Estate Planning Tax Question

[Keebler Elf]

A female friend of mine told me this situation and asked for my advice. My advice is going to be talk to a lawyer but I can't put my finger on why it won't work. It seems too easy (albeit situational).

The situation is this:

Two daughters and their aging father (not in good health but also not on his death bed).

Daughter #1 lives with the father in his house.

Daughter #2 lives alone in a townhouse she owns.

If father dies, the house would be sold and split evenly between the two daughters. But capital gains tax will apply (and daughter #2 will pay more tax bc she already owns her own home).

Instead, father is going to gift the house now to daughter #1 while he's still alive and she will immediately take out a mortgage for half the value of the house and gift the money to daughter #2. Daughter #1 will now own the house outright (albeit with a mortgage) and daughter #2 will get 50% of the house's value. No taxes.

So besides the obvious (a whole lotta trust needed to make this work lol), what's the flaw in their plan? I feel like this is too easy and they must be missing something but I can't put my finger on it. Depending on how long the father lives the house will accumulate in value so there is the lost value that daughter #2 won't get if she's paid out now but that's not really the tax question.

Anyone know anything about this tax/estate planning stuff?

 

[chrispalen]

A female friend of mine told me this situation and asked for my advice. My advice is going to be talk to a lawyer but I can't put my finger on why it won't work. It seems too easy (albeit situational).

The situation is this:

Two daughters and their aging father (not in good health but also not on his death bed).

Daughter #1 lives with the father in his house.

Daughter #2 lives alone in a townhouse she owns.

If father dies, the house would be sold and split evenly between the two daughters. But capital gains tax will apply (and daughter #2 will pay more tax bc she already owns her own home).

Instead, father is going to gift the house now to daughter #1 while he's still alive and she will immediately take out a mortgage for half the value of the house and gift the money to daughter #2. Daughter #1 will now own the house outright (albeit with a mortgage) and daughter #2 will get 50% of the house's value. No taxes.

So besides the obvious (a whole lotta trust needed to make this work lol), what's the flaw in their plan? I feel like this is too easy and they must be missing something but I can't put my finger on it. Depending on how long the father lives the house will accumulate in value so there is the lost value that daughter #2 won't get if she's paid out now but that's not really the tax question.

Anyone know anything about this tax/estate planning stuff?

Consult a lawyer specializing in estate planning.

CP

 

[dirkd101]

I like the thought process, it's where everyone's head should be in life and I hope his will and POAs are up to date. CP is bang on, seek the advice of an estate planning lawyer.

 

[Cbr20152012]

Number of flaws in the original message. Additionally, this isn’t for a lawyer - it’s for a CPA. Start with a CPA m, then have lawyer execute the CPA’s advice (if even necessary).

Correct re POA (money and health) and will comment above.

 

[K Douglas]

A female friend of mine told me this situation and asked for my advice. My advice is going to be talk to a lawyer but I can't put my finger on why it won't work. It seems too easy (albeit situational).

The situation is this:

Two daughters and their aging father (not in good health but also not on his death bed).

Daughter #1 lives with the father in his house.

Daughter #2 lives alone in a townhouse she owns.

If father dies, the house would be sold and split evenly between the two daughters. But capital gains tax will apply (and daughter #2 will pay more tax bc she already owns her own home).

Instead, father is going to gift the house now to daughter #1 while he's still alive and she will immediately take out a mortgage for half the value of the house and gift the money to daughter #2. Daughter #1 will now own the house outright (albeit with a mortgage) and daughter #2 will get 50% of the house's value. No taxes.

So besides the obvious (a whole lotta trust needed to make this work lol), what's the flaw in their plan? I feel like this is too easy and they must be missing something but I can't put my finger on it. Depending on how long the father lives the house will accumulate in value so there is the lost value that daughter #2 won't get if she's paid out now but that's not really the tax question.

Anyone know anything about this tax/estate planning stuff?

If this is in Canada the house would be deemed a principal residence and therefore not subject to capital gains tax.

 

[Keebler Elf]

Yes, in Canada

 

[K Douglas]

Yes, in Canada

Ok so none of this planning needs to be done then. The father just has to stipulate in his will what % of his Estate each daughter is entitled to receive.

 

[Keebler Elf]

Ok so none of this planning needs to be done then. The father just has to stipulate in his will what % of his Estate each daughter is entitled to receive.

I think the issue they're trying to avoid is daughter #2 not having to pay capital gains on her share.

 

[Ponderling]

Allow one that is the live in to live in estate controlled house after death for a stipulated rent until she can buy it, presuming she qualifies for the mortgage.

