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The E's of Estate Errors - Equal vs. Equitable (eek!)

Estate planning and distribution of investments. Most parents want to ensure that they treat their kids as fairly as possible. But what could possibly go wrong, if things are fairly simple?

Take Ernie, a retired widowed father who aimed to divide his estate equally between his two children, Arisa and Aali.

Current Assets:

  1. RRIF account - value $250,000

  2. Non registered investment account - value $250,000

Current Debts: None

Will plan: Arisa is executor; Aali contingent executor.

Ernie had recently sold his home and was renting a room in a retirement home.

Once he’d invested the equity from his home sale, his non-registered investment portfolio was about equal to his RRIF balance. Because a RRIF with a named beneficiary doesn’t pass through probate, Ernie opted to name a beneficiary to save on probate fees. He named his eldest daughter, Arisa, as beneficiary, and to offset that bequest, named his youngest daughter, Aali, as the heir to his estate, which consisted solely of the non-registered investment portfolio. Even Steven! Or so he thought.

When Ernie passed away, it was time to settle up with the CRA. As Arisa is the executor, she was pleased to learn that there’d be very little income tax associated with the non-registered investment portfolio because there’d been almost no investment growth. But Ernie's RRIF was fully taxable! Arisa had to tell her sister, “Our inheritances aren’t so even, after all”. Since Arisa was named beneficiary of the RRIF, it was payable to her, in full, by Ernie's investment brokerage. But its tax liability was the responsibility of the estate and had to be paid from the non-registered portfolio willed to Aali. The match wasn’t even close. The estimated tax bill from the RRIF proceeds was approximately $100,000.

Fortunately for the sisters, their relationship was rock solid, and they were keen to see their dad’s estate divided equally between them. They knew this was their father’s wish, because they’d discussed it as a family in advance, and their dad had also documented his intentions. Aali and Arisa split the tax bill equally from the proceeds of their inheritances. Even, as Ernie desired. But in a not-so-friendly scenario, the end result could have been disastrous.

Consider this…

  • While naming a beneficiary (other than the estate) on certain financial instruments means they won’t be subject to probate fees, any tax payable on death is the responsibility of the estate unless the spouse is the beneficiary, then there is no tax liability.

  • When planning, consider the after-tax value of your assets, or account for taxation in your planning.

  • If the heirs of the estate are receiving equal portions, naming them equally as beneficiaries on the financial instrument keeps things even-steven.

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