Estate planning is a global plan that covers the time from now until shortly after the second death of a couple. The end of life plan is part of it but not the most crucial. Effective use of money while living is usually the better goal.
Nonetheless, it makes some sense to consider avoidable costs in the final estate.
One of the obvious ones in Ontario is the (Estate Administration Tax) commonly called EAT. It is tiny and often poorly considered expense. On estates greater than $50,000 1.5% of the net of assets minus some of the liabilities. (Emphasis on some.) On a $3 million estate roughly $45,000. Not insurmountable but still painful.
There are ways to avoid it and some work well.
- Property passing to a spouse attracts nothing.
- Property passing by way of a beneficiary designation attracts nothing
- Property passing by operation of law, usually joint and last survivor is exempt.
- Trusts created while living
- Multiple wills so no EAT is paid on assets that can pass without probate
The EAT discussion with clients is generally not very intense. However, given the Ontario’s sad lack of fiscal oversight and their insatiable demand for more tax revenue, how long will it be until there is some kind of an estate tax? What if the rate was 30% instead of 1.5%.
An obligation of thousands is usually manageable. An obligation in the hundreds of thousands and millions would be unpleasant.
Every end of life estate should take such obligation minimizing steps as are convenient and that do not unnecessarily burden the potential decedent. On E done, liquidity will matter.
There are just four ways for the estate trustees to have the cash they will need.
Two of them are, by default, trustee’s choices. Sell something or borrow against estate assets. Both have flaws. Selling often causes loss of value because of the urgency. They have the “Executor Year” to get it done for income tax advantage, and for complex assets that may well be too short a time. Borrowing ties up the whole estate to get a small fraction of it in cash.
The other two choices are own liquid assets or own life insurance. Liquid assets often yield too little and are taxed adversely. Life insurance is the provably least costly way to acquire cash for the executor’s use. Do not overlook it.
There is an interesting article from estate lawyer, Margaret O’Sullivan here. End of life estate planning is a well-defined planning process.
Pay attention. Do not assume you can put it off or fix it later.
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.