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Halifax Estate Planning Council

Halifax Estate Planning Council. February 2007 Case Study. The Case Study Facts. The Client: Dad (age 58) Immigrated to Canada in his twenties from Greece Owner of development ( “ Constructco ” ) and real estate holding companies ( “ Realco ” ) Actively involved in the businesses

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Halifax Estate Planning Council

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  1. Halifax Estate Planning Council February 2007 Case Study

  2. The Case Study Facts • The Client:Dad (age 58) • Immigrated to Canada in his twenties from Greece • Owner of development (“Constructco”) and real estate holding companies (“Realco”) • Actively involved in the businesses • Second marriage • One son (28) from first marriage who is actively involved in the business • Second wife (45) and daughter (16) who Mom wants to be involved in the business • Elderly Grandmother (83) who Dad has brought over from Greece Halifax Estate Planning Council

  3. The Client’s Personal Assets- Initial Meeting • Jointly owns home with second wife FMV $800,000 ACB $600,000 • RRSPs $600,000 • Owns 100% of Realco and Constructco • Personally owns first rental property purchased • 4 unit building personally owned FMV $500,000 ACB $50,000 Halifax Estate Planning Council

  4. The Client’s Corporate Assets • Constructco • $500,000 Term insurance convertible to Universal Life • FMV $1,000,000 – land, work in progress, equipment • Realco • FMV $4,000,000 net of financing • ACB/UCC $800,000 • Debt $1,000,000 operating line Halifax Estate Planning Council

  5. The Client’s Family Second Wife (age 45) • Not employed, has a non-registered portfolio of $350,000 from inheritance • Home is jointly owned with client Son (age 28) • No significant assets, employed in Dad’s development business and works under a General Manager who reports to Dad Daughter (age 16) • From Dad’s second marriage Halifax Estate Planning Council

  6. The Client’s Family Grandma (age 83) • Immigrated to Canada 5 years ago, lives in basement in-law suite of client’s home but desires her own condominium • Life savings is a $750,000 non-registered portfolio Aunt (age 51) • Second Wife’s sister • Resident of NS • Lukewarm relationship with Client’s family; Halifax Estate Planning Council

  7. HEPC 2006 CASE STUDY Grandma 83 Dad 58 2 Wife 45 nd Son 28 Daughter 16 First Property Constructo Co Real Co GM 45 Dad 100% Dad 100% Dad 100% Halifax Estate Planning Council

  8. The Plan • Succession plan for businesses • Retirement plan for Dad and Wife • Business/financial plan for Son • Estate plan for family Halifax Estate Planning Council

  9. Constructco and Constructo2 Son FT Value Pref Shares $1,000,000 Daughter DD2 shares - Son Father Spouse 100 Common 100 Common CONSTRUCTCO INVESTCO2 DD1 Shares 100% Son 60% 25% LEASECO CONSTRUCTCO2 GM 15% Lease • Shareholders’ Agreement of Constructco • Contractually obligates life insurance proceeds to fund purchase of Preferred Shares (drafted to provide flexibility of a redemption or dividend) • Shareholders’ Agreement of Constructco2 • Provides shareholder exit mechanisms to ensure central control of company by a key group of people (avoiding third-party sales, bequeathing shares and involvement by a trustee in bankruptcy)

  10. Realco FT 85% Common DAD 100% Common DAD $2,000,000 Pref. Shares $2,000,000 Pref. Shares REALCO (GM over time) 15% Common INVESTCO • Shareholders’ Agreement of Realco • Son has option to acquire up to 75% of common shares over a period of time if certain business milestones are met • GM has option to receive shares from the Trustees of the Family Trust over time

  11. Dad’s Planning to Date • Purchased a $1,000,000 Joint Last-to-die insurance policy naming the Estate as beneficiary • Purchased $500,000 additional life insurance in Constructco • $1,000,000 total insurance • Froze his interest in Constructco to a discretionary family trust (Trust 1) • Issued preferred Freeze shares • Preferred “super-voting” shares • Froze Realtyco to a different discretionary trust (Trust 2) • Changed beneficiary designation on his RRSP’s to Second Wife and his mother as contingent beneficiary Halifax Estate Planning Council

