If you have ever asked someone to refer you to a lawyer to draft your will, you were likely given the name of an “estate planning” lawyer, a “wills” lawyer or an “estates” lawyer. Alternatively, you may have been given the name of a family lawyer or a real estate lawyer, who often draft wills for their clients.
These lawyers do a great job drafting wills. However, sometimes there are peculiar circumstances that warrant the expertise of a tax lawyer. Also, there may be instances in which an estate planning lawyer drafts a clause that is appropriate from the perspective of the client who is trying to achieve a particular objective, but in pursuing that objective, an adverse and unintended tax consequence results. Consequently, it may be a good idea to have your will drafted (or at least reviewed by) a tax lawyer.
What’s the Connection Between a Will and Tax?
Death and taxes aren’t inter-connected only because they are often understood (in some circles at least) to be the only two guarantees in life. Rather, in Canada and the U.S., death often directly causes a tax liability – due to (among other things) the “deemed disposition” in Canada, and the “Estate Tax” in the U.S. If considered in that light, then it becomes very logical as to why a tax lawyer is well-suited to draft or review a person’s will. A person’s passing leads to the tax, but if not properly prepared, it is the person’s will that could lead to even more tax that shouldn’t have arisen in the first place.
I’ve Seen this Happen
Let’s first look at a real scenario in which I saw a clause in a will which compelled the beneficiaries to take certain action that directly led to additional and completely unnecessary tax. There were several children of the deceased, each of whom owned an unequal number of shares in two family corporations (one active business and one holdco that held real estate). The deceased wanted the shareholdings to be equalized after his passing, and the will therefore required the child with more shares to either transfer some shares to the siblings, or have the corporation redeem some of those shares so as to equalize all shareholdings among the siblings. Option A would lead to a capital gain realized by the transferor of shares (not to mention the potential for future double tax in respect of the shares/underlying real estate of the holdco), and option B would lead to a deemed dividend (i.e., dividend income) in the hands of the shareholder whose shares were to be redeemed. In other words, the will forced one of the beneficiaries to realize additional tax, beyond the tax that would have been payable by the deceased’s estate on death.
U.S. or Other Non-Resident Beneficiaries of an Estate
Having a U.S. (or other non-resident) beneficiary of a Canadian estate (which, for U.S. tax purposes would generally include a green card holder) is a minefield of tax issues. There are many examples of all the money that the estate and the non-resident beneficiary can lose because of unnecessary tax. If there are any U.S. (or potential future U.S.) beneficiaries or your estate, it is wise to seek the advice of a tax lawyer who can take these factors into consideration in drafting or reviewing your will and planning your estate.
Is a Will the Most Important Part of an Estate Plan?
Finally, I should note that preparing a proper will is only one small element of proper estate planning. Let me give you an example. A couple was once referred to me for a will. They were very modest people (in character, not in wealth), and thought that all they needed were simple wills. However, we quickly discovered that we needed to address the $4 million tax bill (this should give you an idea as to the size of
the estate) they would have if (G-d forbid) something happened to them, whether or not they had wills at all. In other words, a large part (if not the biggest) of proper estate/tax planning occurs well in advance of a will ever coming into effect. Typically, where there is substantial wealth, there is substantial opportunity for a reorganization of assets to reduce a future tax bill, as well as a current/ongoing tax liabilities.
A will should never be drafted in a vacuum, without considering all important factors. An estate plan simply cannot be comprehensive without the proper consideration of the tax implications. In the world of tax, it is the details and the nuances that make all the difference. A tax lawyer can help to identify relevant issues, and save the estate a lot of money. Remember – there is usually a way to pay less tax.