Generally, you are expected to dispose of all your assets at fair market value (“FMV”) upon your death. If the assets go to the surviving spouse or to a spousal trust, then there isn’t a deemed disposition at FMV until their death.
A spousal trust is set up for the benefit of the spouse while he or she is still alive. However, upon the spouse’s death, the capital of the trust goes to the beneficiaries of the original deceased. Normally, the income generated by the trust can be paid to or for the benefit of the spouse. Unpaid income becomes capital of the trust for the benefit of beneficiaries. A spousal trust is set up by way of a Will and you must ensure that it is set up properly to guarantee that the deemed disposition rules at FMV don’t apply.
You should have separate Wills to deal with the shares and shareholder loans of a corporation. Separate Wills preclude the 1.5 percent probate fees on that investment.
If you have assets that are owned by a corporation and those assets have appreciated in value significantly over the years, unless you take the necessary precautions, your estate/beneficiaries could pay tax twice on the exact same increase in the value of the assets. To avoid this, you must structure your estate appropriately.
There are a couple of solutions to avoid potential double taxation, using real estate as an example:
1. Sell the Real Estate: If the company shares are willed to the estate (i.e. they do not go directly to the children) and the real estate is sold and the company is wound down within the first year of the estate, the estate would incur a capital loss on the shares which can then be carried back to offset the capital gain relating to the shares on the terminal return. The effect of this is that the income tax relating to the shares would be eliminated.
2. Transfer the Real Estate to a New Company at FMV: If the estate does not want to sell the real estate, then it could “sell” the real estate to a new company owned by the children; or the real estate could be sold directly to the children.
The point here is similar to example No. 1 in that if this is done within the first year of the estate and the company is wound down, the income tax liability relating to the shares will be avoided.
Every situation regarding Estate issues is unique and should be reviewed in detail.