Why the TFSA is a top choice in estate planning

Why the TFSA is a top choice in estate planning

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The tax-free nature of the TFSA gives it a leg up on the RRSP when it comes to estate planning, according to financial experts.

For all the investment accounts and tax strategies out there to protect your life’s wealth from the taxman when you die, one of the most popular options among finance experts to protect assets from inheritance taxes is by makes a tool that many Canadians already have: – Free Savings Account (TFSA).

“Even when you die, there will be no tax. It’s a pure tax-free account,” said Sylvia Azoulay, vice president of tax and estate planning at Richardson Wealth. Yahoo Finance Canada by telephone.

“You want to maximize the amount you can contribute.”

At the time of death, there is no tax on your TFSA.

If the spouse is named successor, it will automatically pass to the owner’s spouse, tax-free, whether or not the spouse has sufficient contribution room. On the death of the spouse, the fair market value of the account is transferred to their estate or to a beneficiary, tax-free.

There is so much flexibility from an estate planning perspective.Frank Gasper, CSR Wealth Management

If there is no spouse, the TFSA holder can name a beneficiary and the non-taxable benefit still applies.

Compare that to Registered Retirement Savings Plans (RRSPs). All money in an RRSP will be taxed in the hands of the account holder upon death, which could result in a huge tax hit for family members.

If the spouse is designated as the beneficiary on the account, it will be transferred to him and the tax will not be immediately due. However, it is important to note that taxes will have to be paid whenever withdrawals are made from the account or upon the death of the surviving spouse.

That’s one of the reasons Frank Gasper, Wealth Advisor and Founder of CSR Wealth Management, also touts the TFSA as a great estate planning tool.

“There’s just no downside,” he said. “There is so much flexibility from an estate planning perspective.”

On death, a deemed disposition is triggered on the person’s assets, which means that it is as if all of their assets were sold at fair market value just before their death, which could result in a large tax bill for members of the family.

Using measures built into government and the tax system, such as tax exemptions and inheritance rules, along with some additional financial planning strategies, can help protect assets from taxation and leave more money to family members.

Life insurance as an investment

It’s not as big of a deal as the usual suspects like an RRSP, TFSA, or stock brokerage account, but life insurance policies can also be used as an investment tool, with the added benefit allow investments to grow tax-free.

“You can use life insurance as an additional investment asset class,” Azoulay said.

“If you have money that you know you won’t need for yourself, you can invest in a life insurance policy, and it will be paid out tax-free when you die at your heirs.”

Segregated funds are also sometimes used in estate planning. They are essentially mutual funds with an element of life insurance. They can protect themselves against market downturns since they guarantee 75-100% of the money initially invested and can bypass probate fees since they have named beneficiaries.

However, Gasper, who is also a life insurance agent, says segregated fund fees are higher than other investments, so he “not a big believer.”

There are certain situations where they can make sense to a client, but that’s rare, he says.

Real estate in estate planning

When it comes to real estate, most Canadians are familiar with the principal residence exemption, which allows the family residence to be sold tax-free.

For married couples, the marital home is often held in joint ownership, which means that the property belongs to both parties. Azoulay says this allows the home to seamlessly pass to the surviving spouse upon the death of the other and bypass probate fees.

Minimizing property taxes when secondary properties such as a cottage or vacation property are involved can be much more difficult. However, one of the advantages of the principal residence exemption is that it can be spread across multiple properties, not just the main family home.

If one property had a greater gain in value than the other, the exemption can be applied to protect the gain. It involves calculations and research, Azoulay says, but it can reduce an individual’s overall tax burden.

Michelle Zadikian is a Senior Reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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