4 Reasons to Transfer Money at the End of Life
There are numerous ways to transfer assets to others. The challenge is to make those transfers in the right way at the right time so that you remain financially secure, take into consideration the circumstances of the recipients, and minimize taxes. There are four fundamental ways that property can be transferred at the end of life, they are as follows:
The most common form of joint tenancy is joint tenancy with right of survivorship (“JTWROS”). This is a form of ownership of property where at least two people have an equal right to account assets, and when one of them dies ownership of the property automatically passes to the surviving joint tenant(s). It is common for a married couple, and often domestic partners as well, to own their residence as JTWROS, but sometimes business partners or a parent and a child might also own property in this manner. Neither of the joint tenants in this arrangement can sell or encumber the property without the other’s consent.
An advantage of JTWROS is that the property will not be subject to probate, and thus full ownership passes immediately to the surviving joint tenant. A disadvantage is that the deceased joint tenant forfeits any right to dispose of his or her interest in the property. If he or she has children by a previous marriage, or wants to benefit other family members or charities, they would receive no part of the property unless the surviving tenant chooses to provide for them.
The form of joint tenancy, normally chosen by those who are not married, is tenancy in common. Whereas in a JTWROS the tenants have equal ownership of the property, in a tenancy in common, there can be unequal ownership. For example, one of the tenants might have a 25 percent interest and the other a 75 percent interest. This would likely have resulted from the fact that one of them contributed 25 percent of the cost of purchasing the property while the other paid 75 percent of the cost. When one of the owners dies, his or her interest does not pass automatically to the surviving tenant. Instead, it passes by direction of the deceased tenant’s will or trust agreement. Either of the tenants can dissolve the tenancy in common by proposing a division of the property, and if they cannot agree on the terms of the partition, a court order forcing sale of the property and division of the proceeds can be secured. While transfer of a tenancy-in-common interest is subject to the normal procedures applicable to property transferred through a will or trust, it does not risk disinheritance of people the tenant wants to benefit.
The death proceeds of a life insurance policy are paid to the named beneficiary(ies). Like property owned through JTWROS, these proceeds are not governed by the will and are not subject to probate unless the policy owner’s estate is named as beneficiary. Normally, the proceeds are paid as soon as a claim form is completed and filed with a copy of the death certificate. The policy owner at any time can request a change-of-beneficiary form from the insurance company and list the new beneficiaries and the percentage of proceeds each is to receive. It should be noted that a charity, as well as individuals, can be named as a beneficiary. For example, the policy owner might stipulate that one-third of the proceeds be paid to a charity and one-third to each of two children. A charity could also be named as a contingent beneficiary to receive proceeds in the event that the primary family beneficiary is not living.
Remaining assets in a retirement fund, such as an RRSP or RRIF are also transferred to named beneficiaries, and like insurance proceeds are not governed by the will and subject to probate unless the owner’s estate named as beneficiary. The plan owner can request a change-of-beneficiary form from the plan administrator and, as with an insurance policy, designate new beneficiaries and the percentages each is to receive. Consult your lawyer about any limitations on transfers of qualified retirement plan funds during life or at death without spousal consent.
A simple way to make an end-of-life gift to a charity is to name it as a beneficiary of all or a percentage of whatever funds remain in a retirement plan. The charity will issue a donation receipt for the amount received, and the resulting credit will offset the tax on the distribution, enabling you to give the remaining funds to the charity with no tax cost. Sometimes a better alternative is to indicate in your will the amount you wish to give by bequest and empower your executor to select the assets with which to satisfy the bequest. The executor could select highly-appreciated listed securities because the gain in them is exempt from tax when they are contributed to charity. If the securities were given to individuals, 50 percent of the gain would be taxed. By making the gift in this manner, tax on the gain is avoided, and the tax credit for the gift would reduce the tax on remaining retirement funds.
Another simple way to transfer assets is by beneficiary designation on a bank account. You would name a specific person as a beneficiary of funds in your account at the time of your death. The beneficiary has no access to your account while you are alive but becomes account owner at the end of your life. The beneficiary can be either an individual or an organization, such as a charity.
A very common way of transferring property at death is through a trust established during your lifetime. Four types of trusts were noted above: a spousal trust, an alter ego trust, a joint partner’s trust, and a charitable remainder trust. The remaining assets of the latter definitely go to a charity, while the remaining assets of the first three could go to individuals or charities or a combination of them.
While a spousal trust can be established by a living spouse for the other spouse, it is more common for the trust to be established in the will of the deceased spouse for a surviving spouse. If the trust is funded with appreciated assets, taxation of gain is deferred until the death of the surviving spouse or earlier sale of the assets. There are also two important non-tax benefits. The spouse who creates the trust can simultaneously provide for the surviving spouse and direct that the principal then be paid to others, perhaps to children by a previous marriage. The other non-tax benefit is expert financial management, thereby lifting this burden from someone who may not be experienced in investing.
A will governs assets not transferred through some form of joint tenancy, by beneficiary designation, or through a trust. If everything a person owns is passed by one of these three ways, a will would have no effect. However, even if a person owns a residence in joint tenancy with right of survivorship, has named beneficiaries of life insurance policies and retirement accounts, and has established a trust, he or she likely owns some things that would not be transferred by one of these means. That is why everyone should have a will. It sweeps up everything that was not otherwise transferred.
