COLLINS BARROW TALKS ABOUT Estate Planning Issues

We believe it is necessary to have an effective overall tax plan in place to maximize the value of your estate and minimize your total taxes paid.

There are two estate planning tools which we believe you should utilize in order to minimize the effect of taxes on your estate.

The first tool is the use of multiple wills. This simply means that you have two wills prepared by your lawyer. The primary purpose of having two wills is to help avoid having to pay probate tax on some of the assets in your estate.

Probate is an authentication for third parties of the appointment of the personal representatives of an estate and verification that the copy of the will attached to the estate certificate is a copy of the authentic last will and testament of the deceased. Probate tax is levied by the provincial government against the value of the estate which, in simple terms, is the value of all the assets included in the will which is presented for probate. Ontario probate tax is 0.5% of the first $50,000 of assets and 1.5% of the remaining assets. The idea behind multiple wills is that anything that a bank or other person may require an estate certificate for is included in one will and anything that will not require an estate certificate will be included in the second will. The first will is probated and the second will is not.

Assets that should be included in a separate will include certain real estate, shares in a private corporation, and loans receivable from private corporations.

The second tool is the use of a graduated rate estate (GRE). GRE’s are used to minimize personal income taxes.

A GRE arises on and as a consequence of death. On the estate’s first tax return it must designate itself as a GRE. The GRE can only exist for the first 36 months from the date of death to allow for the estate’s administration. If the estate remains in existence past the 36 months it will be taxed at the top marginal tax rates both federally and provincially after 36 months.

The advantage of a GRE is that in the first 36 months it is taxed at the same marginal tax rates as an individual, which is approximately 20% on the first $40,000, 32% on the next $30,000 and increasing to approximately 53.5% when income exceeds $220,000. Without the GRE designation, income earned in an estate or testamentary trust is taxed at the highest marginal tax rate of approximately 53.5%.

Together these two options provide the potential for substantial tax savings.

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