  12. January 1, 2007 Grandma 84 Dad 59 2nd Wife 46 Aunt 51 Son 29 Daughter 17 First Property Dad 100% Constructo Co Comms: Trust#1 Prefs: Dad “Freeze” Supervoting Real Co Comms: D. Trust #2 Prefs: Dad “Freeze” Supervoting $1,000,000 Insurance Trust #1 Trust #2 Halifax Estate Planning Council

  13. The Client’s Personal Assets- Date of Death • Jointly owns home with second wife FMV $800,000 ACB $600,000 • RRSPs $600,000 (Beneficiary: Wife; Contingent: Grandma) • Owns Preferred shares • Realco –“Freeze shares”: $3,300,000 • Constructco –“Freeze shares”: $1,000,000 • Plus nominally valued “super-voting” shares of each; • Joint last to die policy: $1,000,000 Halifax Estate Planning Council

  14. Current Facts • Dad & Second Wife died in a car crash on January 1, 2007 • CSI crew cannot determine who died first • Daughter, now 17, has a new boyfriend, who is a drug dealer Halifax Estate Planning Council

  15. Distribution of Dad’s Estate • Dad was older than Second Wife and is therefore presumed to have predeceased Second Wife under the Survivorship Act, R.S.N.S. 1989, c. 454 • “3(1) Where two or more persons die at the same time or in circumstances rendering it uncertain which of them survived the other or others, such deaths are, … for all purposes affecting the title of property, presumed to have occurred in the order of seniority, and accordingly the younger is deemed to have survived the older.” Halifax Estate Planning Council

  16. Distribution of Dad’s Estate (Cont’d) • Significant implications to the distribution of Dad’s assets • Second Wife acquires 100% interest in house as the surviving joint tenant • Dad’s RRSP – does it pass to Second Wife as the designated beneficiary or does it pass to Grandma as contingent designated beneficiary? Halifax Estate Planning Council

  17. Distribution of Dad’s Estate (Cont’d) • Beneficiaries Designation Act, R.S.N.S. 1989, c.36 permits designation of a beneficiary for a registered plan (section 9) • Since Second Wife survived Dad, Dad’s RRSP payable to her • However, Act does not apply to designations made pursuant to the Insurance Act, R.S.N.S. 1989, c. 231 (as amended) Halifax Estate Planning Council

  18. Distribution of Dad’s Estate (Cont’d) • Section 218 provides as follows: • “Unless a contract or a declaration otherwise provides, where the person whose life is insured and a beneficiary die at the same time or in circumstances rendering it uncertain which of them survived the other, the insurance money is payable in accordance with subsection (1) of Section 196 as if the beneficiary had predeceased the person whose life is insured.” Halifax Estate Planning Council

  19. Distribution of Dad’s Estate (Cont’d) • Accordingly, if the RRSP was held by an insurer in insurance products and a declaration pursuant to the Insurance Act had been made, Second Wife would have been treated as predeceasing Dad and the contingent designation to Grandma applies • Tax would have been payable by Dad’s estate • Assumption: RRSP not an insurance contract Halifax Estate Planning Council

  20. Distribution of Dad’s Estate (Cont’d) • The remainder of Dad’s assets pass under the Intestate Succession Act, R.S.N.S. 1989, c. 236 (as amended) as follows: • $50,000 to Second Wife as her preferred share (ss.4(2)) – equal to Dad’s bank account • Rest of the estate (comprised of freeze preferred shares of Constructco and Realtyco, voting preferred shares of Constructco and Realtyco and four unit rental property) are divided one-third to Second Wife and one-third to each of Dads’ two children, Son and Daughter (ss. 4(5)) Halifax Estate Planning Council

  21. Distribution of Dad’s Estate (Cont’d) • Common shares of Constructco and Realtyco held by Family Trust 1 and Family Trust 2 pass the same way (one-third/ one-third/ one-third) Halifax Estate Planning Council