Through a will you can give individuals or institutions dollar amounts, specific items or property, or a percentage of whatever remains after paying estate settlement expenses and bequests of dollar amounts and particular property. Fluctuations in the size of your estate will affect the allocation to beneficiaries who receive a percentage of whatever remains (the “residue). For example, when you executed your first will, you might have had an estate of $400,000. At that time, you gave $100,000 to each of A, B, and C, and you said that D and E were each to receive 50 percent of the residue. Now you estate is $3 million, and if you have not changed your will, A, B, and C combined, receive only 10 percent of your estate while D and E receive 90 percent of it. Previously, C and D received 25 percent, but now they get 90 percent. While that might be what you want, possibly failure to update your will resulted in percentage allocations you did not intend.
Taxes Due at the End of Life
If you died on January 1, had no receivables, and your estate consisted of only your principal residence and cash, no taxes would be due on your final income tax return. However, it is likely that you will have received some form of income between January 1 and the date of death, that you may have salary or payments due to you, and that you will own appreciated securities and other property. The income you received in the year of death plus 50 percent of the capital gain in your various kinds of assets, with certain exceptions, will be taxed on our final income tax return. The exceptions are gain in your principal residence, gain in property passing directly to your spouse or funding a spousal trust, or any retirement funds qualifying for a rollover. If you have a lot of appreciated assets, and particularly if you have no surviving spouse for whom you will be providing, your final tax bill could be quite large.
Any charitable gifts you make through your will or by beneficiary designation to The Winnipeg Symphony Orchestra and other charities will reduce that bill. The donation receipts from these end-of-life gifts, plus other gifts made during the final year of life, are creditable to the extent of 100 percent of your net income in the year of death. Any portion of the donation receipts that cannot be used because of this limit can be carried back to the previous year and used, again to the extent of 100 percent of our income that year. Effectively, your income tax for that previous year is re-figured and an additional tax credit allowed.
Example: Suppose Roger’s income and taxable gain in the final year of his life was $300,000, and he left a bequest of $100,000 to charity. Since the bequest is not more than 100 percent of $300,000, the entire amount can be claimed for credit. The allowable credit in the province where he resides is 46.4% of $100,000 = $46,400. If he had left a bequest of $400,000, the amount he could claim for credit on the return for his final year of life would be $300,000. The remaining $100,000 could be carried back and an additional credit allowed.
Avoiding Blunders with End-of-Life Gifts
Following are some blunders that might cause the final distribution of your assets to be different from what you intended.
- By incorrectly assuming that your will, or trust, controls the disposition of all assets, you failed to coordinate beneficiary designations with the will or trust. For example, you want your children to receive equal amounts and you so state in your will, but you name one of the children as beneficiary of a life insurance policy. That child will receive more than the siblings.
- A similar error is failing to coordinate property owned in joint tenancy with your will. If you create a joint tenancy with right of survivorship for a home or other property, the surviving tenant will receive the property in its entirety and then have full discretion of how to dispose of the property. Thus, your intentions might be frustrated if you have children by a previous marriage and wanted them eventually to benefit from your interest in the property. Consider making a chart showing what will flow to individuals and institutions by all four means – joint tenancy, beneficiary designations, trusts, and the will – and tally the results. Then make any changes necessary to achieve the desired results.
- Your “estate” is named as beneficiary of your life insurance policies and retirement account, but you omitted to make a will. All of the proceeds from your policies and retirement plan will pass according to the intestate laws of your province.
- In your will, you provided for a trust to be established for a minor child, but you named that child as beneficiary of a life insurance policy. That results in confusion as to whether the insurance proceeds were to fund he trust or the trust was to be funded with probate assets.
- You want to provide income to your spouse but preserve the principal of your estate for children by a previous marriage, but you (1) fail to execute a will or (2) make a will leaving everything to your surviving spouse with a verbal understanding that he/she will distribute the property per your understanding with each other. To assure your wishes, you should have created a spousal trust making your surviving spouse the income beneficiary and your children the remainder beneficiaries. If you want to provide for a charity as well as children, the charity could be one of the remainder beneficiaries of the trust.
- You forgot to update beneficiary forms after life changes. Review these to make sure they are compatible with your overall estate plan. You may want to add beneficiaries or delete some because you provided for them in other ways.
- You provide for a bequest to charity in your will but not in your alter ego trust agreement, but nearly all of your assets have been transferred to the trust. Be sure that there will be enough assets in your probate estate to pay bequests in your will.
- You were overly restrictive in the language of your charitable bequest. If you want a bequest to be used for a specific purpose, call our office to confirm that that we can fulfill you intentions. Another error with charitable bequests is using ambiguous language as to the identity of the charity. We can provide you or your lawyer with the correct legal name.
Having invested many years of your life building your estate, it is natural that you want your property to be distributed according to your intentions. We hope this booklet has been helpful in describing the various ways property can be transferred both during life and at the end of life, in alerting you to errors that can result in unintended consequences, and in helping you develop an agenda for the meeting with your lawyer.