The will is at the centre of estate planning. It determines how your estate will be carried out.
But what happens after you die? What should an executor of an estate watch for?
When you plan your estate, think about the role your executor will play to ensure the process is as smooth as possible.
Executor
General responsibilities of an executor carrying out an estate include:
- locate and review the current copy of the will
- obtain the death certificate
- make appointments with the deceased’s lawyer, accountant and investment advisers
- apply for probate or court approval of authority to act on behalf of estate
- file appropriate tax returns
- pay all taxes and bills of the estate
- distribute the assets of the estate to beneficiaries after tax clearance is received and all debts have been settled
The executor is personally liable for all expenses and taxes after assets have been distributed from the estate. Therefore, the executor must ensure he has received tax clearance and paid all debts before distributing estate assets.
Considerations
Executors of farm estates should discuss the following considerations with advisers:
- “Rights or things” return — A final tax return that picks up all income to the date of death needs to be filed when a person dies. However, there may be an option to file a “rights or things” return, which can allow access to lower tax rates on certain types of income. For example, cattle or grain inventory would be considered a right or thing.
- Farmland rollover rules — Tax is often not required on the passing of farmland to children. However, the same rules do not apply when passed to a non-resident child. This can result in unexpected estate taxes.
- Shares in farm corporation — It is important that the shares held in a farm are passed onto beneficiaries within three years of death or the tax deferral may not apply. There are also situations when shares are owned in a corporation where possible double taxation can occur. This can result if capital gains are reported on the shares and the beneficiaries look to liquidate the corporation. Options are available to avoid this and pay less tax.
- These are complex rules, and it is important to talk with your accountant about whether it would be more beneficial to pay tax on capital gains or the dividend on liquidation early on. Timing is key.
- Lifetime capital gains exemption — If the deceased taxpayer still has lifetime capital gains exemption available, it is usually beneficial to use this on the final tax return. This can be used on farmland or shares in a farming corporation.
- Goods and Services Tax — Beneficiaries that are receiving land should be registered for GST.
The executor of the estate is not required to know all of the rules, but it is beneficial to have an understanding. It is important to speak to professional advisors in these situations.
Riley Honess of KPMG assisted in producing this article. Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca.
