Top 5 Will Writing Pitfalls

Estate planning can be an intense process for some, for others it might seem like just another hassle. As the top earning generation ages into retirement, it’s becoming essential for people to know what goes into writing a will. If you, your spouse or a loved one needs help with creating a legal and fiscally sound plans– consult Liu & Associates’ guide below! The following five tips are the most common oversights made when planning an estate.

1. Good intentions are one thing, but leaving major sums of money to a charity or non-profit organization in your will may not always be the best route. Tax benefits are limited and other methods of giving tend to be more beneficial. A charitable giving fund set up in your name means more money going towards the causes you support.

1. Don’t take chances, ensure your will is kept up to date! Assuming that life changes and other conditions are accounted for can leave your loved ones unprotected. Divorces, new children, and plans for business assets– these all can have serious consequences if left unaddressed in an obsolete will.

1. Wills cover most aspects of your estate planning, but not all. Insurance policies, pensions and registered accounts often have their own beneficiaries, separate from your will. These designations should be reviewed and updated every two to three years to ensure proper dispensation.

1. If you share joint accounts with loved ones, you may want to add clauses to your will to ensure the remaining amounts return to the estate. If these amounts are overlooked, the other holder or holders of the account may be immediately entitled to the funds. This can cause disagreements resulting in litigation, which rarely leaves a family unscathed.

An heirloom cottage has a nice ring to it, but keeping your vacation home in the family could cost your loved ones more than you expect. Taxes and maintenance costs can be startling to younger relatives, possibly putting them in financial risk. Agreements can be signed beforehand to ensure the property passes on to someone who is prepared for the responsibility.

The above list is only a summary of what can go wrong if you take shortcuts when planning an estate. For a full review and consultation of your needs, contact or visit Liu & Associates today. Our experienced staff will ensure your loved ones, properties, assets and businesses are protected for decades to come.

Are There Any Tax Implications for an Inheritance in Canada?

In some countries, inheritance taxes are imposed upon an amount inherited by a person from someone who has died. That person is responsible for paying tax on whatever they receive. Fortunately for us in Canada, inheritance taxes do not exist when it comes to receiving an inheritance from a loved one.

Instead, the estate of the deceased pays the taxes before any money or value is transferred to the beneficiary. This means that, in the end, the beneficiary should not have to worry about taxes.

While this may reduce the initial value of the estate, it certainly provides peace of mind to beneficiaries and loved ones who would otherwise shoulder the burden of any owing taxes, interests or penalties.

Who Inherits the Estate?

Who inherits the estates all depends on whether or not the deceased left a valid will. An estate is considered to be everything that a person owns when they die, including their property and their debts. A will is a legal document that describes who will inherit the estate after the owner of the will passes away.

With a will, the estate is distributed as per the directions of the will after taxes and expenses are paid and settled. If, however, the deceased did not have a valid will, then government-imposed rules are applied:

If there is a surviving spouse but no surviving descendants, then the spouse receives the estate.
If there are surviving descendants, and no surviving spouse, then the descendants receive the estate.
If there are both surviving descendants and a spouse, the spouse receives the household furnishing and the spousal preferential share (a specified amount from the estate before other distributions are made). The spouse then receives half the remainder of the estate, with the other half split between descendants.
If there are no descendants or spouse, the estate goes to other relatives based on a government-imposed distribution schedule.

Filing the Deceased’s Final Tax Return

After a person passes away, their tax return is filed and any owing taxes are paid by the estate. This is done by the deceased’s legal representative, which is usually an executor or estate administrator. This individual also notifies the CRA (Canada Revenue Agency) and Service Canada of the date of death and forwards any necessary documents.

The final tax return and owing taxes are due on April 30th if the deceased passed away between January 1st and October 31st. Otherwise, they are due six months after the date of death.

Any owing income tax is paid by the estate first.

Clearance Certificate

After the deceased’s taxes are filed and settled, a Clearance Certificate needs to be requested from the CRA to confirm that all taxes have been paid. A Clearance Certificate confirms that the estate has paid any taxes, interest and penalties owed.

A Clearance Certificate is necessary because it allows the legal representative to distribute the inheritance to any receivers without the risk of being personally responsible for any amounts owing.

Distribution of Inheritance

After the Clearance Certificate is obtained, the executor distributes what remains of the estate in accordance to the will. The entire process from death to receiving inheritance can be a lengthy process, as wills have to be verified, items appraised and taxes filed.

Ultimately, the beneficiary will never have to worry about paying taxes on any amounts received.

Need help? Contact Liu & Associates today!

How To Manage An Inheritance

Coming into a lump sum of money suddenly, be it big or small, can be jarring to say the least. A sizable inheritance can represent a life-changing opportunity, if managed properly. Follow these five tips to make sure you’re managing your money smart and effectively to keep you financially stable for years to come.

1. Take A Step Back

Because an inheritance usually comes with a loss, it’s important for you take time to deal with your grief. You don’t want to be making any major financial decision when you’re in an emotional haze.

