Move assets out of estates before death

Legacy: everybody has a different idea of what it looks like. But excessive taxes, legal hassles or family conflict shouldn’t be part of it.

Pushing assets out of a client’s estate before death addresses these concerns. The move can both eliminate probate fees on the assets in question, and mitigate legal challenges from creditors and heirs.

A variety of strategies

Ian Hull, partner at Toronto’s Hull and Hull LLP, notes while probate dodging shouldn’t be the sole driver of an estate plan, “if you can properly avoid it, you should.”

Hull identifies four viable strategies:

• joint ownership
• multiple wills (in jurisdictions that permit them)
• inter vivos trusts
• estate freezes

He says those strategies could theoretically be used with most assets, although they make the most sense for business owners and their heirs.

In such cases, an estate freeze can be effective. A typical example: an owner builds a company from scratch; several years later, she wants to pass the business to her kids. The owner exchanges existing common shares for preferred shares set at the company’s current value, while issuing new common shares to the kids.

Businesses and cottages are easy to dispose of

No, these are the most complicated assets, often causing family friction.

“Initially the new common shares are worth $1, but any growth in the company stays with the common shares. You are essentially starting to give away your assets before you die,” Hull says.

Canadian estate-planning specialists also suggest getting rid of most U.S. assets before death.

“The U.S. rules have been changing fast and furiously, and we’re not sure where they’re landing,” Hull says. “Clients are having to do more sophisticated tax planning than ever. Even something as simple as owning a condo in Florida is a lot more complicated.”

Should your client move assets out of the estate?

• Does it make financial sense? Advanced estate planning isn’t cheap. Before starting, make sure the savings outweigh the costs.

• Is it worth the headache? Multiple wills, inter vivos trusts, or an estate freeze all take time and effort. Not every client will make the investment.

• What about control? Moving an asset out of the estate typically involves giving up some degree of control. This is easier for some clients than others.

• What’s the family dynamic? Could family issues derail the estate plan? Are there former spouses, or children from previous marriages who require special consideration?

As a result, people are deferring U.S. taxation. “Many couples are holding assets jointly so they can drag out the final decision as to how best to pass [them] on,” Hull says. “Others are putting U.S. assets into a Canadian trust.”

Family matters

Family concerns are equally important, particularly if there’s potential for family members to initiate legal challenges after the client dies, says Deidre Herbert, partner at McLellan Herbert in Vancouver.

“In provinces that have dependant relief legislation—B.C. has a very broad one—some individuals may want to remove assets from their estate to avoid [adult] children making claims,” she says.

Transferring assets into a trust can avoid such problems. Joint ownership is another possibility, as long as there are “documents in support of those joint assets that describe the intention,” she says. “Are they to pass to the survivor on death? Or does the survivor hold them in trust for the estate?”

Any asset can lead to challenges, though businesses and cottages typically cause the most headaches. Even the family home can be the source of conflict, says Herbert, “if the transfer occurred when the deceased was very ill or subject to undue influence, [or] it was contrary to previously discussed plans.”

James Dolan is a Vancouver-based financial writer.