Estate Planning: Essential Steps and Mistakes to Avoid

When a death occurs, beyond the emotional turmoil and the many steps that must be taken, certain tax and administrative actions taken right from the start can greatly facilitate—or complicate—the subsequent settlement of the estate.

The first few weeks are not meant to resolve everything, but rather to move forward methodically: protecting assets, identifying those responsible, complying with essential formalities, and avoiding irreversible mistakes—all within a context that is often already emotionally taxing.

In general: What is an estate?

Upon a person’s death, all of their assets, rights, and obligations constitute their estate. For tax purposes, the decedent’s assets are transferred to the control of the executor(s). The executor(s) must administer the estate, pay debts, file tax returns, and distribute the assets to the heirs.

The Income Tax Act provides that, upon death, there is generally a deemed disposition of property at its fair market value, except when a spousal rollover is available.

Actions to Take Immediately

1. Obtain the official documents

There are four essential documents:

The death certificate issued by the Registrar;
The Chamber of Notaries’ will search;
The Quebec Bar Association’s will search service;
The will, if there is one.

These documents are used to identify the executor and the heirs. In the absence of a will, the legal heirs become the executors and may appoint a single person to simplify the process.

2. Prepare an inventory of assets upon death

Before any distribution takes place, important assets and documents (real estate, bank accounts, investments, insurance policies, debts, etc.) must be secured. The executor must then prepare a complete inventory of the decedent’s assets and debts.

3. Notify the tax authorities and financial institutions

Tax authorities and financial institutions must be notified of the death as soon as possible. For tax authorities, this allows them to terminate or adjust certain payments and credits, such as the GST/HST credit, Old Age Security, and other benefits. As for financial institutions, notifying them promptly allows them to freeze certain transactions and secure the deceased’s accounts.

4. Quickly check your registered investments

It is important to begin planning for TFSAs, RRSPs, and RRIFs as soon as possible. To avoid adverse tax consequences, these registered accounts must be closed or transferred no later than December 31 of the year following the death.

For a TFSA, capital gains realized after death become taxable to the estate. However, when a spouse is designated as the beneficiary, a rollover is possible, thereby deferring the tax. In this case, Form RC240 must be completed so that the amounts transferred to the spouse are recognized as excluded contributions.

5. Open a bank account for the estate

The liquidators must open a bank account in the name of the estate to make payments and centralize incoming funds.

6. Consult a tax specialist

Consulting a tax specialist at the outset of an estate is essential to avoid costly mistakes. In addition to helping compile an inventory of assets and liabilities and determine which assets require a professional appraisal, the tax specialist can also prepare the tax returns for the decedent and the estate. This helps minimize estate taxes, optimize spousal rollovers, and implement tailored tax planning, thereby ensuring a more efficient and better-structured estate settlement.

7. Filing a Partial Discharge in Quebec

The liquidator must file a partial discharge with Revenu Québec to allow the agency to distribute a portion of the estate’s assets before the estate is fully liquidated. The requirements for discharge certificates differ between federal and provincial authorities.

What You Shouldn’t Do Too Quickly

1. Do not distribute the goods too early

This is probably the most common mistake. The executor should not distribute the assets to the heirs until he or she has identified the debts, filed the required tax returns, and obtained the necessary tax clearance certificates. If the tax clearance certificates have not been obtained and the executor distributes the assets to the heirs, the executor becomes personally liable for any unpaid amounts, up to the value of the distributed assets.

2. Don’t close the estate too quickly

An estate may be subject to progressive tax rates for 36 months, which can sometimes allow for advantageous tax planning. Liquidating the estate too quickly may result in missed tax opportunities.

In a nutshell

In light of the above, the first few weeks following a death are dedicated to securing, identifying, and documenting assets. The best course of action is therefore to locate the will, confirm the executor and the heirs, protect the assets, notify the tax authorities, and avoid any premature distribution of assets. It is important to remember that:

Death does not terminate tax obligations.
There may be several declarations to file, including those regarding the deceased and the estate.
Some assets trigger a tax even without a sale.
Transfers to a spouse allow for tax deferral.
RRSPs, RRIFs, and TFSAs require prompt analysis.
Assets must not be distributed until debts have been paid.

Mistakes to avoid include emptying bank accounts, dividing assets too soon, closing the estate quickly, or assuming that the estate is “simple.”

In conclusion, it is recommended that you seek the assistance of qualified professionals. Tax advisors, notaries, and other specialists can assist you in ensuring that your estate is managed in a compliant, secure, and optimal manner, and offer you reassuring support, allowing you to focus on what matters most, at your own pace, during this already difficult time.

An article by our tax team