The second thing you need to do is take a reality check. Before you go quitting your job or booking a flight to Europe, you need to think realistically about what your inheritance is going to do for your life. $90,000 might seem like a lot at the time, but that’s not enough to sustain you and your family for 25+ years. You need to consider whether your new found fortune is going to rewrite your financial goals, or simply just help you reach some of your existing goals a bit sooner.

2. Pay off Debts

Using your inheritance to pay down or pay off any current debts can help you to reduce your expenses and save you money that would go towards interest down the line. When choosing which debts to pay off first, always pick the loans with higher interest rates first, like credit cards, personal loans, or car loans, before paying off a lower interest rate loan like your mortgage.

3. Prioritize Your Goals

Identifying your financial goals will help you determine the next steps you take with your money. Cleaning up any debt should always be a top priority, followed by creating a retirement nest egg. After that the sky’s the limit; others goals may include:

Setting up a trust
Starting a college fund for your children
Contributing to charity

Determining what your financial goals are will help guide you in the types of investments you make, or the types of accounts you open.

4. Splurge Thoughtfully

It’s okay, and even encouraged, to have a little fun with your new money! Depending on the size of the inheritance, your “splurge” will look very different. It could be anything from some new shoes to a new house! Remember: reason and moderation are what it’s all about. Just because you can buy 10 swimming pools doesn’t necessarily mean that you should!

5. Hire Some Help

Depending on the type of inheritance you received (ex. Investments, life insurance, etc.) there may be some hidden taxes you are unaware of. A financial advisor or accountant can help you create a financial plan and deal with any tax implications that might come your way. They will help you understand your inheritance, and can assist you in managing it moving forward.

For help managing your inheritance, trust the team at Liu & Associates. Call today to book an appointment.

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Family Trusts 101

One of the most common misconceptions people have about family trusts is that they’re only for incredibly well-off families. That couldn’t be further from the truth. Keep reading for our introduction to family trusts and how they can be beneficial to you!

What is a family trust?

A trust fund or family trust is a legal agreement two parties in regards to assets to be passed on. A trust can contain money, stocks, real estate, and/or other assets.

There are three parties involved in establishing a trust fund:

The settlor or trustor – this is the person or entity who establishes the trust fund with the initial contribution. This can be a company, family member, or even a family friend.
The trustee(s) – the person, people, or entity responsible for the management and administration of the trust fund. Typically this is a financial institution or legal entity, though in some cases it may be a family member.
The beneficiary/beneficiaries – The person or people that will receive the benefits of the trust, usually children and/or grandchildren of the person who established the trust.

While the specific roles of each party will vary between different types of trust funds, they are required in every situation. There is a huge variety in the types of trusts available, including living trusts that become effective right away, revocable trusts that allow you to keep control and ownership of your assets, and irrevocable trusts which allows you to transfer ownership and control of assets over to the trustees.

What are the benefits?

There are a number of different benefits for setting up a family fund for both the settlors and the beneficiaries. For certain types of trusts, once an asset is placed in the trust it no longer belongs to the settlor. This means that the settlor would not be required to pay income tax on money made off of those particular assets. For beneficiaries, there is a similar benefit. Since assets within the trust do not belong to them, beneficiaries would still be eligible for things such as student aid.

One of the greatest benefits may be a sense of security for the beneficiaries. As opposed to handing out a single payment that could be wasted and spent irresponsibly, a trust can be set up with certain stipulation for beneficiaries. For example, you can dictate that the beneficiaries may receive a monthly or yearly payment as long as certain conditions are met. Furthermore, you can make specific guidelines on how the money can be spent (education, investments, etc.). A family trust is a great way to ensure that your children and grandchildren receive the maximum benefit from what you’ve passed on to them.

Is it right for me?

As mentioned earlier, trust funds are not exclusively for those who are well-off. Anyone who has assets that they would like to protect for future generations would benefit from at least exploring the option of a family trust. There are limitless options for family trusts, allowing you to choose something that best meets the needs and wants of you and your family. Don’t be afraid to explore your options!

For more great advice on family trusts and estate planning, contact the team at Liu & Associates today!

To Give or Not To Give: How to Spread Your Wealth

Traditionally, money and assets to be willed to children or charity upon the death of their parents. However, this isn’t always the best strategy – if it’s feasible, it often makes better tax sense to gift or donate your assets in your lifetime. Read on to find out how you can make the most of passing on your wealth.

Maximize Your Impact

If you are in a position where you’ve amassed enough wealth that you couldn’t spend it all in your lifetime, you can benefit both yourself and your children by gifting it to them now rather than later. It’s likely that you’re paying more taxes than necessary on cash you’ll never use, while your children are currently servicing debts like mortgages, or are in a lower tax bracket.

By giving inheritances sooner rather than later, you reduce your taxes and watch your heirs benefit. Finally, there is no “gift tax” in Canada, meaning that you’re able to give large sums of cash (not investments or property) tax free.

