, just because you are also a Canadian resident will likely not change the impact of the foreign country’s laws on your estate. Start with your own advisor and consider the involvement of a lawyer in the other country as well.

• The method of ownership of foreign property is critical. The most important times to get advice are when the property is being bought and when the will is being prepared. If you purchase foreign property without advice and own it in your own name, in joint tenancy, in a corporation or in a trust, you may end up needing to unravel the method of ownership at the time you prepare your will when the tax implications are reviewed.