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Yes, we are mere mortals.

It is hard for some people to think that they are mere mortals, but, alas, it is true. Once you accept this fact, you will be able to effectively and properly estate plan. Estate planning may be simple or complex. However, the goal is typically to decide how your assets will be distributed while ensuring that the government gets as little of your money as possible. Estate planning is a very broad topic and is too large an area to discuss in one article. Thus, I will be covering a number of estate planning issues in the next few articles, issues that one should take into account prior to conducting any estate planning.

There are a number of devices that people should consider including in their estate planning tool kits:

1. Wills;

2. Powers of attorney;

3. Personal directives;

4. Trusts;

5. Shareholder agreements;

6. Estate freezes; and

7. Life insurance policies.

What happens to your property at death?

Under subsection 70(5) of the Income Tax Act (Canada) (the Act), taxpayers are deemed to have disposed of their property immediately before their deaths. There are, however, a few "rollover" provisions within the Act, which allow the tax burden that would otherwise be triggered upon your death to be deferred.

Some examples include the following:

1. Subsection 70(6)--Spousal rollover: The following conditions need to be met in order to use this rollover:

a. The deceased was a resident of Canada before death;

b. There was a transfer of property to the deceased's spouse as a consequence of death;

c. The deceased's spouse was a resident of Canada immediately before the deceased's death; and

d. The property vested indefeasibly in the spouse within 36 months or longer with the Minister's discretion (written application for an extension is required). In general terms, "vested indefeasibly" means giving a property owner an unconditional, absolute right to the property that cannot be revoked, defeated or lost.

2. Subsection 70(6)--Spousal trust rollover: The following criteria must be met for this rollover:

a. The deceased was a resident of Canada before death;

b. There was a transfer of property to the deceased's spouse as a consequence of death;

c. The trust was created by the deceased's will;

d. The trust--that is the legal arrangement itself--was resident in Canada immediately after the time the property vested indefeasibly in the trust;

e. The deceased's spouse must be entitled to receive all income of the spousal trust before the spouse's death; and

f. No person except the spouse may, before the spouse's death, receive or use any of the income or capital of the trust.

3. Subsection 70(9)--Transfer of farm property to a child: The following requirements must be satisfied in order to use this rollover:

a. Immediately before the taxpayer's date of death, the child was a resident in Canada;

b. The transferred property is situated in Canada;

c. Before the deceased's date of death, the property was used principally in the business of farming in which, the deceased, spouse, or child was actively engaged on a regular and continuous basis;

d. The property is transferred as a consequence of the taxpayer's death; and

e. The property vested indefeasibly in the child within 36 months or longer with the Minister's discretion (written application for an extension is required).

4. Subsection 70(9.1)--Transfer of farm property from trust to settler's children: This provision provides for a subsequent rollover of farm property if the following conditions are met:

a. The transferred property is situated in Canada;

b. The property was originally transferred to a trust under subsection 70(6);

c. The property immediately before the death of the taxpayer's spouse was used in the business of farming;

d. The property is transferred to a child as a consequence of the spouse's death;

e. The child was a resident of Canada immediately before the death of the spouse; and

f. The property vests indefeasibly in the child.

In addition to these rollovers, the Act also allows ways to minimize your taxes at death. First your principal residence is exempt from tax. Second, life insurance proceeds are exempt from tax depending on the named beneficiary.

Furthermore, there are a number of ways of keeping your property out of your estate at your death. First, this can be done through owning property as joint tenants. A joint tenancy allows the right of survivorship. When one of the joint tenants dies, the surviving joint tenant will take the entire property. For example, when you die and you own property (i.e., your house) in a joint tenancy with your spouse, your spouse will receive the house and it will not become a part of your estate.

Secondly, if you own RRSPs with your spouse as your beneficiary, upon your death, the RRSP will not become part of your estate but will flow directly to your spouse. Additionally, by creating inter vivos trusts, you will dispose of your property prior to your death and pay taxes at this disposition, and the property will not become a part of your estate. Therefore any growth in the value of your property will not be taxed in your hands but will be taxed in the hands of the person to whom you transferred your property. It is a form of accelerating your tax payable. Finally, by naming your spouse as the beneficiary of your life insurance policy, this will take the policy out of your estate.

Dying Intestate

If you die without a will, your property will be disposed of in accordance with the applicable intestate succession acts (for example, the Intestate Succession Act (Alberta) 2000. Usually under such an act, the court must appoint an administrator, which will lead to a delay in distributing your assets, probating, getting a tax clearance certificate, etc. This will also lead to increased legal fees since an application to the courts is necessary for the appointment of an administrator.

The rules under intestate succession acts are inflexible, and the dispositions of your assets may not be as you intended. Further, by dying intestate, you cannot exclude certain beneficiaries, provide gifts to your friends and charities, or appoint guardians or create trust provisions for your children. Usually, a fixed amount of funds is given to your spouse, and then the remaining property will be divided between your spouse and your children.

If your children are minors at your death, the Public Trustee will be in charge of each child's inheritance until he or she reaches the age of 18, at which time the entire inheritance is given to that child. This may allow an 18-year-old access to a large amount of money with no preventative measures to protect him or her from spending the inheritance all at once. In addition, if your spouse has predeceased you, the courts will then appoint a guardian for your children. This may cost a lot of time and money, and the person who is appointed as your children's guardian may not be the person who you would have chosen.

Preparing Your Will

A will is one of the key documents that you will prepare while estate planning. Your will can dictate who will get your property and in what amount, and can also set forth care and guardianship provisions for your children. If you currently do not have children, having a will with general guardianship provisions can be crucial in the event of your death, in case you do not have time to change your will if and when your children are born. Remember, a will can always be changed to address the new circumstances in your life, but a basic will can be quite helpful in the event that you didn't have time to change your will prior to your death.

You can prepare your own will, but it may be safer to seek legal counsel since there are a number of formal and legal requirements that must be met to have an enforceable will. Such requirements include the following:

* the will is in writing and is properly signed and witnessed;

* the testator has the capacity to prepare the will; and

* the witnesses are neither beneficiaries nor related to family members of beneficiaries. Below is a list of issues that you should consider when preparing your will:

1. Consider your marital status and citizenship, and the citizenship of your spouse;

2. Identify your assets and their values and locations;

3. Identify the persons who you would like to include in some way in your will (i.e., spouse, children, children of a previous marriage if any, relatives, friends, etc.);

4. Consider the type of gift which these persons should receive;

5. Identify your executor and alternative executors if your initial executor predeceases you or is unable to act;

6. If you have children, identify who will be their guardian and their alternative guardians;

7. Also, consider who should receive your gifts or bequests if your beneficiaries predecease you;

8. Identify who should receive the residue of your estate; and

9. Consider funeral arrangements.

To be continued ... Chastine M. Taerum is a lawyer with the firm of Felesky Flynn LLP in Edmonton, Alberta.
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Title Annotation:TAX law
Author:Taerum, Chastine M.
Geographic Code:1USA
Date:Jun 1, 2005
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