Keeping the Properties in the Family

An estate holds six buildings and a modest bank balance. The tax produced by the deemed disposition is payable on the ordinary schedule. The executor has assets worth a great deal and almost no money, and a deadline. Assets are not the problem here; timing is.

That is the problem this page is about. It is a liquidity problem and not a tax problem, and the distinction decides everything that follows. The tax itself is sized on the tax at death on a rental portfolio, which names no product. This page describes one of the answers.

What is the problem, precisely?

Money is owed on a date, and the assets are buildings. A date and a deadline, and nothing between them that can be spent.

Nothing about a rental portfolio converts to cash quickly. A sale takes months in a good market and longer in a poor one. A refinancing requires a lender willing to deal with an estate, and lenders are cautious about estates for reasons that are their own. Meanwhile the filing deadline does not move, interest on unpaid amounts accrues, and the executor carries a personal exposure if distributions are made before a clearance certificate is obtained. Every route to money takes longer than the calendar allows. An executor who cannot pay on time carries the consequence personally.

The result is a sale that nobody planned, on a timetable nobody chose, with a buyer who knows exactly why the property is on the market. Executors report this as the hardest part of administering a portfolio, and the discount it produces is not theoretical. A planned sale and a forced one produce different prices for the same building. Estates are visible sellers and visible sellers negotiate from behind.

What is missing is not value. It is money, on a date. Everything on this page is about supplying that, and nothing on this page reduces the tax by a dollar. Everything on this page supplies money and none of it reduces tax.

What does a death benefit actually do?

It converts a premium paid over years into money paid within weeks. Weeks and not months, and no market involved.

A life insurance death benefit is a contractual obligation of the insurer, payable on proof of death to the person or entity entitled to it. It arrives in weeks and not months, it does not depend on a market, and it does not require anyone's approval beyond the claim being in order. Proof of death and a claim in order are the whole of the process. The claim is administrative and not negotiated, which is why it is fast.

Used against the obligation the deemed disposition produced, it means the estate pays the tax with money it already has, and the buildings stay where the owner intended them to be. The portfolio is not worth more because of it, and the tax is not smaller. What changes is that nobody has to sell anything by a deadline. Nothing about the portfolio changes; only the pressure does. The buildings stay exactly where the will says they go.

That is the entire claim. It is a smaller claim than the material on this subject usually makes, and it is the one that holds. A smaller claim, honestly made, holds up better than a large one.

Who should the benefit be paid to?

A question for a lawyer, and the two main answers behave very differently. The two routes look similar on paper and behave quite differently once a claim is made.

A benefit paid to a named beneficiary generally passes outside the estate. It is quick, it avoids probate in the provinces where probate applies to estate assets, and it is normally received free of tax by the beneficiary. The money is then in that person's hands, and using it for the tax is a decision they make and not an obligation they carry. Families rely on an understanding here, and understandings between relatives are where these arrangements fail. Speed and simplicity on one side, and reliance on a person's cooperation as the cost. An understanding between relatives is not a document and it does not bind anyone.

A benefit payable to the estate goes into the estate. The executor can apply it to the tax directly, which removes the reliance on somebody's cooperation. It is also available to the estate's creditors, it forms part of the estate for probate purposes where that applies, and it moves at the estate's speed and not the insurer's. Certainty on the other side, and exposure to creditors as the cost. The executor's certainty is bought with the estate's exposure.

Neither is automatically correct. The choice depends on who owes the tax, who the beneficiaries of the will are, whether there are creditors, and what province governs. Make it with a lawyer, record it, and revisit it when the family changes. Provinces differ, families differ, and the answer differs with them.

What does the corporate version look like?

The capital dividend account is the mechanism, and it exists for exactly this. The mechanism exists in the Act for precisely this situation.

Where a corporation owns the policy and is the beneficiary, the corporation receives the death benefit. The amount exceeding the contract's adjusted cost basis is credited to the capital dividend account under section 89(1), and can generally be distributed to shareholders as a capital dividend. The corporation receives, and the account is credited. The credit is the excess over the contract's adjusted cost basis, and that basis moves.

That distribution is what moves corporate money into the hands of the people who owe personal tax on the shares or on the properties. Without it, a corporation would hold money and the estate would hold a bill, which solves nothing. Money in the corporation and a bill in the estate is not a solution. Two entities, one obligation, and a mechanism that connects them.

Three practical points follow. The election has filing requirements and timing that the accountant handles. The adjusted cost basis of the contract reduces the credit, and that basis changes over the life of the contract. And ownership set correctly at issue is what makes the mechanism available; a policy owned personally does not credit a corporate account. That ownership decision is set out in holding property in a corporation and the contract.

What does it cost?

Premiums, for decades, and the requirement is the whole of the honest case against. The honest case against this page is entirely about cost and commitment.

A participating whole life contract carries a premium that has to be paid on schedule for a very long time. The cost of putting it in force falls heaviest at the beginning, so an arrangement abandoned in year five has collected the early costs and delivered none of the later benefit. That outcome is worse than never starting, and it is the failure this section keeps naming because it is the one that actually happens. An arrangement abandoned early is the worst outcome available in this subject. The premium has to survive the year with a vacancy, a renewal and a repair in it.