Then father in will specifies POA/trustee private sale of house to daughter living there as soon as estate trustee can do that. Will need sale of house and final tax bill for all affairs fro all funds to be released.

Might be a case for a hired estate trustee who is also fathers POA.

Proceeds of estate are tax free, so both get funds tax free.

Or, simplier, transfer ownership to joint with live in, then to just her, and then she mortgages half of house for funds to pay out sister.
But then how to reconcile the effort of caring for aging parent?

 

[anonemouse]

I think the issue they're trying to avoid is daughter #2 not having to pay capital gains on her share.

As others have said, seek professional help for it.

What they may tell you is that the house should be held jointly with the daughter living in it, and a term added to the father's will that jointly held assets are only jointly held for estate planning purposes and proceeds are intended for the estate. On death, ownership transfers to the daughter with no capital gains in any event, since it's the primary residence or probate tax. All they need to know is that it's possible and they should get advice from a lawyer that does estate planning as they can help with the title transfer which should only be around $700 plus disbursements.

Source: I did this with my parents, based on advice from an estate lawyer.

 

[MattyMcG92]

Hi Keebler Elf,

RE: Transferring Principal Residence After Death in Ontario

I work in Estate and Tax Law. I will try and get a response to you soon. I would like to confirm one detail of note. Does the father currently own any other property, such as a cottage or a rental home, aside from his principal residence?

Kind Regards,

Matt

 

[Keebler Elf]

Hi Keebler Elf,

RE: Transferring Principal Residence After Death in Ontario

I work in Estate and Tax Law. I usually finish work around 700 and will try and get a response to you soon. I would like to confirm one detail of note. Does the father currently own any other property, such as a cottage or a rental home, aside from his principal residence?

Kind Regards,

Matt

No other properties.

 

[bazokajoe]

I think the issue they're trying to avoid is daughter #2 not having to pay capital gains on her share.

As stated in a previous comment. there is no capital gains tax on the sale of a principle residence.

 

[MattyMcG92]

Hi Keebler Elf,

RE: Transferring Principal Residence to Adult Children

Facts

• A father is looking to transfer ownership of his solely owned (i.e. he owns 100%) home, to his two daughters.
• The home is the father's principal residence, meaning he primarily occupies the home (i.e. he lives there) and it is generally not rented to earn income. The term principal residence is defined in Section 54 of the Income Tax Act (ITA)
• One of the daughters lives in the home and the other daughter lives in a different home that she owns.
• The father is considering gifting the home, prior to his death, to the daughter that currently resides with him. She will then mortgage the home and pay out half of its fair market value to her sister.
• The father wants to structure the transaction with the intent of limiting the taxes he has to pay on the disposition of the home.

Analysis

• In Canada, the sale of a principal residence is exempt from capital gains tax. So the father can sell the home and as long as it is designated his principal residence, in each year that he resided there, the capital gain from the sale will not be taxable.
• Probate is a formal legal process through which the court confirms that the deceased's will is their last will and testament and grants a person the authority to act as the estate trustee.
• Estate Administration Tax (also known as probate fees) are charged on the total value of a deceased's estate. In Ontario, the estate administration tax is 1.5% for estate assets above $50,000.
• Principal residences in Ontario are subject to estate administration tax. The fair market value of the principal residence is included in the assets subject to the estate administration tax.
• Gifts are not taxable in Canada, but if a person transfers property (other than to their spouse or common law partner), the transfer will be deemed (i.e. considered to) to have taken place at Fair Market Value ("FMV").
• In Ontario, the transfer of real estate from a parent to a child will trigger land transfer tax based on the FMW of the property at the time of the transfer, regardless of whether money is exchanged or the property is gifted. The tax is payable by the child when they take ownership of the property.

The Land Transfer Taxes ("LTT") are currently:

• 0.5% on the first $55,000 of the FMV
• 1.0% on the amount exceeding $55,000 up to $250,000
• 1.5% on the amount exceeding $250,000 up to $400,000.
• 2.0% on the amount exceeding $400,000.
• 2.5% on the amount exceeding $2,000,000 (assuming single family residences)

If the property is located in Toronto, a Municipal Land Transfer Tax (MLTT) will also apply which essentially doubles the LTT.

Review of Client Proposed Solution

The father is proposing gifting the home now to his daughter who lives with him. She will immediately take out a mortgage for half the value of the house and gift the money to her sister.

