Estate planning is essential for dental professionals to ensure that their assets are distributed to loved ones in the best possible manner.
Appointing a Power of Attorney, preparing a Will, and considering estate planning strategies help provide peace of mind that will save your beneficiaries time, money, and stress if you die or become incapacitated.
ESTATE PLANNING GOALS
Crafting an estate plan begins with identifying overarching goals. Consider the following objectives for your estate plan:
(1) Planning for how your assets will be distributed if you become incapacitated;
(2) Providing for your spouse, children, and other dependents;
(3) Preserving your assets and money;
(4) Directing how your assets are transferred to your beneficiaries;
(5) Reducing taxes for you and your beneficiaries;
(6) Planning for your dental practice when you die; and
(7) Leaving a financial legacy to a charity or cause.
POWER OF ATTORNEY
Determining who is authorized with Power of Attorney to make decisions on your behalf if you become incapacitated or die is a key part of estate planning.
There are two types of Power of Attorney to consider. First, a Power of Attorney for Property is a person or trust appointed to make decisions about your assets if you become unable to make these decisions yourself. Second, a Power of Attorney for Personal Care is appointed to make healthcare decisions of your behalf if you are unable to do so.
Think about who you would like to give Power of Attorney and whether you would like different people to make asset and healthcare decisions on your behalf.
DUAL WILLS STRATEGY
Preparing two distinct Wills might help to meet your estate planning needs if you practice through a dentistry professional corporation (DPC). The dual Will strategy is increasingly common in Ontario for dentists practicing through a DPC who acquire a significant portion of their net worth under their DPC.
Probate & Wills
A will must be probated for the Estate Trustee to act on behalf of the deceased party. “Probate” refers to the administrative process by which the Estate Trustee receives court approval to act on behalf of the estate.
The authority of the Estate Trustee is based on the Will, but third parties and institutions often require probate to recognize the Estate Trustee’s authority.
Certificate of Appointment of Estate Trustee
The court will appoint a person as an Estate Trustee and issue a probate certificate known as a Certificate of Appointment of Estate Trustee as evidence of the appointment. The purpose of the certificate is to verify the validity of the Will and ensure that all the estate’s taxes and liabilities are paid.
Additionally, the certificate assures third parties of the Estate Trustee’s authority to act on behalf of the estate. The Estate Trustee will need a Certificate of Appointment of Estate Trustee to act on behalf of the deceased party when interacting with institutions including banks, insurance companies, and land registry offices.
Paying Probate Fees/Estate Administration Taxes
Under Rule 74.13(1) of the Ontario Rules of Civil Procedure, the estate will have to pay Estate Administration Taxes (previous called “probate taxes” or “probate fees”) when filing the application for a Certificate of Appointment of Estate Trustee.
The amount of Estate Administration Taxes payable is based on the value of the estate when the party dies. Under section 2(6.1) of the Ontario Estate Administration Tax Act, the tax amount payable for applications as of January 1, 2020, is $15 for every $1,000 (or part thereof) by which the estate’s value exceeds $50,000.
Reducing Estate Administration Taxes using a Primary and Secondary Will
To reduce your Estate Administration Taxes, you could prepare a Primary Will and a Secondary Will to distribute different assets. This dual will strategy was endorsed by the Ontario court in Granovsky Estate v. Ontario.
Primary Will
The Primary Will would distribute business-related assets for which probate is required. This Will would include assets to which Estate Administration Taxes apply, including shares of public corporations, certain investments, bank accounts, and land registered in the Land Titles System.
Secondary Will
The Secondary Will would dispose of personal assets for which probate is typically not required. This Will would cover shares of private corporations, personal items (e.g., antiques and vehicles), unsecured loans, and real estate outside of Ontario that is not registered under the Registry System.
Only the Primary Will would be submitted for probate and be subject to Estate Administration Taxes, whereas the Secondary Will would avoid these taxes.
Note that the Secondary Will could include privately held shares of your DPC, thereby allowing the value of your DPC shares to bypass probate.
TRUSTS
Trusts are useful tools for distributing your assets in a tailored way to achieve a specific outcome. Trusts are created when an individual transfers assets to a Trustee who becomes responsible for managing the assets on behalf of the beneficiaries.
Inter Vivos Trusts
Inter vivos trusts can be established during your lifetime. The advantages of creating an inter vivos trust is that it may allow distributions to your children or spouse/partner, reduce taxes by transferring taxable income to your lower-earning children, provide creditor protection, and avoid probate fees.
Some disadvantages are that you may be prevented from accessing assets for personal use and will need to pay costs for administering the inter vivos trust.
Testamentary trusts
Testamentary trusts are established after death and are often outlined in a Will. The advantages of a testamentary trust are that it may give control over the timing of asset distribution to you beneficiaries and could provide customized terms for financially unskilled or disabled beneficiaries.
