Asking a friend or relative to execute your estate may be a recipe for unpleasantness or worse after you’re gone.
As baby boomers husband their assets and approach the inevitable, many are properly making wills, trusts and other preparations for the late-life and after-life treatment of their affairs. And many are turning to friends and relatives to execute their wishes. But if someone close, even a parent, asks you to act as executor of his or her estate, we suggest you think long and hard before saying yes. It can be a difficult and thankless task.
An executor’s job is to pay an estate’s debts and then to distribute the remaining assets as quickly as possible in accordance with the will. The plot can thicken, however, if debts, especially taxes, make it necessary to sell assets that have been specifically bequeathed to a beneficiary.
Then too, the will may be unclear and in need of interpretation. Even without administrative difficulties, beneficiaries who feel unfairly treated could contest the will and the interpretation thereof.
An executor will often be as much concerned with income taxes and the filing of the terminal T1 return as with distributing assets. And the executor can be held personally (or jointly and severally in the case of co-executors) liable for taxes not properly handled.
Calculate taxes before distributing assets
Taxes in the deceased’s final year (from January 1 until death) can be surprisingly high, even in the estates of people with relatively little, and simple, income. Market values of RRSPs and RRIFs at the time of death can add a lot to final taxable income.
That liability means it’s critical to calculate taxes owing before distributing the assets of an estate. If the Canada Revenue Agency (CRA) assesses the estate for more taxes after the distribution of the assets, the executor could be held personally liable. At the very least, there’s the unpleasant task of making beneficiaries return part of their inheritance.
Here are a few things to keep in mind when completing a deceased person’s final tax return.
If there are any unfiled tax returns from previous years, complete and submit them to the CRA as soon as possible along with any taxes owing. Otherwise, interest will continue to accumulate even though the taxpayer is deceased. In the case of death early in the year, before the deadline for filing the previous year’s return, you’ll have two returns to file.
The due date for the terminal return depends on the date of death. If the taxpayer died between January 1 and October 31 inclusive, then the terminal return is due by April 30 of the following year. If death occurred between November 1 and December 31, then the return is due six months after the date of death.
While your first impulse may be to wait before paying the CRA, this will delay the final distribution to beneficiaries. You’ll then have to weigh whether some interim distribution is appropriate before submitting the terminal T1. If you do so, be sure to leave ample funds in the estate to pay the taxes.
Look for all income, received or not
Besides finding and recording the deceased’s earnings from January 1 until death (and possibly for the entire preceding year), check for other, unrecorded income. This may include unclipped bond coupons, dividends declared but unpaid and commissions earned but not received.
You must declare as taxable income the market value of any RRSP or RRIF at the time of death, whether or not a beneficiary has been named. Exceptions may, however, include registered plans left to a spouse, a dependent child or grandchild. Any increase in value between the time of death and distribution is taxable income for the beneficiaries.
The deemed disposition rule assumes the deceased sold their assets for their market value at the time of death. If, for example, an estate has stocks that cost $10,000 outside a registered plan but are worth $40,000 at the time of death, the terminal T1 must include $15,000 (50% of $30,000) as income. You can use realized losses, of course, to offset gains.
Some specific assets, like the deceased’s principal residence, are exempt from the deemed disposition rule. Also, assets bequeathed to a spouse pass without capital gains taxes.
You’ll have to contact all of the deceased’s banks and trusts to see whether there has been any interest income earned on balances prior to death. These adjustments can lead to a surprisingly large tax bill.
Make sure the taxes are paid and a Clearance Certificate has been obtained from the CRA before making the final distributions. You can get that by filing a completed form TX19 with the terminal T1.
This is an edited version of an article that was originally published for subscribers in the August 27, 2021 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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