As you have probably already figured out, most estate planning involves an effort to leave as much of your estate as possible to your heirs and as little as possible to the tax man. It is in this area that competent professional advice is critical. Failure to take advantage of available tax strategies can cost an estate large tax bills which might easily have been avoided.
We have already seen that most parents wish to postpone direct gifts to children past the age of 18. All trust funds for infant children and those over 18 who have not yet received the capital are subject to income tax on their annual income. Where the amounts are significant, it is important that a person familiar with taxation of trusts review the trust and advise as to the appropriate amounts to pay out and retain in the trust in order to minimize the tax. Generally, the trustee will attempt to equalize the income so that the trust and the child both receive the same amount of taxable income, thus ensuring the imposition of tax at the lowest rate (subject, of course, to the terms of the trust document).
RRSPs offer a little known but very useful means of reducing income tax in appropriate circumstances. Under recent amendments to the Income Tax Act, parents can designate dependent infant children as direct beneficiaries under their RRSPs, thus achieving taxation of the funds in the hands of the child at a much lower rate of tax. A requirement is that the RRSP be used to purchase an annuity payable over the number of years between the child’s current age and the age of 18. While this arrangement is not for everyone, it can be a useful tool in appropriate circumstances.
Perhaps the most important area of estate planning involves the small business owner. Few owner-managers have thought about succession should they die prematurely. Many parents have strong feelings on who, if any, of their spouse or children is best suited to continue to operate their business but few have developed a plan to accomplish their wish.
One of the last remaining true opportunities for tax avoidance involves the exemption for up to $500,000 of capital gains on the disposition of shares in a qualifying small business corporation or farm property. A rollover of shares to a holding company or reorganization of the existing capital structure can often permit a realization of the exemption and pass on the benefit of future growth in the company to a future generation. The requirements for a successful deferral are complex and require expert accounting and tax advice.
Call the Clark Craig Law Office for taxation consultation in Burlington.