Frank* is 84 years old, a widower and thinking about how to pass on his accumulated wealth to his two adult children in the most efficient and cost-effective way possible.

He is in reasonable health and he expects to live to 90. He lives debt-free in British Columbia where he owns a home valued at $1.4 million. His indexed pension, investments and Canada Pension Plan (CPP) benefits provide an annual income of $140,000, which cover all of his expenses, including tax related to dividend and capital gains income. His Old Age Security (OAS) is 100 per cent clawed back.

Frank reinvests his investment income into a balanced investment portfolio, which is currently valued at about $1,481,000. The portfolio includes a

registered retirement income fund

(RRIF) with $743,000, a

tax-free savings account

(TFSA) with $265,000 and a non-registered investment account with $473,000.

He

has a will

and

his estate will pass on

to his children equally.

“Assuming I die without ever having to move into a care home and draw down monies from my investments, how do I have the investments and my home pass on to my two children without complications or lengthy probate?” asked Frank. “Should I establish a limited trust?”

Frank has also considered selling his home, investing all the proceeds and then renting or living in an assisted living residence that could be paid with the income from his pension and CPP. Is this a good idea, he wondered? If he doesn’t sell his home, should his children consider keeping it and renting it out rather than selling it?

Frank plans to advise his children to keep the investments as joint owners and not liquidate or make major changes

without first getting good advice

.

What the expert says

“One of the most common mistakes people make in estate planning is to make major changes just to avoid probate,” said Ed Rempel, a fee-for-service financial planner, tax accountant and blogger. “Probate is generally small, not like income tax. In B.C., probate fees are 1.4 per cent, while Frank is paying a marginal income tax rate of 41 per cent.”

Frank can avoid probate on his RRIF and TFSA by listing his two children as 50/50 beneficiaries, Rempel said. “His estate will pay tax on the RRIF value only and then both accounts can be transferred to his children for their non-registered investment accounts.”

Rempel said it is important to note that the RRIF value at death is considered income and will be subject to a 30 per cent withholding tax. This is probably not enough to cover the top marginal income tax rate of 54 per cent on income over $260,000, Rempel said.

“Frank’s RRIF and TFSA can be transferred tax-free relatively quickly, but then they are gone and cannot pay the rest of the income tax. His estate should keep the non-registered investments to pay all the taxes before transferring them to the children,” Rempel said.

“Probate should apply to his home and to his non-registered investments and would cost about $29,000 today. However, since the value of his home and investments should continue to rise in value, it will likely cost his estate more in future.”

Many people add their children’s names to their home and investments to avoid probate, Rempel said. But the general rule of thumb is that if your home is worth more than $1 million or if your investments are worth more than $250,000 to $500,000, the possible tax costs and risk of creditors or divorce settlements for your children are usually more prohibitive than probate fees, he said.

“Frank’s home and non-registered investments are worth too much for this to be a good idea. There is a risk that the Canada Revenue Agency (CRA) will think he is giving his children part ownership of his home, making this a taxable transaction. He could write a letter stating he is adding their names for estate planning reasons only, but CRA might not accept that. Income tax costs would be far more than probate fees.”

Since the value of Frank’s investments exceeds $250,000, adding their names to his non-registered investments would create a “bare trust” under the new CRA rules and he would have to file a T3 trust tax return and special schedule every year, Rempel said.

There are

different types of trusts

, Rempel said. “Frank could use an ‘inter vivos trust’ or a ‘bare trust’ but neither makes sense for his home. “If he owns his home until death, the principal residence exemption means there will be no income tax on it. However, if he transfers it to a trust, there would be a capital gains tax from now until his death, which is likely to be a lot more than probate.”

As for his non-registered investments, Rempel said transferring them to a trust would avoid probate but is not likely worthwhile until they grow to $1 million or more.

“Creating a trust costs between $5,000 and $10,000 in legal fees to set up. Then a trust income tax return must be prepared by an accountant every year, which likely costs $1,000 or more. Probate fees on $700,000 of non-registered investments is just under $10,000.”

Whether Frank stays in his home or moves to an assisted living residence should be a lifestyle decision and not based on trying to save probate costs, Rempel said.

“Selling his home may not really save him probate fees anyway. He would avoid probate on his home but the proceeds would be added to his non-registered investments, which are subject to probate,” Rempel said. “If he does this, then he would have more than $2 million in non-registered investments, so creating an inter vivos trust would make sense.”

“If he is confident in his investments and his children are less knowledgeable about investing, it can make sense for Frank to recommend transferring his investments ‘in kind’ to his children instead of in cash, but this is something his children would have to do,” he said.

As for Frank’s registered investments, “the RRIF does not have to be fully withdrawn by age 90,” Rempel said. “The minimum RRIF withdrawal rises every year until age 90 when it is 20 per cent a year. You can keep your RRIF indefinitely. They are deemed cashed in on death and taxes withheld.”

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*His name has been changed to protect his privacy.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).