June 25th 2017, was the eighth anniversary of the death of Michael Jackson, the undisputed King of Pop. Albertans preparing wills and estate plans should look beyond the sensational headlines about the singer's life and the circumstances of his death and consider the issues faced by Jackson's estate when creating their own estate plans. Using Jackson's estate as an illustration, this blog post will focus on general tax considerations for estate planning in Alberta.

The Jackson Estate's tax troubles

This is a highly simplified summary of the issues that Jackson's estate faced following his death. The King of Pop passed away unexpectedly on June 25, 2009. He left behind a will which established a testamentary trust for the benefit of his mother and three children. It was alleged that Jackson died with significant debts, such that the estate was essentially worthless. The Internal Revenue Service (IRS) disagreed and identified a lengthy list of allegedly incorrect valuations and deficiencies by the personal representatives of the estate. The IRS took the position that Jackson's name, likeness and other intangible assets were worth $434 million. With penalties, arrears and legal fees, it was estimated that tax-related estate administration costs would approach $1 billion. The matter went to trial in February 2017, and as far as we have been able to uncover, the decision is still pending. In the meantime, Jackson's executors managed to generate significant income within the estate by monetizing his catalogue, name and image.

What does this mean for me?

In Canada, when someone passes away, the Income Tax Act deems them to have disposed of all of their assets at fair market value. Those deemed dispositions are reported on the Terminal Tax Return, which has to be prepared and filed by the personal representatives of the estate.

If you pass away while employed, with a business, investments or other assets that appreciate over time, there is a strong likelihood that your estate will have to pay some tax. However, there are a number of ways to plan during your lifetime to either minimize the tax your estate will have to pay, or at least to ensure that your estate will have sufficient resources to pay the tax after your death. A full review is beyond the scope of this blog post, but below is a list of things to consider when updating your estate plan:

  • If you gift property to your spouse or common law partner, the tax that your estate would have otherwise owed can be deferred to the death of the second spouse or partner
  • RRSPs and RRIFs can be rolled over to spouses and common law partners, minor children or disabled adult children who are your dependants, so that the tax is deferred until their deaths
  • A beneficiary of an RRSP or RRIF typically receives those proceeds directly outside of the estate. If you designate someone other than a spouse, common law partner, minor child or disabled adult child, no tax deferral is available, and your estate will pay the full tax on that asset. If the beneficiaries of the RRSP/RRIF are different from the beneficiaries of the residue under your will, you may be giving a windfall to one set of beneficiaries to the detriment of the others
  • If you have multiple properties, consider claiming the principal residence exemption on the property with the highest capital gain
  • If you own a family business, it may be appropriate to implement an estate freeze at a time that you are prepared to transition the growth in the business to the next generation – an estate freeze will allow you to crystallize your tax liability on the business assets so that you can plan for its payment accordingly
  • If you own property in multiple jurisdictions, make sure to organize your affairs so that your estate is not paying tax in both jurisdictions
  • Consider purchasing life insurance in a sufficient amount to cover the estate's anticipated tax liabilities. Properly document your wishes with respect to the life insurance proceeds so that they are used in the manner in which you envisioned
  • If you are a creative individual who has tangible or intangible assets such as copyrights, trademarks, artistic works and licensing agreements, those assets carry a fair market value and will need to be addressed as part of your planning process

These are only some examples of the tax planning considerations that you may wish to consider or access in your estate plan. The best results usually arrive from a competent team of professional advisors including your accountant, lawyer and financial/insurance advisor who work together and with you to achieve your objectives.

Estate planning is an important task at any stage of adult life. If you are thinking about implementing your first estate plan or updating your existing one, Field Law can help you identify your needs and implement a plan that gives effect to your wishes. 

Originally published June 2017

Predrag (Peter) Tomic is a wills and estates lawyer with a focus on complex estate and trust litigation, estate planning and probate matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.