Under this strategy, the price appreciation on the home from the initial purchase price to the fair market value on the date title is changed to the daughter, will be tax exempt under the Principal Residence Exemption. So no capital gains on the sale of the home. However, the daughter making the purchase will have to pay the land transfer tax and if the home is in Toronto, the Municipal Land Transfer Tax, as well. The purchasing daughter will also have to qualify for a mortgage for half the value of the property and pay mortgage interest at current rates of approximately 4.00%.

Recommended Strategy

Sell the home after the father passes away and have instructions in the father's will to divide the proceeds equally among the surviving daughters.

When the father passes away, the capital gain from the sale of the home will be exempt under the Principal Residence Exemption. The fair market value of the home will be subject to estate administration tax. The land transfer tax, which will most likely exceed the estate administration tax in amount, is paid by the buyer, so the sisters do not have to pay it if they sell the home to an unrelated party.

Kind Regards,

Matt

 

[forest]

Hi Keebler Elf,

RE: Transferring Principal Residence to Adult Children

Facts

• A father is looking to transfer ownership of his solely owned (i.e. he owns 100%) home, to his two daughters.
• The home is the father's principal residence, meaning he primarily occupies the home (i.e. he lives there) and it is generally not rented to earn income. The term principal residence is defined in Section 54 of the Income Tax Act (ITA)
• One of the daughters lives in the home and the other daughter lives in a different home that she owns.
• The father is considering gifting the home, prior to his death, to the daughter that currently resides with him. She will then mortgage the home and pay out half of its fair market value to her sister.
• The father wants to structure the transaction with the intent of limiting the taxes he has to pay on the disposition of the home.

Analysis

• In Canada, the sale of a principal residence is exempt from capital gains tax. So the father can sell the home and as long as it is designated his principal residence, in each year that he resided there, the capital gain from the sale will not be taxable.
• Probate is a formal legal process through which the court confirms that the deceased's will is their last will and testament and grants a person the authority to act as the estate trustee.
• Estate Administration Tax (also known as probate fees) are charged on the total value of a deceased's estate. In Ontario, the estate administration tax is 1.5% for estate assets above $50,000.
• Principal residences in Ontario are subject to estate administration tax. The fair market value of the principal residence is included in the assets subject to the estate administration tax.
• Gifts are not taxable in Canada, but if a person transfers property (other than to their spouse or common law partner), the transfer will be deemed (i.e. considered to) to have taken place at Fair Market Value ("FMV").
• In Ontario, the transfer of real estate from a parent to a child will trigger land transfer tax based on the FMW of the property at the time of the transfer, regardless of whether money is exchanged or the property is gifted. The tax is payable by the child when they take ownership of the property.

The Land Transfer Taxes ("LTT") are currently:

• 0.5% on the first $55,000 of the FMV
• 1.0% on the amount exceeding $55,000 up to $250,000
• 1.5% on the amount exceeding $250,000 up to $400,000.
• 2.0% on the amount exceeding $400,000.
• 2.5% on the amount exceeding $2,000,000 (assuming single family residences)

If the property is located in Toronto, a Municipal Land Transfer Tax (MLTT) will also apply which essentially doubles the LTT.

Review of Client Proposed Solution

The father is proposing gifting the home now to his daughter who lives with him. She will immediately take out a mortgage for half the value of the house and gift the money to her sister.

Under this strategy, the price appreciation on the home from the initial purchase price to the fair market value on the date title is changed to the daughter, will be tax exempt under the Principal Residence Exemption. So no capital gains on the sale of the home. However, the daughter making the purchase will have to pay the land transfer tax and if the home is in Toronto, the Municipal Land Transfer Tax, as well. The purchasing daughter will also have to qualify for a mortgage for half the value of the property and pay mortgage interest at current rates of approximately 4.00%.

Recommended Strategy

Sell the home after the father passes away and have instructions in the father's will to divide the proceeds equally among the surviving daughters.

When the father passes away, the capital gain from the sale of the home will be exempt under the Principal Residence Exemption. The fair market value of the home will be subject to estate administration tax. The land transfer tax, which will most likely exceed the estate administration tax in amount, is paid by the buyer, so the sisters do not have to pay it if they sell the home to an unrelated party.

Kind Regards,

Matt

And it might be possible for the estate administration tax to be avoided if the property qualifies under "Ontario First Dealings Exemption" (Google the term for more information, a simple example would be property bought during the 1960's when the paper land title system existed and there have been no title changes since then). The short story is to create dual wills where the property is under one will and everything else in the second will. Only the second will needs to be probated (assuming there are significant assets at the various financial institutions, e.g. > $10 000 at each bank/brokerage) so the FMV of the property will not included in the second will estate administration tax calculation.