The disadvantages are that you must also pay costs for maintaining the testamentary trust, and the trust’s assets may be subject to probate fees.
BENFICIARY SHARE OWNERSHIP
If you operate through a DPC, you generally want you and your family to own the class of shares that cannot be bought back for a nominal amount of money.
One maneuver to ensure this is an estate freeze. An estate freeze locks in the current value of your DPC and allows you to introduce your family as new shareholders. Some techniques for estate freezes use an approach called purification, where the assets from your DPC are moved to another DPC with the proper share structure and your family listed as shareowners.
Careful planning is important because both maneuvers require that new shareholders hold their shares for 24 months.
ESTATE FREEZE TECHNIQUES
There are two general approaches to estate freezes: internal techniques and external techniques. The main distinction is that external techniques create separate entities to implement the freeze.
Selling to a Holding Company
In this external purification technique, you create a holding company to sell your shares to. You would sell the shares of your DPC to family holding company whose common shares are owned by your beneficiaries. Your DPC shares can be sold directly or through an inter vivos trust.
The share sale is often performed using a rollover under section 85(1) of the Income Tax Act to not trigger immediate tax consequences.
However, this transfer among related persons will inevitably trigger the deemed dividend rules under section 84.1 of the Income Tax Act, resulting in some of all of the capital gain from the share sale being converted into a taxable dividend.
Donation
This internal technique involves donating your DPC shares to your successors. In most cases, this donation will be deemed to be at arm’s length because it is made between related persons.
You would be deemed to have disposed of your shares at fair market value under section 69 of the Income Tax Act. Consequently, this would trigger immediate tax consequences though a taxable capital gain at the time of the donation. However, this tax may be minimized by using your capital gains deduction if your DPC shares are qualified small business corporation shares.
You should also note that donating your DPC shares using this method means you will lose control of the shares once they are donated.
Direct Sale of Shares
Another internal estate freeze technique is to sell your DPC shares to your successors in a bona fide transaction. The price of the shares will be at fair market value because the transaction will likely be between related persons. Certain legal documents would be required for the transaction to be official.
The consequence here is that you would have to declare a taxable capital gains transaction. As with donation, your capital gains tax could be reduced if your DPC shares are qualified small business corporation shares.
Financing the Sale
You would also need to consider how your successors would finance the transaction. Your successors could take out personal loans, but a loan of sufficient value may be difficult to obtain.
Alternatively, you could apply an external purification technique by creating a holding company that takes out a loan to buy your DPC shares. However, holding companies owned by related persons would trigger the deemed dividend rule under section 84.1 of the Income Tax Act, resulting in taxable dividend income and the inability to claim a capital gains deduction.
Exchange of Shares
Various sections of the Income Tax Act allow for an internal exchange of common shares for preferred shares within the same corporation.
Using certain sections of the Act can allow you to exchange your DPC common shares for preferred shares to create an estate freeze with little or no additional taxation.
TAXES & ESTATE FREEZES
Three tax considerations often arising around estate freezes are (1) capital gains deferral, (2) using the lifetime capital gains exemption, (3) and income splitting.
Capital Gains Deferral
An estate freeze can help you avoid paying a large capital gains tax on your DPC shares upon your death by limiting the accrued capital gain on the DPC shares and transferring future capital gains to your beneficiaries.
Lifetime Capital Gains Exemption
If your DPC shares qualify as “Qualifying Small Business” shares, then you could reduce realized capital gains when selling the shares by using your lifetime capital gain exemption (LCGE).
After the estate freeze is completed, the LCGE may be available for both you and your beneficiary shareholders to use during their lifetime when disposing of shares.
Income Splitting
You can structure the estate freeze so that your children or family members hold newly issues common shares of your DPC that allow for income splitting strategies.
Dividend payments can be made to your younger beneficiaries who own common shares and are likely at a lower tax bracket, resulting less tax payable than if the dividend were paid to you.
Putting your adult children as beneficiaries may also allow for opportunities for income splitting that would ordinarily be unavailable.
CONCLUSION
Estate planning requires considering multiple interlocking factors to make the most of tax savings and effective distribution of your assets under your terms.
The dental community is in great hands here at Emerge Law. Our Dental Law team utilizes their extensive experience dealing with Dentists to provide legal representation on corporate law, employment law, and real estate law.
Our lawyers have committed to being well acquainted with not only the specific framework but the RCDSO guidelines and government regulations to help navigate some of the challenges dentists face in their career.
We invite you to contact the firm to book a free consultation.
The contents of this article are not to be construed as legal advice. Contact Emerge Law’s lawyers for legal assistance.
Emerge Law
https://emergelaw.ca/
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