Death and Taxes: Spousal Rollover
The inevitability of death and taxes is a time-worn adage that we all know. But the fact that we hear it so often doesn’t mean we should stand by and watch it happen. If you keep up with your income sources and tax brackets as you move from work to retirement, your tax bill can be delayed, reduced, or both. And if you plan your estate ahead of time, your surviving relatives can be spared a hefty tax bill.
Non-Registered (Open) Accounts
A taxpayer is deemed to have disposed of all capital property, immediately before death, at fair market value. So in the eyes of the government, the instant before you pass away, you’ve conducted the biggest fire sale of your (after)life. This includes stocks, bonds, mutual funds, real estate, farm property and anything else you own in your own name (RRSPs are treated somewhat differently; we’ll discuss that later). If the proceeds of this sale, or disposition, exceed the Adjusted Cost Base (Or ACB – the cumulative net expense you’ve put into acquiring that property), the result is a capital gain.
50% of that capital gain will be taxable to you and has to be reported on the final tax return (called the Terminal Return). If you own qualifying property, such as a farm or shares of a small business corporation, you may be able to claim a deduction against those capital gains.
Spouse or common-law partner as beneficiary
The most common exception to deemed disposition rules occurs when the capital property is transferred to your spouse or common-law partner (CLP) – or to a testamentary trust set up in his or her name. That trust is usually created through the will, so be sure to check with your estate attorney whether it makes sense to include that provision. The testamentary spousal/CLP has to meet certain criteria, but it will usually entitle the beneficiary to receive all of the income generated by the trust in his or her lifetime. When property is transferred to the spouse/CLP, the transfer can be done without pulling the trigger on capital gains.
Example:
John and Mary are married. John has an open mutual fund investment, with an ACB of $150,000. When John died, the fair market value of his holdings had grown to $250,000. The accrued capital gain was $100,000.
If John left the investment in the mutual fund to Mary through his will, the investment can be transferred to Mary’s name. She will acquire the funds at an ACB of $150,000, and defer the $100,000 capital gain.
If Mary wasn’t the named beneficiary, John’s fund would be deemed disposed at a fair market value of $250,000. This results in a capital gain of $100,000. 50% of that gain would be taxable, so assuming John’s marginal tax rate was 46.41%, there would be $28,205 in taxes owing on that investment.
Tags: Estate Planning, Investments, Mutual Funds, RRSP, Taxes
This entry was posted on Monday, October 5th, 2009 at 1:35 pm and is filed under Estate Planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
