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Successor holder and/or Beneficiary
August 7, 2017
6:02 pm
Bill
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JenE, sounds ok but without even getting into potential pitfalls plus the concept of giving a friend financial advice that results in her taking out a line of credit not for her benefit (she'll be gone when EAT need to be paid by the estate) but for her kids, if she has (say) $50K of TFSA contribution room I'd think pretty hard about whether it's worth involving myself for the $250 (not counting line of credit costs) or so probate fee savings? (Just me though, I avoid involving myself in any way in another capable adult's financial affairs.)

August 7, 2017
6:09 pm
Cranston
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JenE said
Thanks Loonie and Bill.
I've come up with an idea for an elderly friend of mine (honest!), who wants to leave her home jointly to her two children who live with her. She doesn't have any savings but if she gets a line of credit on her home to buy TFSAs, names her children as beneficiaries, then she should pay less Estate Admin Tax as the encumbrance will be deducted from the value of the estate? Is this correct, and legal?  

Good idea. Who is paying off the line of credit? Friend or children? From what funds? And what would be the interest amount to be paid. So if the estate value minus liabilities is subject to probate fees.....what is the average rate of probate fees in your province? Assume the house is NOT part of probate then what else is subject to probate? Also one could assume contents of house were given to children before death. So that leaves what other assets subject to probate fees.

August 7, 2017
6:10 pm
Norman1
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JenE said

I've come up with an idea for an elderly friend of mine (honest!), who wants to leave her home jointly to her two children who live with her. She doesn't have any savings but if she gets a line of credit on her home to buy TFSAs, names her children as beneficiaries, then she should pay less Estate Admin Tax as the encumbrance will be deducted from the value of the estate? Is this correct, and legal?

Ontario estate administration tax is no more than 1.5%. Unless she dies very soon after, she may end up paying more in interest on the line of credit than she would save in Ontario estate administration tax. sf-frown

It is even worst in Québec where there's no probate needed on notarial wills or Alberta where the probate tax is capped at $400.

August 7, 2017
8:09 pm
Loonie
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I don't think it's a good idea.
The savings would not be that great in the scheme of things.
In addition, setting up a secured line of credit (you said "on the house") involves legal fees and what-not that might offset any savings, and also are a hassle to carry out, constitutes a lien on the property, something else that has to be discharged after she dies or moves (more fees). And if she's unhappy in the end because of these and possibly other unforeseen concerns, you will get blamed. Who needs it? Tell her to consult a lawyer who specializes in estate planning. If that's too difficult or expensive, do nothing. The kids will be getting an almost-free house. Let them pay for a lawyer to advise the best way to allow for necessary fees to be paid without selling the house. If they can't or won't pay for it, they aren't going to be able to pay to maintain it anyway.
Elderly people need to keep things as simple as possible, and easy for them to understand.

Other options: she could downsize and put the savings into TFSA; she could put her children on title (not something I'd really recommend, but up to her; legal advice needed); maybe she could sell the house to her kids now with a proviso that she can live in it as long as she wants (not sure if this is possible), take the cash, fill up the TFSA, invest the rest, leave it all to the kids when she's gone (minus whatever she needs for her own care), and they can pay off the mortgage with it. As Cranston pointed out, somebody is going to have pay the interest on this line of credit anyway, although it's significantly cheaper than a mortgage. This situation really requires professional legal advice IMO.

It's her house for as long as she lives and doesn't need the assets which it represents to care for herself. It's not the kids' entitlement. If they want to keep the house, they may have to pony up, one way or another.
From what I have seen, it's not an uncommon problem that parents put more emphasis on passing something on to the kids than on their own welfare.

David Chilton, in his revised Wealthy Barber book, does advise getting line of credit against house IF you need the cash and the alternative is a (more expensive) reverse mortgage, but not to accommodate the kids. I think it was him who recommended that you only pay the interest - which is all that is required on a LOC.

August 7, 2017
8:12 pm
Bill
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On death your residence is included for probate fee calculation.

Also, loc interest costs are a negative, but TFSA should be earning sheltered income at the same time.

Loonie has covered the other negatives, and I definitely share his overall thinking here.

August 7, 2017
8:23 pm
Norman1
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Loonie said

I am a little less clear about what happens on the death of the second spouse. it would appear that the RSP/RIFs are then fully taxed, both as Estate Adm (as they must be liquidated at this point) and also as Income Tax.… 

There is no successor holder to an RRSP or RRIF. In all cases, the original RRSP/RRIF is deregistered.

According to CRA: Unmatured RRSP, when the RRSP beneficiary is a spouse and the spouse agrees to directly transfer the assets to his/her RRSP/RRIF "by the end of the year following the year of death of the annuitant," there's no income tax liability to the deceased's estate. Instead, the deregistered funds are reported by the spouse as RRSP income on line 129 along with a matching RRSP deduction.

Probate taxes are a separate issue and depend on whether or not the RRSP/RRIF assets are moved through the estate. Either through a beneficiary designation on the RRSP/RRIF or through a bequest in the will.