  22. Distribution of SecondWife’s Estate • Second Wife is deemed to have died immediately after Dad • Second Wife has no spouse at the time of her death but has one child, Daughter • Under Intestate Succession Act, Daughter inherits 100% of Second Wife’s estate (ss. 4(7)) Halifax Estate Planning Council

  23. Distribution of SecondWife’s Estate (Cont’d) • Second Wife’s estate comprises: • Matrimonial home • Second Wife’s own non-registered portfolio • 100% of Second Wife’s interest in Dad’s estate • Proceeds of joint last to die insurance policy – More on this later Halifax Estate Planning Council

  24. Beneficial Ownership ofAssets After Both Deaths(Before Probate or Income Tax) Halifax Estate Planning Council

  25. Administration Issues • Son to act as administrator of Dad’s estate pursuant to the Probate Act, S.N.S. 2000, c. 31, paragraph. 32(1)(a) • Son will require an administrator’s bond equal to 1.5 times the total value of Dad’s estate – extremely expensive • Public Trustee is administrator of Second Wife’s estate, notwithstanding Aunt wishes to be appointed – Probate Act paragraph 32(1)(c) Halifax Estate Planning Council

  26. Administration Issues(Cont’d) • Public Trustee could be asked to renounce in favor of Aunt, but unlikely to do so given the value of the estate and the fact that sole beneficiary is a minor child • While Daughter is a minor, she also needs guardian of the person and a guardian of the property under the Guardianship Act, S.N.S. 2002, c. 8 (as amended) Halifax Estate Planning Council

  27. Administration Issues(Cont’d) • Because there is no guardianship appointment by Dad and Second Wife, Aunt must apply to Supreme Court to be appointed guardian of Daughter’s person - Grandma fights this but loses • Public Trustee is authorized to receive Daughter’s interest in Dad’s estate and, if required, Second Wife’s Estate (section 14) Halifax Estate Planning Council

  28. Administration Issues(Cont’d) • Daughter becomes adult at age 19 pursuant to the Age of Majority Act, R.S.N.S. 1989, c. 4, section 2, notwithstanding that she will be an adult for purposes of the Income Tax Act at age 18 • Public Trustee cannot resist transferring all the assets to Daughter at age 19 Halifax Estate Planning Council

  29. Administration Issues(Cont’d) • Public Trustee does not need a bond Halifax Estate Planning Council

  30. Can Post-Mortem Tax Planning Occur? • Very difficult proposition given role of Public Trustee • Some limited scope to effect tax planning that benefits Daughter • Public Trustee will always act in best interest of Daughter • If tax planning saves Daughter significant tax, may support it Halifax Estate Planning Council

  31. Can Post-Mortem Tax Planning Occur? • Court application will be required • Son, as administrator, must act in best interest of Dad’s estate and cannot pursue actions that favor him over Daughter • Principles in BC cases O’Hagan v. O’Hagan, [2000] B.C.J. No. 204 (CA) and British Columbia (Public Trustee) v. Bradley Estate [2000] B.C.J. No. 205 (CA) would be applied Halifax Estate Planning Council

  32. Can Post-Mortem Tax Planning Occur? • Very unclear whether otherwise appropriate post-mortem planning could occur Halifax Estate Planning Council

  33. What if Dad and Second Wife Had Planned Properly? • Dad’s will would have appointed an alternate executor avoiding bonding costs for Son as administrator of Dad’s estate • Second Wife’s will would have appointed an alternate executor and trustee for Daughter avoiding involvement of Public Trustee Halifax Estate Planning Council

  34. What if Dad and Second Wife Had Planned Properly? (Cont’d) • Wills would have contemplated joint death and provided an alternative distribution equalizing estate between Son and Daughter • Both wills would have provided trust for Daughter until age 25 (or later) for estate planning purposes with Aunt as trustee • Wills would have provided for testamentary trust for Son immediately and for Daughter after age 25 (or later) purely for tax planning/income-splitting Halifax Estate Planning Council

  35. What if Dad and Second Wife Had Planned Properly? (Cont’d) • Aunt would have been named guardian of the Daughter’s person by guardian appointment, avoiding court application • The general manager of Constructco would have been properly addressed – not addressed at all without a will and/or shareholders’ agreement/earn-in agreement Halifax Estate Planning Council

