Key Market Facts

May 6, 2005

The first part of this two part series was written in the March 15th, 2005 issue of Markets @ A Glance. That issue contained the basics of an Estate Plan, Planning for Incapacity, Your Will and Testamentary Trust. To view this or any other issue of my newsletter please visit my website at www.rbcinvestments.com/kathy.findlay.

Death and Taxes
There are potentially three types of taxes that are due upon death: probate (provincial) taxes, federal taxes and US estate taxes. Probate taxes are levied on all assets that pass through the will. In British Columbia, they amount to 1.4% of the value of all assets over a combined total of $50,000. Assets that avoid probate taxes are those registered in joint tenancy with right of survivorship, a registered account with a named beneficiary, assets held in a living trust and the proceeds of a life insurance policy if the beneficiary named is not the estate.

Federal taxes are levied on the deemed disposition of all assets at death excluding your principal residence, any assets held in joint tenancy with right of survivorship with your spouse, all assets passed to a spouse in a will and any registered accounts where the spouse is named as the beneficiary. Deemed disposition assumes that on the day you pass away all of your assets are sold at their fair market value although in reality they have not actually been sold. For example, the capital gain on a recreational property or a stock portfolio are said to be realized at your death unless one of the three above mentioned situations exists.

Upon the death of the second spouse, all remaining registered accounts (RRSPs or RRIFs) are taxed as income regardless of who is named as the beneficiary, except if the beneficiary is a charity or a disabled child. However, if the surviving spouse names a specific beneficiary they do avoid probate taxes even thought the income taxes cannot be avoided. This is definitely worth considering.

Registering your assets in joint tenancy with right of survivorship does avoid probate taxes and can defer income taxes however you must be cautious with who you do this with. The assets in this form can be used 100% by any of the joint tenants and can be seized by the creditors of one of the tenants at any time without warning.

US Estate taxes may have to be paid by any individual whose personal world -wide wealth is greater than $1.2 million US and their US assets are greater than $60,000 US. The threshold is marginally lower if you personally own US real estate. If you are concerned about whether or not your estate may be subject to US estate taxes please give me a call or contact your accountant.

Gifting Assets
This is the easiest method for transferring wealth while you are alive as there is no prescribed limit in Canada for gifting. There may be tax implications only if the assets that you gift contain unrealized capital gains. Ensure that you do not gift away too many assets so current lifestyle can be maintained for the remainder of your life.

Living Trusts
These trusts are set up while you are alive as compared with the testamentary trusts, which are set up upon your death. Living trusts are not as tax efficient as testamentary trusts as any income earned in a living trust and not distributed to the beneficiary is taxed at the highest marginal tax rate (43.7% in BC).

The advantages of a living trust are that the assets avoid probate and they are not subject to the Wills Variation Act. Assets held in a trust do not pass through the estate and therefore their distribution cannot be challenged. The assets are distributed as per the terms of the trust agreement that governs them and you stay in control of the assets. In the case of an Alter Ego Trust or a Spousal Trust there is no deemed disposition on the transfer of your assets to the trust; the tax on the disposition is deferred until death.

Insurance
Insurance can play an important role in preserving the value of your estate, particularly after the death of the second spouse. Most married couples will look at a joint last to die insurance policy to cover any taxes and final expenses that will occur upon the death of the second spouse. As this policy is insuring the life of two individuals, it is more cost effective than two separate policies. Life insurance death benefits are not taxable as they avoid the will and are paid directly to the beneficiaries. If the beneficiary of your life insurance policy is a charity it can provide a tax benefit to your estate upon your death.

When preparing your estate plan you should consider all of the topics covered in this two article series. For further information on any of these areas please call me at 604 257-7055.

Did You Know?

So many of us are determined to own some amount of life insurance as a way to protect our families from the loss of income that would occur as a result of our untimely death. Although it is important to ensure that you have adequate life insurance here are some statistics that may make you think twice about where all your insurance dollars are going.

An individual has a:

• 1:3-4 chance of having a critical illness in their lifetime
• 1:8-16 chance of having a disability that lasts longer than 90 days and
• 1:150 chance of passing away before their life expectancy.

If you do not currently own critical illness or disability insurance you may want to consider them as you are more likely to become critically ill or disabled than you are to die before life expectancy. Please call me at 604 257-7055 for more information.

RBC Dominion Securities Inc. is a member company under RBC Investments. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities which are affiliated. Investment Advisors are employees of RBC Dominion Securities Inc. Member CIPF. ?Trademark of Royal Bank of Canada. RBC Investments is a registered trademark of Royal Bank of Canada. Used under licence.©Copyright 2003. All rights reserved

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Insurance products are offered through RBC DS Financial Services Inc and RBC DS Financial Services (Ontario) Inc. (« companies ») The companies and RBC Dominion Securities Inc. are member companies under RBC Investments and are separate corporate entities which are affiliated. When discussing and selling life insurance products, Investment Advisors are acting as Insurance Representatives of RBC DS Financial Services Inc or RBC DS Financial Services (Ontario) Inc.