Today, I would like to share an interesting article written by Tim Cesnick published in The Globe and Mail.
Tax Matters: In estate planning, know the hazards of joint ownership
I recall a number of years ago that the New Haven (Conn.) Register newspaper reported a story about a local woman, Joanne Kamerling, who had decided to change the ownership on two acres of land that she owned in Weber County, Utah. She placed the property into the joint names of a group of people that included a physical therapist, a prominent local attorney, the former Louisiana Ku Klux Klan leader David Duke, and O.J. Simpson. She didn’t know these people personally, none of them knew each other, and they weren’t looking to become owners. Ms. Kamerling continued to pay the property taxes. Weird.
Yet when it comes to tax planning, Canadians often do something similar: They regularly place assets into joint names with right of survivorship. Okay, so there aren’t many of us adding O.J. Simpson to the title on our homes, but the end result is often about as effective. You see, while joint ownership can reduce probate fees and make for an efficient transfer of assets at the time of death, there can be drawbacks. Consider these 10:
1. A tax liability might be triggered. When you add another individual as a joint owner, you will often be creating a change in beneficial ownership. The result? When adding anyone other than your spouse as a joint owner, you may be deemed to have disposed of that ownership interest at fair market value, which could trigger a tax hit.
2. Your estate distribution might be inappropriate. If you’re hoping to leave an asset to, say, all of your children equally when you die, but have perhaps named just one as a joint owner to avoid probate fees, there is no requirement for your joint-owner child to share the asset with the others. This may not be your intention.
3. Family or legal disputes could result. Continuing with the scenario in number 2 above, those children who are effectively disinherited may dispute the unequal distribution of your estate, and there is no shortage of court cases dealing with these types of battles. Make your intentions clear, in writing, if you do choose to put assets in joint names.
4. You may not save tax. If you think you’ll save tax by placing assets into joint names, perhaps with your spouse, think again. Any income earned by your spouse on his or her half of the assets will generally be attributed back to you unless you charge interest at the prescribed rate. Further, owning assets jointly with a child will not allow you to escape tax on your share of the asset when you die.
5. Exclusive control over assets will be lost. If you add another person as a joint owner on an asset, you’ll no longer have sole control over the asset.
6. Assets could be attacked by creditors. If the individual who jointly owns an asset with you faces the attack of creditors, the full value of the asset you jointly own could be subject to the claim of those creditors.
7. Testamentary trusts will be impossible. It is possible, when you die, to leave income-producing assets to a trust established in your will for your heirs. This trust can pay the tax on the income earned annually after you’re gone. This can save your heirs tax. Any assets held jointly, with right of survivorship, will pass directly to the surviving owner or owners and there will be no opportunity for those assets to be place in a trust upon your death.
8. Portfolio risk profile may not be appropriate. If two or more people jointly own an investment account or portfolio it may be difficult to invest the capital in a manner that meets the risk profile of all owners on the account, particularly when there are large age differences between the owners.
9. A principal residence could become taxable. If you decide to place your principal residence into joint names with, say, a child, it may be necessary for both you and your child to designate that property as your respective principal residences in order to avoid tax on a disposition of the property later. This could be a problem if your child has, or will have, another property that he or she owns; it may expose your child’s other home to tax.
10. Joint tenancy may be permanent. Forget about undoing the joint ownership unless the other owner or owners agree to change things.
Be sure to ask yourself whether you should be concerned about each one of these potential drawbacks. This will help you to evaluate whether joint ownership is right for you.
Showing posts with label Section 86 - Estate Freeze. Show all posts
Showing posts with label Section 86 - Estate Freeze. Show all posts
Tuesday, August 23, 2011
Tuesday, October 19, 2010
Business owners: What are the benefits of an Estate Freeze?
As you may know, I practice corporate & tax law with a focus on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs. One technique that I like to use is called Estate Freeze. Hence, Today, I would like to share an article written by Bessner Gallay Kreisman, Chartered Accountants.
What are the benefits of an Estate Freeze?
For an owner-managed business, tax minimization is central to the overall financial plan. One popular tool is an estate freeze. An estate freeze is a corporate re-organization that allows business owners to freeze the value of the company at today's value. As a result, future increases in the value of the company can be transferred to the benefit of children, key employees or a trust. Such a freeze allows business owners to minimize capital gains tax due to deemed disposition rules at death and provides a deferral of tax.
A freeze in combination with the creation of a discretionary trust can provide a flexible framework that can lead to further tax minimization. The use of a trust facilitates income-splitting strategies between family members, and if properly planned, can also result in each beneficiary being able to utilize their $750,000 capital gain deduction concurrently. In a company that is expected to experience continued growth, the ability to benefit from multiple capital gain deductions can result in substantial tax savings.
