Estate Liquidity Considerations

By Marla Shragge, LLB, CFP, TEP, Wealth Planning Group of United Financial, a division of CI Private Counsel LP.

As the executor of his late mother’s estate, Guy came across so many problems that he was tempted to just walk away from the job.

Guy’s mom had recently made a will after his dad died, leaving $10,000 each to her six grandchildren, with her remaining assets to be divided equally among Guy and his sisters, Marie and Charlotte. This was her stated intention – then it was discovered that mom had:

  • Designated her retirement plans (about $400,000) to Charlotte
  • Designated her life insurance ($300,000) directly to Guy, and
  • Added Marie as the joint owner of all of her bank and investment accounts, which totalled $400,000.

Since these arrangements involved all of mom’s assets, there was nothing in her estate – her retirement plans and life insurance passed directly to Charlotte and Guy and the joint accounts passed to Marie as the surviving joint owner.

This meant there were no funds to pay any gifts to mom’s grandchildren. There were also no funds to pay the taxes owing, which Guy calculated to be about $180,000 due to the retirement plans, mom’s share of accrued gains on the investment accounts and mom’s income to the date of her death.

There wasn’t even money to cover mom’s funeral and other final expenses.

Fortunately, Guy and his sisters worked out a solution so that taxes and final expenses were paid, the grandchildren received the gifts intended for them, and each child was treated equally.

Here are some tips to ensure these estate liquidity problems don’t arise in your situation:

  • Consider the tax impact of a direct designation of retirement plans to a beneficiary (other than a spouse). Unless otherwise directed, the designated beneficiary will receive the full amount of the proceeds, while the estate bears responsibility for the resulting taxes. This could result in the estate beneficiaries receiving less than intended. If there are insufficient estate assets to pay the taxes, Canada Revenue Agency (CRA) can turn to the designated beneficiary for payment – and if more than one beneficiary was designated, CRA can go after any or all of them, which may cause further inequalities among your beneficiaries.
  • Document your intentions if you put assets into joint ownership with a child or children. Be clear about whether the transfer to joint ownership is a gift to the child or if your child is to hold the assets on behalf of your estate and distribute them to others after your death.
  • Ensure there will be enough assets in your estate to pay intended gifts to individuals and charities, as well as taxes and final expenses. Keep in mind that direct designations of retirement plans, TFSAs and life insurance mean that these proceeds would not be available for gifts, taxes or estate expenses, nor would jointly owned assets that pass to the surviving joint owner. Couples should also watch out for the timing of intended gifts.

Different rules apply in Quebec regarding designations and joint ownership – although care must still be taken as estate liquidity issues and could potentially arise.

Talk to your advisor to make sure estate liquidity will not be a concern.