Tag: Will

Whether a gift to an executor is taxable compensation

At issue

Compensation received by an executor is income from an office, and thereby taxable.   

Where an individual is both named as executor and provided a legacy or bequest in the Will, there is a presumption that that gift is in lieu of compensation.  For distinction, a legacy is a dollar amount, whereas a bequest is an item of property.  Either way, the amount of compensation would be the fair market value of the gift.  Ironically in the case of a large single property bequest, an executor who lacks cash liquidity may have to dispose of the item in order to pay the corresponding tax bill.

The executor may rebut the presumption that a gift is compensation by offering evidence of the testator’s contrary intention, either through the Will or by surrounding circumstances.  

Boisvert v. The Queen, 2011 TCC 290

Guy Boisvert and a notary were named as liquidators (the proper term for executor in Quebec) of the estate of Marcel Sauvé.  The Will provided that as a “token of gratitude” for the services as liquidator, Mr. Boisvert would be bequeathed the deceased’s residence and contents.  In time, Mr. Boisvert was assessed for income from an office in the amount of $68,080, as quoted in the estate’s declaration of transmission.

On appeal, Mr.Boisvert testified that, despite the words in the Will, he had a very small role in the estate administration, deferring much to the notary.  In turn, the value of the property should be seen as disproportionately large to be characterized as remuneration.  

The court held that even if he played a small role, he “had accepted the office and the responsibilities that came with it” and therefore the presumption of compensation was not rebutted, and the tax assessment was upheld.

Re Hayes (Estate of), 2006 ABQB 427

This matter came before the court as a contested passing of accounts, opposed in part by the Public Trustee on behalf of minor beneficiaries who were grandchildren of the deceased.  Among the arguments offered, it was asserted that the gift of a residence to one of the executors constituted compensation, and therefore there should be no further claim for personal expenses of the executors.

After summarizing the arguments, the judge simply stated the view that “the gift to Delwin Hayes as Bert’s son was personal and therefore the presumption has been rebutted.”  Though this was not a tax case, the opposite finding would certainly not have been helpful to Mr. Hayes in dealing with his subsequent tax return. 

Capital Trust Corpn. Ltd. v. The Minister of National Revenue, [1937] S.C.R. 192

Joseph Mackenzie was one of a number of executors of the estate of his father, who died in 1923.  A Codicil to the Will provided that Mr. Mackenzie should be paid $500 monthly, which was to be in addition to any entitlement that “courts or other authorities may allow him in common with the other executors.”

For reasons unexplained, the monthly amount was not paid until a catch-up payment of $19,500 was made in 1927.  

Mr. Mackenzie’s argument that this constituted a gift was not successful as he would not have been entitled to it had he not accepted the appointment.  Furthermore, he was taxed on the full amount as received in 1927, and specifically was not allowed to allocate the amounts proportionately across the intervening years.

Practice points

  1. A testator should understand that where a gift is closely tied to an absence of compensation, it is likely that the executor will be taxed on that amount.  Bear in mind as well that it is often the case, especially with small and quickly administered estates, that there is little or no corresponding tax deduction to the estate, effectively resulting in a gratuitous windfall to the government.
  2. An executor who is a beneficiary of a bequest or legacy may wish to review the Will before accepting the appointment.  Depending on phrasing, this could bring a gift under tax scrutiny that might not have occurred had the individual been strictly a beneficiary.  On the other hand, if there is a direct connection between accepting executorship and the gift, a taxable gift is likely better than nothing at all.

And to my faithful companion, I leave … – Pets in estate planning

I often refer to estate planning as the process of taking care of yourself now and in future, and taking care of those close to you – now, in future and when you are no longer around.  For the most part, the “those” are human beings, however that is not always the case.

Many people have very strong affection for their pets, and will wish them to be well cared for after one’s death.  For single or widowed seniors in particular, the implications of an owner’s death could be significant for the pet, perhaps even fatal.  Indeed, the pet may have to be ‘put to sleep’ if no family member or close friend is able and willing to step forward, and on fairly short notice.  (See sidebar Love you to death)  

On the other hand, consider the fortunes of Trouble, the Maltese lapdog to whom New York City landlord and real estate maven Leona Helmsley bequeathed the lion’s share of her estate on her death in 2007.  While Ms. Helmsley’s human descendants managed to have the value of the dog’s inheritance reduced, Trouble lived in the lap of luxury for years before heading to the great kennel in the sky.  (See sidebar No Trouble)

Apart from any legal issues, there are some practical concerns that a pet owner should carefully consider in choosing an appropriate successor owner/caregiver:

  • Does the person have the disposition and lifestyle to be a pet owner?  Does the person’s daily routine and work schedule allow for adequate care?  How do travel and vacations factor in?
  • Is the person physically up to the task?  Are there any safety issues (to pet or people), particularly where there are young children in the home?  Are there allergy issues?
  • Is there space to care for the pet?  Do condominium or housing rules allow pets?  What are the municipal bylaws in the case of exotic pets?  (See sidebars Lions… and Lizards…)  

And then there is the matter of money.  As any pet owner can attest, there is the cost of food, accessories, heath checkups, emergency medical care, and possibly boarding when the owner is traveling.  Multiply this by the pet’s remaining life expectancy and that can be a stiff financial burden to place on an individual or family.  On top of that, there can be a significant time commitment that in fairness should be compensated.