For many companies that have already undertaken such a freeze, the current economic climate has unfortunately eroded valuations. However, from an estate planning perspective the decrease in values may have created a unique opportunity to re-freeze shares. Re-freezing at a lower value can help further reduce the tax liability upon death and defer the same to the next generation.
An important factor to consider with any estate freeze is the valuation of the shares being frozen. Given the nature of a freeze, and the potential benefits to non-arms length parties, the need to ensure a fair and impartial valuation is critical. While many may believe an ad-hoc valuation is sufficient, determining the value that may be attained in an open and unrestricted market, between informed and prudent parties, is a complex process that poses several challenges. A formal report ensures that adequate research is conducted and the valuation can be defended in the event the transaction comes under review by the taxation authorities.
Given the unique characteristics of each situation, effectively implementing such a strategy requires careful consideration of both technical and non-technical components. An estate freeze is only one component that can be utilized as part of a global tax and estate plan.
What are the benefits of an Estate Freeze?
For an owner-managed business, tax minimization is central to the overall financial plan. One popular tool is an estate freeze. An estate freeze is a corporate re-organization that allows business owners to freeze the value of the company at today's value. As a result, future increases in the value of the company can be transferred to the benefit of children, key employees or a trust. Such a freeze allows business owners to minimize capital gains tax due to deemed disposition rules at death and provides a deferral of tax.
A freeze in combination with the creation of a discretionary trust can provide a flexible framework that can lead to further tax minimization. The use of a trust facilitates income-splitting strategies between family members, and if properly planned, can also result in each beneficiary being able to utilize their $750,000 capital gain deduction concurrently. In a company that is expected to experience continued growth, the ability to benefit from multiple capital gain deductions can result in substantial tax savings.
For many companies that have already undertaken such a freeze, the current economic climate has unfortunately eroded valuations. However, from an estate planning perspective the decrease in values may have created a unique opportunity to re-freeze shares. Re-freezing at a lower value can help further reduce the tax liability upon death and defer the same to the next generation.
An important factor to consider with any estate freeze is the valuation of the shares being frozen. Given the nature of a freeze, and the potential benefits to non-arms length parties, the need to ensure a fair and impartial valuation is critical. While many may believe an ad-hoc valuation is sufficient, determining the value that may be attained in an open and unrestricted market, between informed and prudent parties, is a complex process that poses several challenges. A formal report ensures that adequate research is conducted and the valuation can be defended in the event the transaction comes under review by the taxation authorities.
Given the unique characteristics of each situation, effectively implementing such a strategy requires careful consideration of both technical and non-technical components. An estate freeze is only one component that can be utilized as part of a global tax and estate plan.
Wednesday, October 7, 2009
Business Owners: Are you aware that you can save a lot of money with an Estate Freeze!!
Taking care of business with estate freezes *
I previously wrote about an estate freeze happening during the course of a corporate reorganization.
Today, I would like to share a great article written by Tim Cestnick from the Globe and Mail:
Estate Freeze
THE CONCEPT
What in the world is an estate freeze?
It's the process of taking certain assets you own today and freezing them at their current values. The idea is that the future growth of those assets will accrue to anyone you choose – your children or other heirs, for example. So, why would anyone consider a freeze? There are a few potential benefits.Cutting the tax bill on death. When a freeze is completed, all future growth between the date of the freeze and your death will accrue in the hands of your heirs. That future growth will otherwise be taxed in your hands at the time of your death, if not sooner, if the freeze isn't done. Deferring the ultimate tax bill. By passing the future growth in the asset's value to your heirs, you can defer income tax on that growth until a much later time. Although your heirs will eventually pay tax, these taxes may not be due, for example, until your heirs pass away. Establishing the tax bill on death. By freezing the value of an asset today, you'll be able to establish, pretty accurately, what your tax bill will be upon death. This makes planning for those taxes much easier. You could, for example, consider buying life insurance to cover the tax liability.Utilizing the capital gains exemption. A freeze may allow you to take advantage of the lifetime capital gains exemption where you own shares of a qualified small business corporation or qualified farm or fishing property. This exemption could shelter up to $750,000 of capital gains on these types of assets.
Splitting income with family members. In the process of completing a freeze, you'll be placing certain assets (often private company shares) in the hands of your heirs, either directly or indirectly through a trust. These assets can provide regular income to your heirs that will be taxed in their hands – not yours.
Protecting assets from creditors. It may be possible to protect certain assets from creditors by transferring their ownership to your heirs or, better still, a family trust, as part of a freeze.Protecting assets from spouses. If your kids (or you) own valuable and growing assets prior to marriage, it may be possible to use a freeze to minimize the claims of future spouses or ex-spouses through planning that can be done prior to marriage.
Reducing probate fees. A freeze will restrict the growth of the frozen assets in your hands. This means that you'll generally own less in your hands at the time of your death than you would have without the freeze, which will minimize probate fees.Minimizing annual taxes.