There is a second cost that is not money. Underwriting. Coverage is issued on health, family history, travel and occupation, and it is issued at an age. An owner who decides at seventy that this is a good idea is deciding after the cheapest years are gone and after health has had time to complicate the application. This is the one argument on this page that favours acting sooner, and it is an argument about insurance and not about capital. Underwriting is decided by a medical file and not by a plan. The medical is booked, attended and decided by people you will never meet.

And there is a cost of opportunity. A premium paid is a dollar not deployed in the portfolio. For an investor still assembling, that trade is usually wrong. For one whose properties carry themselves and whose surplus is sitting in an account, it is a different question. Every premium dollar is a dollar not in the portfolio, and that is a real trade.

How is the amount arrived at?

From the exposure, not from a product, and the order matters. Exposure first, coverage second, and never the other way round.

Size the tax first: the accrued gain and the recapture across every property, at a top marginal rate, as set out on the sizing page. That produces a number specific to your portfolio. The exposure page produces the number and this page uses it. Nothing on that page names a product, which is what makes the number usable here.

Then subtract what is already available. Liquid assets the estate could use. Registered accounts, net of the tax they themselves trigger. Anything that can be turned into money quickly without a discount. Registered accounts look larger before the tax they trigger is subtracted.

What is left is the gap. That gap, and nothing else, is what a coverage amount should be measured against. A figure arrived at any other way is a figure somebody chose for a different reason. The gap is the only figure a coverage amount should ever be measured against.

Two cautions. The gap moves as values change and as depreciation is claimed, so the calculation is repeated every few years and not done once. And a spousal rollover changes when the gap arrives and not whether it does, which is why joint last-to-die coverage is often discussed in this context. It is a question for the professional and the accountant together. Repeating the calculation every few years keeps the figure honest.

What has to be in place besides the contract?

Four things, and none of them is insurance. Four items, and every one of them is paperwork and not product.

A will that says what happens to the properties, drafted by a lawyer who has seen the portfolio and not a template. A will that divides a portfolio between children who do not want the same thing produces litigation regardless of how much liquidity exists. A template will divides a portfolio without knowing what is in it. A lawyer who has seen the portfolio writes a different will from one who has not.

A beneficiary designation that matches the will's intention. These two documents are prepared by different people at different times and they disagree more often than anyone expects. Two documents prepared years apart by different professionals will disagree eventually.

An executor who knows what exists. A single page listing the properties, the mortgages, the insurer and policy number, the accountant and the lawyer. It takes an hour and it is the most valuable hour in this whole section. One page, one hour, and an executor who is not starting from nothing.

And a conversation with the family, once, out loud. Who wants the buildings. Who does not. And what the one who has been managing them expects by way of compensation. None of that is an insurance question, and every one of those questions decides whether the plan survives. Liquidity solves a tax problem and solves no family disagreement at all.

What are the alternatives, stated fairly?

Three, and a page that names only one answer is not describing a decision.

An owner can hold liquidity directly, in accounts and investments, sized against the exposure. It costs the return that liquidity does not earn elsewhere, it is available for any purpose and not one, and it requires no underwriting and no health. For an owner with substantial liquid assets already, this is often the whole answer and no contract is needed. Liquidity held for this purpose is available for every other purpose too.

An owner can arrange financing in advance, so the estate borrows against the properties rather than selling one. Lenders do lend to estates, on terms, and the conversation is far easier while the owner is alive to explain the portfolio and introduce the executor. The cost is interest, the limitation is that a lender in a poor year is a less willing lender, and the arrangement is not binding on a future lender. A lender's willingness in a poor year is the weak point of that route.

Or an owner can decide which property will be sold, write it down, and tell the family. That converts a forced sale into a planned one, which recovers most of the discount the sale would otherwise suffer. It is the least discussed answer and one of the more sensible ones, and it costs nothing at all. Choosing the property in advance is free and recovers most of the discount.

Set against those three, a contract offers money that arrives quickly, that does not depend on a market or a lender, and that is sized to the obligation. It costs a premium for decades and it requires health at the outset. That is the trade, stated in full, and a reader who chooses one of the other three has read this page correctly.

Who this suits, and who it does not

It suits an owner whose portfolio has a large accrued gain, whose properties are intended to stay in the family, and whose surplus income can carry a premium through a bad year without strain. Four descriptions of who it fits, and four of who it does not.

It suits an owner whose family has already had the conversation and knows what it wants, because liquidity solves a tax problem and solves no disagreement at all. Health and timing decide more of this than any spreadsheet does. Portfolios with large accrued gains produce the largest and clearest cases.

It suits an owner in reasonable health who is doing this early enough that underwriting is a formality rather than an obstacle. Health at sixty and health at seventy are different conversations with an underwriter.

It does not suit an owner still assembling a portfolio, for whom the next property is the better use of the dollar. It does not suit an owner who cannot commit to the premium through a vacancy, a renewal and a bad tenancy in the same year. It does not suit an owner who intends to sell during their lifetime, since the tax then arrives on a transaction they chose and the liquidity problem does not arise in the same way. A number first, then a decision, and not in the other order.

And it does not suit anyone who has not first sized the obligation, because a coverage amount chosen without a number behind it is a coverage amount chosen by somebody else. The arrangement as a whole is described on the real estate investors page.