  36. What if Dad and Second Wife Had Planned Properly? (Cont’d) • Wills could have provided sufficient powers to the executors to implement post-mortem tax planning that benefited estate as a whole • Professional fees to deal with this mess and the administration bonding costs greatly outweigh costs to implement the plan recommended to Dad in 2006! Halifax Estate Planning Council

  37. Income Tax Issues • Tax on death • Funding of liability • Post mortem planning for corporations • RRSP Halifax Estate Planning Council

  38. Husband’s asset distribution Halifax Estate Planning Council

  39. Wife’s asset distribution Halifax Estate Planning Council

  40. Total distributions Halifax Estate Planning Council

  41. Husband’s Tax • Facts and Assumptions: • RRSP goes to wife’s estate • Capital cost for recapture on rental property assumed to be $30,000 • Husband used capital gains deduction on Constructo estate freeze, therefore ACB of 2/3 of the shares is $333,333. • All income taxed at highest tax rate • Realco shares worth $3,300,000 Halifax Estate Planning Council

  42. Husband’s assets subject to tax ValueTaxable Tax Constructo Voting p/s $ 67 $ 0 0 Freeze p/s $ 666,667 $ 166,667 $ 80,417 Realco Voting p/s $ 67 $ 0 0 Freeze p/s $2,200,000 $1,100,000 $530,750 Rental ppty $ 333,333 $ 150,000 $ 72,375 Recapture $ 20,000$ 9,650 $4,800,200 $3,200,133 $693,192 Probate tax$ 65,918 Total tax liability $759,110 Halifax Estate Planning Council

  43. Wife’s Tax • Facts and Assumptions: • Principal residence exemption used on home • Capital cost for recapture on rental property assumed to be $30,000 – 1/3 owned by wife’s estate • Wife is able to use capital gains deduction on her 1/3 interest in Constructco • All income taxed at highest tax rate Halifax Estate Planning Council

  44. Wife’s tax Value Taxable Tax Constructo Voting p/s $ 33 $ 33 0 Freeze p/s $ 333,333 $ 0 0 Realco Voting p/s $ 33 $ 33 0 Freeze p/s $1,100,000 $ 550,000 $265,375 Rental ppty $ 166,667 $ 75,000 $ 36,188 Recapture $ 10,000 $ 4,825 Portfolio $ 350,000 $ 37,500 $ 18,094 RRSP $ 600,000 $ 600,000 $289,500 Probate tax$ 59,683 Total taxes $673,665 Halifax Estate Planning Council

  45. Post Mortem planning Constructco: • Use life insurance to redeem freeze shares • Loss on redemption can be used to offset ½ of capital gain on death • Tax savings in Husband’s estate: $40,200 • Provides liquidity in estates Halifax Estate Planning Council

  46. Post Mortem planning Realco: • Double tax issue if no post mortem planning • Consider wind-up and 164(6) election • Consider 88(1)(d) bump planning Halifax Estate Planning Council

  47. Realco Post Mortem Tax Planning Halifax Estate Planning Council

  48. Realco Post Mortem Tax Planning Tax in Husband’s estate $530,750 Tax in Wife’s estate 265,375 Total taxes paid by estates 796,125 Corporate tax on wind-up 1,092,000 RDTOH recovered (400,000) Personal tax on wind-up 396,000 Total taxes if no planning 1,884,125 Halifax Estate Planning Council

  49. Realco - 164(6) election • Consider winding up within Estates’ first taxation year • Estates will realize a loss on Realco shares on wind-up • Loss can be used to offset gain on final tax returns of Husband and Wife • 164(6) election • In this scenario, the full loss cannot be carried back – stop loss rules apply • Most tax on death can be offset • Corporate tax paid • Tax on wind-up dividend paid Halifax Estate Planning Council

  50. Realco Post Mortem 88(1)(d) bump Facts and Assumptions: • FMV Land and buildings = $5,000,000 • FMV of land = $2,000,000 • FMV of building = $3,000,000 • ACB Land and buildings = $800,000 • No recapture as ACB = UCC Halifax Estate Planning Council

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