Freezing assets typically requires a corporation to be set up. Corporations that carry on an active business are entitled to very low rates of tax (about 18 per cent) on the first $400,000 of active business income. It may be possible to take advantage of these rates, depending on the assets you're freezing.Maintaining control over the property. You can enjoy the first nine benefits without having to give up control over or use of the assets during your lifetime.
THE CANDIDATES
An estate freeze is most commonly undertaken by those who own active businesses. The shares of a growing private company can give rise to a substantial tax bill at the time of death, and where there's a desire to pass the business to the kids or other heirs, a freeze can facilitate this nicely since you'll be able to issue new growth shares (common shares) to anyone you'd like. Other assets can be frozen as well, but it's not as commonly done.
Before undertaking an estate freeze, you should be confident in a couple of things:
(1) That you're happy with the amount of growth you've received to date, and you're happy to see the future growth accrue to someone else;
(2) That there will be sizable growth in the assets in the future.If there isn't going to be much future growth in the assets you're freezing, then there won't be much growth to have taxed in the hands of your heirs; it may not be worthwhile freezing in this case.
* Published in the Globe and Mail, July 3rd, 2008
As business lawyer, I suggest this option to a lot of my clients - with an estate freeze and a corporate reorganization they can save a substantial amount of money. As usual, if you have any questions, please do not hesitate to contact me.
I previously wrote about an estate freeze happening during the course of a corporate reorganization.
Today, I would like to share a great article written by Tim Cestnick from the Globe and Mail:
Estate Freeze
THE CONCEPT
What in the world is an estate freeze?
It's the process of taking certain assets you own today and freezing them at their current values. The idea is that the future growth of those assets will accrue to anyone you choose – your children or other heirs, for example. So, why would anyone consider a freeze? There are a few potential benefits.Cutting the tax bill on death. When a freeze is completed, all future growth between the date of the freeze and your death will accrue in the hands of your heirs. That future growth will otherwise be taxed in your hands at the time of your death, if not sooner, if the freeze isn't done. Deferring the ultimate tax bill. By passing the future growth in the asset's value to your heirs, you can defer income tax on that growth until a much later time. Although your heirs will eventually pay tax, these taxes may not be due, for example, until your heirs pass away. Establishing the tax bill on death. By freezing the value of an asset today, you'll be able to establish, pretty accurately, what your tax bill will be upon death. This makes planning for those taxes much easier. You could, for example, consider buying life insurance to cover the tax liability.Utilizing the capital gains exemption. A freeze may allow you to take advantage of the lifetime capital gains exemption where you own shares of a qualified small business corporation or qualified farm or fishing property. This exemption could shelter up to $750,000 of capital gains on these types of assets.
Splitting income with family members. In the process of completing a freeze, you'll be placing certain assets (often private company shares) in the hands of your heirs, either directly or indirectly through a trust. These assets can provide regular income to your heirs that will be taxed in their hands – not yours.
Protecting assets from creditors. It may be possible to protect certain assets from creditors by transferring their ownership to your heirs or, better still, a family trust, as part of a freeze.Protecting assets from spouses. If your kids (or you) own valuable and growing assets prior to marriage, it may be possible to use a freeze to minimize the claims of future spouses or ex-spouses through planning that can be done prior to marriage.
Reducing probate fees. A freeze will restrict the growth of the frozen assets in your hands. This means that you'll generally own less in your hands at the time of your death than you would have without the freeze, which will minimize probate fees.Minimizing annual taxes.
Freezing assets typically requires a corporation to be set up. Corporations that carry on an active business are entitled to very low rates of tax (about 18 per cent) on the first $400,000 of active business income. It may be possible to take advantage of these rates, depending on the assets you're freezing.Maintaining control over the property. You can enjoy the first nine benefits without having to give up control over or use of the assets during your lifetime.
THE CANDIDATES
An estate freeze is most commonly undertaken by those who own active businesses. The shares of a growing private company can give rise to a substantial tax bill at the time of death, and where there's a desire to pass the business to the kids or other heirs, a freeze can facilitate this nicely since you'll be able to issue new growth shares (common shares) to anyone you'd like. Other assets can be frozen as well, but it's not as commonly done.
Before undertaking an estate freeze, you should be confident in a couple of things:
(1) That you're happy with the amount of growth you've received to date, and you're happy to see the future growth accrue to someone else;
(2) That there will be sizable growth in the assets in the future.If there isn't going to be much future growth in the assets you're freezing, then there won't be much growth to have taxed in the hands of your heirs; it may not be worthwhile freezing in this case.
* Published in the Globe and Mail, July 3rd, 2008
As business lawyer, I suggest this option to a lot of my clients - with an estate freeze and a corporate reorganization they can save a substantial amount of money. As usual, if you have any questions, please do not hesitate to contact me.
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