The property is transferred to the beneficiaries based on the first dealings exemption that does not require probate (a real estate lawyer will do this). If the property does not qualify (e.g. bought today where the electronic land registry system is used) the creating of dual wills does not help. Note if the property is transferred to the daughters now, that would definitely make the property will no longer qualify since the title will have changed in the current electronic land registry system.

Otherwise the information provided by Matt is excellent.

 

[skiierelite]

If this is in Canada the house would be deemed a principal residence and therefore not subject to capital gains tax.

I agree.

 

[K Douglas]

I think the issue they're trying to avoid is daughter #2 not having to pay capital gains on her share.

There is no capital gains tax on her share, that's my point.

 

[Keebler Elf]

Thanks for all the advice folks, very helpful! It will give them some good questions to ask when they meet with a CRA/estate lawyer. I'm not positive but I think their plan is for the daughter who is living with the father now to keep the house and live in it for a long time. The other daughter has moved on and doesn't want to live in the house (but I'm sure she still wants her share! lol)

I thought the capital gains somehow got passed down to the two daughters if they inherited the house but sounds like it's more the estate administration tax and the land transfer tax they need to worry about (the latter if the father gifts the home more so than if they sell it, which I don't think is their intention).

 

[Keebler Elf]

Hi Keebler Elf,

RE: Transferring Principal Residence to Adult Children

Facts

• A father is looking to transfer ownership of his solely owned (i.e. he owns 100%) home, to his two daughters.
• The home is the father's principal residence, meaning he primarily occupies the home (i.e. he lives there) and it is generally not rented to earn income. The term principal residence is defined in Section 54 of the Income Tax Act (ITA)
• One of the daughters lives in the home and the other daughter lives in a different home that she owns.
• The father is considering gifting the home, prior to his death, to the daughter that currently resides with him. She will then mortgage the home and pay out half of its fair market value to her sister.
• The father wants to structure the transaction with the intent of limiting the taxes he has to pay on the disposition of the home.

Analysis

• In Canada, the sale of a principal residence is exempt from capital gains tax. So the father can sell the home and as long as it is designated his principal residence, in each year that he resided there, the capital gain from the sale will not be taxable.
• Probate is a formal legal process through which the court confirms that the deceased's will is their last will and testament and grants a person the authority to act as the estate trustee.
• Estate Administration Tax (also known as probate fees) are charged on the total value of a deceased's estate. In Ontario, the estate administration tax is 1.5% for estate assets above $50,000.
• Principal residences in Ontario are subject to estate administration tax. The fair market value of the principal residence is included in the assets subject to the estate administration tax.
• Gifts are not taxable in Canada, but if a person transfers property (other than to their spouse or common law partner), the transfer will be deemed (i.e. considered to) to have taken place at Fair Market Value ("FMV").
• In Ontario, the transfer of real estate from a parent to a child will trigger land transfer tax based on the FMW of the property at the time of the transfer, regardless of whether money is exchanged or the property is gifted. The tax is payable by the child when they take ownership of the property.

The Land Transfer Taxes ("LTT") are currently:

• 0.5% on the first $55,000 of the FMV
• 1.0% on the amount exceeding $55,000 up to $250,000
• 1.5% on the amount exceeding $250,000 up to $400,000.
• 2.0% on the amount exceeding $400,000.
• 2.5% on the amount exceeding $2,000,000 (assuming single family residences)

If the property is located in Toronto, a Municipal Land Transfer Tax (MLTT) will also apply which essentially doubles the LTT.

Review of Client Proposed Solution

The father is proposing gifting the home now to his daughter who lives with him. She will immediately take out a mortgage for half the value of the house and gift the money to her sister.

Under this strategy, the price appreciation on the home from the initial purchase price to the fair market value on the date title is changed to the daughter, will be tax exempt under the Principal Residence Exemption. So no capital gains on the sale of the home. However, the daughter making the purchase will have to pay the land transfer tax and if the home is in Toronto, the Municipal Land Transfer Tax, as well. The purchasing daughter will also have to qualify for a mortgage for half the value of the property and pay mortgage interest at current rates of approximately 4.00%.

Recommended Strategy

Sell the home after the father passes away and have instructions in the father's will to divide the proceeds equally among the surviving daughters.

When the father passes away, the capital gain from the sale of the home will be exempt under the Principal Residence Exemption. The fair market value of the home will be subject to estate administration tax. The land transfer tax, which will most likely exceed the estate administration tax in amount, is paid by the buyer, so the sisters do not have to pay it if they sell the home to an unrelated party.

Kind Regards,

Matt

Thanks! This is above and beyond. Appreciate it!