In Canada, a pet cannot be named as a beneficiary in a person’s Will or under a life insurance policy, so you can’t give the money to the pet directly.  Rather, pets are considered property, and could be given away during one’s life or be the subject of a gift to the intended caregiver in the owner’s Will.  This could be accompanied by a monetary gift to the caregiver with the understanding that it is to compensate for the pet’s future maintenance.    

If the pet owner is concerned that the caregiver may fail to fully carry out the wishes, it certainly is possible to establish a trust to provide for the cost of the pet’s upkeep.  The compensation to the caregiver would then be based on continuing to provide the appropriate care.  Of course this brings into question whether the right person has been selected, not to mention the complication and cost of drafting the trust and providing for its proper administration.

Above all, keep in mind how beneficiaries and family will respond, as a Will challenge can be costly, time-consuming and acrimonious even if legally unsuccessful.  As with many estate planning issues, open communication of the pet owner’s wishes is key.  It can uncover obstacles and options, and put the owner’s mind to rest that the pet’s creature comforts will be best served. 

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SIDEBAR – Some notable animal successions

Love you to death – An Illinois woman left a $1.3 million estate to some animal charities, but directed that her own cat be euthanized, for fear it would end up in an abusive home.  The executor applied to court, and instead the cat was placed in a home with a reputation for caring for cats.

No Trouble – Leona Helmsley’s dog Trouble inherited $2 million.  It cost over $150,000 annually to maintain her in the lap of luxury to which she had become accustomed, including a personal body guard.  On Trouble’s death 3 years later, the remaining funds went to charity.

Lions & tigers & … lizards, oh my – An Ontario Serpentarium owner died unexpectedly of a stroke at age 52.  With no Will, a dispute arose over his 200+ exotic animals, requiring a six-week trial before his brother was awarded ownership.  The animals were donated to two zoos.

Tax talk on the dock – 5 planning points for an investing skeptic

I had the opportunity to catch up with an old friend by a dock earlier in the summer.  

He is a true entrepreneur who took a calculated risk, established a successful business, sold to a multinational, had a brief retirement (at age 40) and a few years later is looking for the next challenge.  

With those buyout funds in hand, he observed the recent economic turmoil with much skepticism about market investing.  Actually he was a skeptic well back in time, and those funds never left the safety of his bank account.  Even so, he knows he can’t remain on the sidelines forever.  

So as summer comes to a close, here is what we threw about, apart from the horseshoes and mosquito swatter. 

Run a business, if you are so inclined 

My friend firmly believes that true wealth is built through active business management.  And given his track record, I can’t disagree that a well-run enterprise can net impressive results – emphasizing the requirement to be well-run.

In actuality, he is something of a zealot when he extols the virtues of running a business, and more specifically the benefits of running a business through a small business corporation.  He is living proof of the value of the small business rate, spousal income splitting and the lifetime capital gains exemption.  Heck, he almost bubbles over in recalling the joys of a well orchestrated salary-dividend mix.

However, running a business is more than merely a financial decision, whether tax-driven or otherwise.  In many ways, it’s a lifestyle choice, and has to be undertaken with that aspect clearly in focus.

Kill the mortgage

There is perhaps no more clearly predictable rate of return on applied money than to eliminate a big debt like a mortgage.  Somewhat ironically, that kind of arithmetic certainty dovetails well with the more nebulously measured emotional comfort of being mortgage-free.  Hey, it’s your home.

In his case, he had already achieved this prior to the business buyout.   

That’s not to say that he was pursuing mortgage retirement to the exclusion of retirement savings.  Rather, he placed more proportional emphasis on the mortgage than any raw calculus might explain. 

Now being free of that debt burden, he is committed to becoming more knowledgeable and effective in fashioning his retirement income plan. 

Getting 20% upfront on your RESPs

As people within the financial service sector, sometimes we forget that those outside the field have things on their mind other than the nuances we see much more regularly.

For instance, my friend was not even aware of the 20% Canada Education Savings Grant he was receiving on his RESP contributions.  Thus, he was only contributing paltry amounts well below the $2,500 limit upon which the current year’s entitlement would be maxed out.  

On the positive side, now that it is possible to pick up past years’ unused room, he will be able to get up to $1,000 CESG annually by putting in $5,000 for each of the kids until he catches up.  Yes, he’s the same skeptic about market investments, but that’s a whopping tax/support benefit left on the table if that CESG is not unclaimed.

It remains to be seen whether he is inclined to make any further use of the RESP tax sheltering room beyond the CESG entitlement thresholds.  

We differ on life insurance

While we are roughly on the same page that life insurance is a top priority matter for income replacement purposes, beyond that we diverge a bit.

He waffles on what to do with current life insurance, given the lack of an income replacement need.  In not so many words, he defines that need in terms of whether his family would suffer a drop in lifestyle should he be removed from the equation.  In that context, I agree that he does not need to replace income.

That said, terminal taxes and final debts loom, distant though they may be in the future.  A tax-free death benefit may make sense to service that eventuality.  Past premium payments are water under the bridge, and future premiums continue to be priced based on an earlier age.  

A consideration of the internal rate of return of continuing premium payments may prove fruitful.  That’s the kind of analysis an entrepreneurial business mind can appreciate.

Do the Wills

Actually they have done their Wills, but that was well before the business came to together and was later harvested.  

The tax benefits of testamentary trusts may have been a passing topic in those earlier estate planning discussions, but now the benefits are very real – for the couple, the kids, and who knows who or what may come up in summers ahead.