No Will And The Worst Case Scenario

by Tax Guy - Burlington Accountant on August 5, 2009 Print This Post Print This Post

I came across a case the other day that is a stark reminder of the importance of having a will and a well though out estate plan.

A husband of three children (ages 10, 12, and 14) passed away from a massive heart attack. The deceased was 50 years old and was the shareholder and director of a successful corporation. His other investments included residential and commercial real estate, investments in a portfolio of stocks and bonds as well as a sizable RRSP.

There was no will. While he had designated his wife as the beneficiary of the RRSP and had her registered as the joint tenant with rights of survivorship of the family home, there was no provisions for the transfer of the other investments and no succession plan for the business. The real estate, business and investment assets totalled $2.5 million.

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What Happens?

The wife will automatically get the family home and the RRSP through a tax-deferred rollover. This means she will get the title to the home without tax consequences and she gets the RRSP essentially transferred to her own RRSP, again without tax consequences.

The investment account and shares of the corporation will be subject to the laws of intestacy in his province of residence and distributed to your family according to those laws. However, the laws of intestacy do not consider personal circumstances and the assets may be distributed in ways you may not have intended.

The Courts Appoints An Administrator

Since there was no will, there is no executor and the courts must appoint one. Often this will be the public trustee and the cost can be expensive! A $2.5 million dollar estate administered by a Public Guardian or Trustee can be as much as $134,000 (in B.C.) and if a trust is required for minor children the annual costs can be upwards of $30,000 per year (in B.C.).

The Division of Assets

Every province has slightly different rules for the division of assets. In B.C., where this person died, the family home plus $65,000 plus 1/3 of the balance of the estate is distributed to the wife and the remainder equally distributed to the children.

Since the children are under the age of majority, the B.C. Public Trustee will administer their inheritance until they are age 18 and then will release the full amount of the inheritance to each of the children. While the Public Trustee administers these trusts, they will charge 1.4% of the annual value of each of the children’s trust or nearly $23,000 per year!

Final Thoughts Taxes

Upon death, the deceased will incur capital gains tax on the deemed sale of his shares of the business, real estate and investments. The portion distributed to his spouse can be done on a tax-deferred basis but the amounts transferred to the children are taxable. The tax on capital gains could have been deferred if he had made a simple will and designated his spouse as sole beneficiary.

If you have minor children or a spouse it is important to make a will!

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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