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Estates & Wills & Trusts

Will drafting involves 'mental gymnastics'

When drafting a will, it's important that people give serious consideration to inevitable issues, such as taxes and who should benefit from the estate, Thunder Bay wills and estates lawyer Rene Larson tells AdvocateDaily.com.

Larson, a seasoned wills and estates lawyer and principal of Larson Lawyers Professional Corporation, says too often people want to bequeath assets and property to beneficiaries, forgetting about the associated costs.

“People don’t tend to do in-depth planning,” says Larson, who helps clients avoid common pitfalls in drafting wills. “They think about which asset is going to which beneficiary. And that, in itself, creates a problem of whether there was the intention to treat the beneficiaries equally because the properties are not always the same value.

“Often they have different income tax or capital gains tax implications.”

For example, a father might want to assign a piece of property to his daughter and another asset to his son. And although both may have the same value, the tax implications might be much different.

Another scenario could involve the testator deciding to leave his prized 2007 Mustang as a special gift to someone in his will. But what happens if, at the time of his death, he no longer has the car and the gift fails.

“If he doesn't have the car anymore, then that person gets nothing,” says Larson. “The asset method won’t necessarily produce equality at the end.”

He suggests the better approach is to look at the bigger picture. If the goal is to divide everything equally between the children, it might be better to assess all the assets, calculate any debts and taxes owing and determine the net value of the estate before dividing the property.

The income tax implications can be significant, he adds.

“How do those taxes get paid? Because first, you have to deal with funeral and testamentary expenses, which could come with legal, accounting and court fees,” he says.

The taxes fall into the category of debt, and upon death, there are certain tax obligations. If there are RRSPs in the estate, income tax will be payable.

A common one is capital gains tax.

The deceased's principal residence could be exempt, but taxes will likely be owed for any other property.

“Cottages in themselves are special problems that have to be dealt with, whether or not only one member of the family unit inherits it” because there will be income tax owing, says Larson.

The will can address how that tax will be paid — from the general estate, or from the beneficiary receiving the cottage. It’s a problem many people don’t consider when drafting their will, Larson points out.

“The reality is you can’t make a distribution to beneficiaries until you pay the tax, which is the debt of the estate,” he says.

Investments with a named beneficiary such as an RRSP, insurance policy, tax-free savings account, pension plans — will not go into the estate, it will be outside of their estate, Larson says.

"However any income taxes owing will be paid out of the estate, and RRSPs or RRIFs are taxed the highest," he says. That may affect the liquidity of the estate later. People aren’t usually willing — or aware — they must do those mental gymnastics.”

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