See the Good

Leaving a sum of money to a favorite charity in your will may seem like a good idea – however making that donation during your lifetime a can be better tax strategy. Not only will your non-profit benefit from your generous gift, you can reap additional tax benefits. Whereas donating in your will would results in tax credits applicable to only 2 tax years (current and previous), donating in your lifetime incurs a tax credit that can be carried forward up to 5 years, adding flexibility to your tax planning.

Giving away or donating your wealth in your lifetime may seem daunting – especially during a long retirement when the need for resources may be higher. However, working with experienced accountants like Liu & Associates to create a realistic retirement and tax plan can enable you to make the most efficient use of your assets.

What Is The Best Way To Leave a Property In Your Will

Vacations at the family cottage is a cherished tradition, and so it would make sense that you would want to pass it on for generations to come. However, passing a vacation property on to your children can have tax consequences for you & your heirs which could make the inheriting the family cottage a burden, not a gift. Read on to learn some tax strategies for passing on your vacation property.

Sell Now or Inherit Later?

It’s a persistent rumour that selling your cottage to your children instead of waiting for them to inherit it can mitigate their tax burden. Or, perhaps that selling an even a 50% stake in the property to your children can lessen the tax burden when it comes time to inherit the rest.

This isn’t necessarily true. Whether you sell your cottage to your children now or they inherit it later, they will still incur the same tax burden, the only difference is the timing. The taxes are based on the deemed capital gain – calculated by subtracting the original sale price from the current Fair Market Value plus any renovations made to the property. Whether you sell now or inherit later, paying taxes on transferring ownership family cottage will be inevitable.

Cover Your Bases

So, is there any way to mitigate the tax burden?

Life Insurance: It may make sense to some to purchase life insurance to cover the taxes, however there are several downsides. It may be difficult to guess what the taxes will be early enough to buy a sufficient policy, or waiting until later in life when you have a better idea may risk your ability to purchase the policy to begin with. Finally, the cost of the premiums for the insurance policy may outweigh the benefits and could have been more productive invested elsewhere.

Gift or Sale: It’s possible to gift or sell the property to your heirs at a more opportune time, before it has increased in value significantly can reduce the tax burden on your children. However, should the property increase in value after the sale, the tax burden will be passed on the the next generation.

Other options include transferring the property to a trust or corporation. Interested in finding out more? Contact the Tax Planning professionals at Liu & Associates to discuss your options.

How To Discuss Estate Planning With Your Heirs

Inheritance can be a difficult subject to talk about, from both sides of the table. Parents do not want to create ill will between their children or grandchildren and, on the other hand, the people that stand to inherit do not want to seem greedy or opportunistic.

Often, both sides will have hesitation approaching this very important topic; but addressing the issue will both eliminate confusion and put everyone on the same page.

Here are a few ways to talk about your estate with your heirs:

Decide what you will talk about

While it is probably best to share the entire plan with your heirs, this may depend on both your stages of life. Wait until your children are old enough to understand the impact of what you’re sharing.

It is appropriate to explain to an adolescent whom their legal guardian would be in the event of an accident, but it may not appropriate to delve into financials until they are a bit older.

Pick a good time

Unloading the details of your will may be too much information for one sitting. Depending on your family situation, a family dinner may or may not be the right time, particularly if there are any sensitive issues amongst heirs. There is no standard way to discuss a will; choosing the best time will depend on your family dynamics.

Allow for questions

Make sure your family feels comfortable asking questions about your decisions. Explaining the thought process that went into creating your plan will help them understand it better.

Ask for their reaction

Keeping an open, two-way dialogue shows your heirs that their feedback is important to you. This also gives you an even better opportunity to explain the plan.

Consider following these guidelines, as they can make the discussion easier on everyone involved. There are many complexities in estate planning, but talking to your friends or family does not have to be one of them.

Consult with Liu & Associates if you have any concerns about your estate or how it will be dispersed, we can offer a wide variety of sensible fiscal advice and guidance.

Estate Planning For Beginners

While we spend much of our time working to care for our families, we often overlook the work we can do to protect those we care about when we have passed on.

Estate planning is a logical way to plan and prepare for something that is illogical and unpredictable in its very nature. Our own mortality may not be easy to confront when thinking about assets and finances, but leaving your loved ones with peace of mind and financial stability is a good way to handle the challenging task of estate planning.

NO WILL, NO WAY

Did you know that if you pass away without a valid will in Canada, your estate is completely in control of the provincial government? Without an estate plan, all distribution of your wealth and any important financial decisions will be left to officials that are paid to obey the law not honour your family’s wishes.

And while there is no “death tax” in Canada, any money made from the sale of property due to your estate settlement will be subject to taxation as well.

Own a business? An estate plan is the only way to ensure it is handed down to the person of your choosing. Heirloom antiques? Government executors may have to sell these items if not explicitly protected in a will and estate plan.

WE CAN HELP

Does this already sound too complicated? Considering the reason we need estate plans, it is not uncommon to be overwhelmed. While grim to imagine, a good estate plan can assure your family’s financial comfort and emotional well-being for generations after your passing.

For explanations of these issues and any other financial concerns involved with estate planning, contact Liu & Associates. We can offer advice and many services to ease the burden of securing your family’s future.