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Protecting Your Estate from Taxes and Creditors
You have worked a lifetime to build up your estate. Naturally, upon your death, you want to make sure that the
people who are important to you keep as much of your money as possible. Yet income taxes, estate
administration taxes, capital gain taxes and creditors can all eat away at the proceeds.
Thankfully, there are some effective ways to protect your assets and plan your estate.
Protecting RRSPs
To protect the money in your Registered Retirement Savings Plan (RRSP), name a beneficiary directly on the plan.
There are multiple advantages to doing so.
If you name a beneficiary on the plan, the money from your RRSP flows directly to that person and cannot
be touched by creditors. This is a fairly recent decision of the Ontario court and might yet be appealed at
the Supreme Court level. For now, however, naming a beneficiary ensures your RRSP funds are secure from creditors.
A second advantage to naming a beneficiary to your RRSP is that Estate Administration Taxes are then not applied
to any money inside the plan.
Lastly, if you designate your spouse as the beneficiary of your plan, the money from your RRSP can flow directly
into their RRSP (as a spousal plan) and thus remain free from income tax until the time that they remove it.
This is often called a “spousal rollover.” In this case, “spouse” refers to either an opposite-sex or same-sex
partner from a marriage or common law relationship. Common law status is accorded to two people who have lived
together in a conjugal relationship for a minimum period of one year.
If you do not name a beneficiary to your plan, the money in your RRSP flows to your estate and is not protected
from creditors. Estate administration and income taxes will also be applied.
Protecting Life Insurance Proceeds
As with an RRSP, the way to protect the proceeds of a life insurance policy from your creditors after your death
is to name a beneficiary.
If you name a beneficiary, the insurance proceeds are paid directly to that person and cannot be accessed by
creditors, nor do estate administration taxes apply.
If you do not name a beneficiary, the insurance proceeds are paid to your estate where creditors have access
to them and estate administration taxes apply. Income taxes, generally, do not apply to insurance policy proceeds.
Protecting Personal Property
When you die, the Income Tax Act deems that all your capital property, including items such as your home and your
stock portfolio, was disposed of the day before you died. The executor of your estate must file a T1 or “terminal”
return to report the capital gains on these deemed dispositions. Your estate is then taxed on 50% of those capital
gains, less 50% of any capital losses that may be available to your estate to offset those gains.
One way to limit the exposure of your capital property to capital gains tax is to leave the capital property
to your spouse. (Again, “spouse” refers to either an opposite-sex or same-sex partner from a marriage or common
law relationship.) If you leave your assets to your spouse, all capital gains taxes may be deferred. Your
spouse receives the capital property at your adjusted cost base. The surviving spouse pays capital gains
tax when they sell or otherwise dispose of the property, or by their estate upon their death.
Another way to reduce your estate’s taxes is to use the principal residence exemption. When you die, your principal
residence is exempt from any capital gains tax. If you have more than one residence – for example, you own both a
home in the city and a cottage – you will want to designate the residence with the most capital gains as your primary
residence. This will help keep the capital gains tax you pay on real estate to a minimum.
Estate Protection Tips
- Who you name as the beneficiary on your plans or in your will can have a dramatic effect on the taxes your estate must pay. I can help you strategically select the right beneficiaries and maximize your estate proceeds.
- Find out who is currently named as the beneficiary to your RRSPs and insurance policies. Many people are surprised to discover that either no one is named, or someone they named long ago – and who is no longer appropriate – is still the beneficiary.
- Review your RRSPs and insurance policies periodically to make sure the beneficiaries are kept up to date and reflect your current wishes.
- Always designate the beneficiary directly to your RRSPs and insurance policies, and keep proof of this designation in your records. Making the designation on the plan itself guarantees a smooth and undisputed transfer of funds to the beneficiary.
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