The 2 Expensive Topics No One Wants To Think About (But You Should Think About Right Now!)

Death and taxes: life’s only two certainties.

To most people, they’re topics that are easily ignored, swept under the carpet in the hopes that neither will happen. And to most people, the financial implications of death are relatively straightforward.

But it’s different for real estate investors. Investors hold real estate, own holding companies, and participate in joint ventures, sometimes across provincial or national boundaries – all of which makes death a little more complicated. If you are a real estate investor, the financial implications of your death are not something to be ignored. Do you know what will happen to your estate when you pass away? Although the topic isn’t a pleasant one to think about, it’s in your family’s best interest that you sit down as soon as possible and make a plan.

Recently, REIN CEO Patrick Francey led a panel discussion with some of REIN’s trusted experts to discuss this uncomfortable topic. Patrick was joined by Barry Maguire, a real estate investing lawyer and real estate investor; Chairman and Chief Legal Counsel David Franklin; and George Dube, a chartered accountant and real estate investor.

It should be noted that every situation is unique – your family and your business and your finances, as well as the province you live in, will all have an impact on your estate, its recipients, and on the taxes they pay. So be sure to speak to a qualified professional who can help you understand your unique situation.

Strategy #1: A Single Source Document with All Account Information

“Fifteen years ago, life was very simple: I owned my retail businesses and my wife owned a small business, then we decided to invest in real estate. I came to an ACRE event, I became a REIN member, we started investing in real estate, and the next thing you know we had joint venture partnerships and we had mortgages  and we had bank accounts and we had holding companies. It’s all good… but how do we prepare for the inevitable?”

This quote comes courtesy of CEO Patrick Francey, who had recently come to the realization that if he passed away suddenly, his wife wouldn’t necessarily know the bank account numbers and contact information that she’d need to know. So he assembled the information together for her in a spreadsheet and he also gave a copy to his accountant.

Real estate investors would be well advised to do something similar: Compile together all the details, account numbers, and contact information into a single document that their surviving spouse would need to understand where the money is, what insurance policies there are, what business partnerships exist, etc.

Investors should also regularly schedule time to update it because the document only has value as long as it is up to date.

Strategy #2: Understand What Happens To Your Estate When You Pass Away

Taxation is complicated at the best of times and it gets even more complicated when someone passes away. Each province has its own rules but George shared some general ways to understand how taxes work when someone passes away:

• When one spouse passes away and is survived by a spouse: “Where a spouse passes away, in the vast majority of cases (and provided that most things have been done correctly) the assets are going to the surviving spouse. There’s not a taxable event. In other words, Revenue Canada’s not going to take their piece of the pie.”

• If both spouses pass away (at the same time, or subsequently): “At that point in time, all of their worldwide assets are deemed to have been disposed of at fair market value, meaning the same as if you sold everything. That will trigger your taxes.”

Here’s an example: When Mr. Smith passes away, he wills his estate to Mrs. Smith. She doesn’t pay any taxes when receiving that estate. But when Mrs. Smith passes away and she wills the estate to her children, this is considered a taxable event.

For real estate investors, it’s important to understand the impact this will have on your family and your business partners. Spouses (including common-law) would receive your estate tax-free. Children and business partners would receive your estate and pay tax. Although there are strategies to help address this, you should talk to a lawyer and an accountant to understand what would work in your situation.

And think beyond just taxation but to the operation of your business: As Barry pointed out, “Sit down and talk with your joint venture partners around what happens if one of you isn’t going to be there: For example, I’m fine with Jerry as my joint venture partner but how do I feel about being partners with Jerry’s wife [if Jerry passes away]? She is a lovely person but do I want to be partners with Jerry’s wife?”

Strategy #3: Get A Will Right Now!

 “I hope that everybody, as sophisticated investors realizes that you must, must, must have a will. Get it done. Secondly, don’t go to Chapters and buy the do-it yourself will kit.” – Patrick Francey

Barry did an informal poll of the audience and found that about 20% didn’t have a will. “You’ve got to, folks; you’ve got to have a will,” he said. Then he went on to explain: “The consequences of not having a will are that your assets will be disposed of according to the provincial rules around what’s called intestacy, meaning dying without a will, and all provinces have their own separate rules. If you don’t say how your estate is going to be disposed of then the intestacy rules will decide. You’re at the mercy of whatever provincial government rules are in place.”

David added, “The key is, go see a lawyer. That’s really what it comes down to, because they’re going to ask questions like ‘what are your assets?’ and ‘who do you want to give them to?’ [Your answers] set the whole framework of how the will gets drafted.”

It was recommended that investors sit down and review their will every five years or sooner if there’s an acquisition or new partnership.

It’s also important for real estate investors to always name an executor (or even a professional executor). There is also value in getting term insurance to help bridge the financial gap while the surviving spouse waits for the estate to transfer.

Although no one wants to talk about death, it is one of life’s inevitabilities and investors will spare their family a lot of discomfort and surprise taxation if they sit down and have open conversations with their family, and follow the three strategies discussed in this article.

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