August 7, 2017
8:30 pm
Norman1
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Loonie said
… maybe she could sell the house to her kids now with a proviso that she can live in it as long as she wants (not sure if this is possible),…

That's called a "life interest" and can be registered on the title. Life interest is the right to use the property (including living on it) and to all the income generated by the property during the time the life interest holder is living.

August 8, 2017
10:08 am
JenE
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.....and the above replies are why I like to ask for opinions. Thanks, all, I'm taking the prudent course and sticking with my first advice to my friend - seek professional help! I do appreciate the various remarks, and as Brimley Chen says, "Always learning from others!"

August 9, 2017
6:44 am
swan
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Top It Up said

YEAH, I'm not sure that holds much value anymore. With the stronger presence of online banking and internet credit unions, there's hardly any need to enter a storefront financial institution. PLUS, for the last couple of decades or so, FIs have been closing the smaller branches and consolidating them into "super" centres leading to less interaction and personal face time.  

I have moved much of my money back to bricks and motor . finical institution because of this lake of service from on line FI .

I live in Manitoba and was able to deal with a aprox million dollars estate no probate . no cost at all .

But what I did find interesting was that the designated beneficiary got the rrsp all of it with no tax with held and the estate had to pay all the taxes on it .

Seems to me that you only had rrsp,rifs.tfsa and a like and they all had delineated beneficiary . and the estate had no other money in it . all the designated beneficiary would get the money leaving the estate with a huge tax bill it could not pay .

This is my experience in Manitoba law differ from province to provinces but nothing beat the personal relationship

August 9, 2017
7:24 am
AltaRed
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swan said

But what I did find interesting was that the designated beneficiary got the rrsp all of it with no tax with held and the estate had to pay all the taxes on it .

Seems to me that you only had rrsp,rifs.tfsa and a like and they all had delineated beneficiary . and the estate had no other money in it . all the designated beneficiary would get the money leaving the estate with a huge tax bill it could not pay .

This is my experience in Manitoba law differ from province to provinces but nothing beat the personal relationship  

Actually, CRA would come after the beneficiaries for the taxes due from the collapse of the RRSP/RRIF if the estate itself had insufficient funds in it to pay income taxes . The CRA always gets its taxes, short of a completely bankrupt (insolvent) estate to begin with. The executor is supposed to advise the FI paying out the RRSP/RRIF funds to beneficiaries to withhold taxes due and should not be disbursing those funds until those taxes are known and advised from the executor, e.g. doing a interim (test) or final version of the Final T1 Tax Return.

Too many people make Wills without taking income taxes due on collapsed RRSPs/RRIFs into account. They forget that, unless they specify otherwise, the heirs (beneficiaries) of the estate end up paying the taxes from RRSPs/RRIFs that may be bequeathed to others.

Imagine an estate in which a RRIF worth $1million is bequeathed by beneficiary designation to beneficiary Adut Child A while the remaining assets worth another $1million are willed to beneficiary Adult Child B....making an assumption that both will thus be treated somewhat equally. What actually could happen, in the absence of anything else being said, is A gets $1 million, while B gets stuck with the income taxes paid on $1 million of income (the RRIF), plus income taxes paid on the capital gains in his/her own bequest of $1 million in non-registered assets. B could end up with perhaps less than $500k from that estate. B should (and could) sue in court for equal treatment given the proposition that the parent wanted both to be treated equally/fairly at $1 million each.

As an executor, I would withhold the distribution of the RRIF assets to A until taxes due from RRIF colllapse were known and only allow the 'net proceeds' of that RRIF be distributed...knowing that B should not be responsible for taxes due. B may still be disadvantaged due to taxable cap gains on unregistered assets, but that would just be hard luck in that instance. At least the consequences would be less unfair.

People making Wills need to consider these things. Lawyers should be advising their clients at the time about those consequences. Indeed, the Will should say that taxes due from the distribution of registered accounts should come from the proceeds of those accounts (especially if they have different beneficiaries).

In my mother's case, she had my bro and I as equal beneficiaries of everything so that it didn't matter. I have made the appropriate provisions in my own Will on how to handle taxes since we are a blended couple with various divisions of assets going to different beneficiaries.

August 9, 2017
10:49 am
Top It Up
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swan said

I have moved much of my money back to bricks and motor . finical institution because of this lake of service from on line FI .

This is my experience in Manitoba law differ from province to provinces but nothing beat the personal relationship  

Remind me again where the personal relationship came into play in the course of executing the will and "dodging" probate?

August 9, 2017
6:28 pm
Norman1
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Norman1 said
There is no successor holder to an RRSP or RRIF. In all cases, the original RRSP/RRIF is deregistered. …

I was wrong about RRIF's. A RRIF can have a successor.

