Estate Planning – Strategies to keep the tax man away from your loved ones

10 January, 2013

It is said that the only two things in life that are certain are death and taxes.
We do not have control necessarily over our time of departure from this planet but we can take steps to reduce the tax our loved ones would have to pay once we do leave.
Here are some important steps when creating an estate plan with your professional accountant, like Numbers Plus.
The first step is to create a will. Having a will is critical to any estate planning as it spells out exactly what assets go to specific beneficiaries so the tax man can be kept away from your assets.  A will should be reviewed periodically to ensure that it will still meet your objectives.
If the surviving spouse is named the beneficiary to all assets then the will creation is relatively straight forward. However, with divorce and extended families, wills can be more complicated and the asset strategies must be reviewed to match the family situation. In cases such as these it is important for your professional accountant to be working with your lawyer to ensure everything is in proper order.
The second step is to review your assets
Are all assets handled in the same manner? The quick answer is no and we will review some of the assets and briefly outline different strategies for each.
Asset #1 – the principal residence
The principal residence exemption allows the surviving spouse and children under 18 to be given one residence tax free. If you have given your spouse the primary family residence, you could give another residence to an adult child that does not currently own a primary residence.
Asset # 2 – life insurance
Life insurance policies that are payable upon death of the policy holder do not create taxable income to the beneficiary. It is best to detail the beneficiary in the will as well as in the policy.
Asset #3 – trusts
Trusts are an effective method to split income as the estate of the deceased is treated as a taxpayer. The income in the trust is split to a spouse and children to give them an income when required and it is taxed at a lower rate. Trusts can be established for each individual child or grandchild to reduce the tax payable.
Asset #4 – small business shares
There are enhanced capital gains exemptions based on the value of the shares at the time off death and whether there is an expected gain in the years following death. In some cases distributing shares to your spouse, children and grandchildren will provide them with income at a low taxable rate.
Other considerations
Charitable donations
Charitable donations must be clearly defined in the will and need to be carefully planned. They are hidden pitfalls in this area that your accountant can guide you through to ensure you maximize your opportunities.
Debt Forgiveness
Again this must be carefully planned and clearly defined in the will. Personal debt forgiveness and business debt forgiveness each have their own challenges to the debtors involved.
Probate Tax Planning
In general, the tax is proportional to the value of the estate. Through several different strategies the value of the estate can be reduced. These are very complicated and can created issues with other tax strategies in use, so a careful review with your professional accountant is highly recommended.
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