Estate planning for investment properties: exploring trusts, tax considerations, and probate cost strategies for asset transfer.
Clients consult with us regularly on all sorts of estate-related matters. Some of the more recent questions involve the following estate planning scenarios:
- investment properties,
- blended families, and
- family business succession.
In this article, we will address the estate planning opportunities for investment properties. In the next two articles, we will address the estate planning for blended families and family business succession planning, respectively.
Investment properties are real estate assets bought to generate returns either through rental income, future resale, or both. Estate planning for investment properties usually focuses on strategies to manage tax implications, avoid probate costs, and ensure efficient transfer of the assets to beneficiaries.
Trusts as a Planning Tool
Trusts are highly adaptable for estate planning involving investment properties. A trust set up for beneficiaries while the person creating the trust is still alive (inter vivos trust) can be established to hold investment properties, thereby avoiding probate taxes and associated legal costs. Testamentary trusts (those created by a will) allow trustees to manage and invest in properties, including recreational or business properties, for the benefit of beneficiaries after the death of the owner. However, the tax implications of transferring assets into a trust must be carefully considered, as capital gains may be triggered unless the trust qualifies for specific exemptions.
Tax Considerations
Tax planning is critical when incorporating investment properties into an estate plan. The Canada Revenue Agency (CRA) deems assets transferred into most trusts as disposed of at fair market value (deemed disposition), potentially triggering capital gains tax obligations. Exceptions include spousal trusts, alter ego trusts, and joint spousal trusts, which do not trigger deemed dispositions. Additionally, the 21-year deemed disposition rule (a deemed disposition of trust assets at the 21st anniversary of the trust) requires trusts to include provisions for distributing property to beneficiaries to defer tax liabilities.
Avoiding Probate Costs
Strategies such as inter vivos trusts and bare trust arrangements can help avoid probate costs. Bare trusts allow property to be held in joint ownership without changing beneficial ownership, thereby avoiding a deemed disposition for tax purposes. Multiple wills can also be used to separate assets that require a Certificate of Appointment of Estate Trustee from those that do not, thereby reducing estate administration tax.
Conclusion
Estate planning for investment properties involves careful consideration of tax implications, probate costs, and asset transfer strategies. Trusts, including inter vivos and testamentary trusts, are effective tools for managing investment properties while minimizing tax liabilities and avoiding probate costs. Bare trust arrangements and multiple wills provide additional mechanisms to streamline estate administration.
Consulting with legal and tax professionals is critical to tailoring these strategies to your unique needs. If you would like to discuss your estate and business succession planning opportunities, please contact us, or reach out to our Wills & Estates team. We’re here to help.