Estate Tax Planning for Married Couples: A Comprehensive Guide

Estate tax planning is an important part of financial planning, especially for married couples. It can help ensure that your assets are distributed according to your wishes and minimize the taxes your heirs may have to pay. In this blog post, we will discuss the basics of estate tax planning for married couples in Canada, with a focus on Toronto and Ontario.

What is Estate Tax?

Estate tax, also known as inheritance tax, is a tax on the transfer of property or assets after someone dies. In Canada, estate tax is levied on the estate, not on the heirs, which means that the estate pays the tax before the assets are distributed to the heirs. The estate tax rate in Canada is 40% on assets above the basic exemption limit of $5.85 million.

However, married couples can take advantage of certain tax planning strategies to reduce or eliminate the estate tax they may owe.

Marital Deduction

The first tax planning strategy available to married couples is the marital deduction. This deduction allows the first spouse to die to pass all their assets to the surviving spouse tax-free. The surviving spouse can then use their own basic exemption limit and the deceased spouse’s unused exemption limit to reduce or eliminate the estate tax they may owe when they die.

For example, let’s say John and Mary are a married couple living in Toronto. John dies, leaving all his assets to Mary. At the time of his death, John’s assets were worth $10 million, which is $4.15 million above the basic exemption limit. Mary can use her own basic exemption limit of $5.85 million and John’s unused exemption limit of $4.15 million to reduce the estate tax they may owe when she dies.

Spousal Trust

Another tax planning strategy available to married couples is the spousal trust. A spousal trust allows the surviving spouse to have access to the assets of the deceased spouse while still allowing the deceased spouse to take advantage of their basic exemption limit.

When the first spouse dies, their assets are transferred to the spousal trust, which is then managed by a trustee. The surviving spouse can receive income from the trust during their lifetime, but they cannot have full control of the assets. When the surviving spouse dies, the remaining assets in the trust can be distributed to the heirs tax-free, up to the basic exemption limit.

For example, let’s say Tom and Jane are a married couple living in Ontario. Tom dies, leaving all his assets to a spousal trust managed by a trustee. The trustee invests the assets and pays Jane income from the trust during her lifetime. When Jane dies, the remaining assets in the trust can be distributed to their children tax-free, up to the basic exemption limit.

Joint Ownership

Joint ownership is another tax planning strategy available to married couples. When assets are held jointly, the surviving spouse automatically becomes the sole owner of the assets when the other spouse dies. This can be useful in minimizing estate tax because the assets are not subject to probate, which can be a lengthy and expensive process.

For example, let’s say David and Sarah are a married couple living in Toronto. They own a house worth $2 million, which is jointly owned. When David dies, Sarah automatically becomes the sole owner of the house without having to go through probate.

Conclusion

Estate tax planning is an important part of financial planning for married couples. By taking advantage of tax planning strategies like the marital deduction, spousal trust, and joint ownership, couples can minimize the estate tax they may owe and ensure that their assets are distributed according to their wishes. If you need assistance with estate tax planning, it’s always a good idea to consult with a qualified estate planning attorney in your area.