Definition of RRIF annuitant in Income Tax Act 146.3(1) allows for successor annuitants:

annuitant under a retirement income fund at any time means

(a) the first individual to whom the carrier has undertaken to make payments described in the definition retirement income fund out of or under the fund, where the first individual is alive at that time,

(b) after the death of the first individual, a spouse or common-law partner (in this definition referred to as the “survivor”) of the first individual to whom the carrier has undertaken to make payments described in the definition retirement income fund out of or under the fund after the death of the first individual, if the survivor is alive at that time and the undertaking was made

  (i) pursuant to an election that is described in that definition and that was made by the first individual, or

  (ii) with the consent of the legal representative of the first individual, and

(c) after the death of the survivor, another spouse or common-law partner of the survivor to whom the carrier has undertaken, with the consent of the legal representative of the survivor, to make payments described in the definition retirement income fund out of or under the fund after the death of the survivor, where that other spouse or common-law partner is alive at that time; (rentier)

August 9, 2017
7:04 pm
Bill
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AltaRed, good points.

You say CRA will come after the beneficiaries for taxes of an insolvent state. I always thought CRA would come after the executor, i.e. the tax liability is the estate's, and, as you point out, it's the executor alone, not the beneficiaries, who acts on behalf of the estate. How can beneficiaries be held liable for some other entity's (the estate's) tax obligations - ??

August 9, 2017
7:17 pm
AltaRed
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Bill said
AltaRed, good points.

You say CRA will come after the beneficiaries for taxes of an insolvent state. I always thought CRA would come after the executor, i.e. the tax liability is the estate's, and, as you point out, it's the executor alone, not the beneficiaries, who acts on behalf of the estate. How can beneficiaries be held liable for some other entity's (the estate's) tax obligations - ??  

I was talking about a case where the remaining estate does not have the funds to pay the RRIF taxes due. If there are insufficent (no) remaining funds to begin with, there is nothing the executor can do about that. Then CRA chases the beneficiaries*.

I think you are talking about a case where an executor has disbursed estate assets to beneficiaries without having paid taxes due. That would be a case of executor negligence.

* I am not sure in what order CRA would chase beneficiaries. Let's say for example, the estate contains only a RRIF and a few joint bank accounts. The joint bank accounts are undivided interest so the survivors automatically get the funds. I don't know if CRA would chase those surviving joint owners... or just pursue the beneficiaries of the RRIF/RRSP. It should logically follow that it be the RRSP/RRIF beneficiaries that are pursued, but I've not read anything on that matter. Regardless, if I was an executor in this kind of situation, I'd hire a lawyer (or tax accountant) for advice....

August 9, 2017
7:18 pm
Cranston
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Not sure of the above. But is a good idea to get a Clearance certificate from CRA after last income tax done and an ad in the local paper.

August 9, 2017
9:50 pm
Norman1
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Beneficiaries of RRSP's and RRIF's are jointly and severally liable with the estate for the taxes on inheriting those registered plans.

I found these references to subsections 160.2(1), 160.2(2), and 160.2(3) of the Income Tax Act that establish that beneficiary liability. This from page 148 of Explanatory Notes to Legislative Proposals Relating to Income Tax published by the Department of Finance in July 2010:

Clause 116

Joint and Several Liability – Amounts Received out of or under RRSP
ITA
160.2(1), (2) and (3)

Subsection 160.2(1) of the Act provides that a taxpayer who receives benefits out of another person’s registered retirement savings plan is jointly and severally liable for the portion of that other person’s tax that is attributable to those benefits. Subsection 160.2(2) of the Act provides a similar result with respect to benefits received out of another person’s registered retirement income fund. The Minister may assess the taxpayer for such a liability under subsection 160.2(3) of the Act.

Subsections 160.2(1), (2) and (3) are amended, in respect of assessments made after December 20, 2002, to clarify that the assessment is subject to interest, without any limit on the amount of interest for which the taxpayer may be liable.

August 10, 2017
5:49 pm
AltaRed
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Thanks Norman. Good to know. I may have to deal with this kind of situation as an executor someday (different beneficiaries than the estate overall), unless that person outlives me!

August 11, 2017
12:46 pm
swan
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Top It Up said

Remind me again where the personal relationship came into play in the course of executing the will and "dodging" probate?  

I did not probate the will . there were no cost because of the relationship they let me distribute the money after they had seen the will with out probating it . that why I said laws are different in every province some were saying that it has to be . if over a certain amount

I do think that with out this relationship that the legal fees would have been much higher . they were basically none other than tax owed

There are on real beneficiary because I have the only copy of the will

August 11, 2017
2:02 pm
AltaRed
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The FI (bank) was taking some risk by releasing without probate, i.e. getting the courts to say that the presented Will is valid and is the most recent one. I don't think it necessarily had that much to do with provincial law.

It may help if the bank knows there is only one close relative, and that relative is both the executor and the beneficiary. Also if the value involved is relatively small.

August 12, 2017
5:13 am
swan
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Iir has been said here that in BC if the estate is over 250,000 you have to probate

this show the value of a bricks and motor credit union were you have a relationship with them .

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