Estate Planning Mini-Case Study F23

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University of Calgary *

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343

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Feb 20, 2024

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This solution is presented by group # (assigned by the instructor); #_________________ Finance 343 Fall 2023 A mini-Case Study on Estate Planning Solution Template (19 pages) By no later than 23:00 (11:00 p.m.) on Monday December 4, 2023 , your group must submit an electronic copy (written on this template) of your solution to this Estate Planning mini-case study to the Finance 343 Drop Box on D2L. Only one electronic copy of the solution per group is required. No collaboration or conversation is permitted between groups! Do NOT alter this template (this includes making any of the boxes larger) and please make certain that you print off and submit in the D2L drop Box ALL 19 pages . The minimum font size is 12 point Total Grade recommended out of 100;____________________/100 Table for Summary of your Answers: Question # Letter Answer 1 – 4 marks d 2 – 4 marks a 3 – 4 marks d 4 – 4 marks 5 – 4 marks 6 – 4 marks b 7 – 4 marks 8 – 4 marks 9 – 4 marks 10 – 2 marks Grade out of 38 for the above answers:______________________/38 Grade out of 62 for the rationale:______________________/62 Estate Planning Mini Case Study Fall 2023 Page 1

The Mini Case Study Narrative: In the spring of 2023, just prior to her business trip to Faro, Portugal, Marley completed a properly executed enduring power of attorney for property in which she appointed her brother Jose as her attorney. While in Portugal, Marley became critically ill and was flown home in grave health. Upon returning home, Marley verbally told her special friend Paige (in absolute confidence when nobody was around), that in the event she succumbs to her illness, Paige is to receive Marley’s entire art collection which has an adjusted cost base (ACB) of $410,000 and a fair market value (FMV) of $710,000. Prior to her trip, Marley had initiated discussions about a will and her lawyer, Orin, had prepared a draft will, but it had not yet been signed. Marley has no prior wills written. Marley is an employee of an international firm of educators and is a single lady who has never been married and has no children. Jose is Marley’s only sibling, and their parents are deceased. The siblings both live in the province of Alberta. Upon their parents’ death several years ago (January of the year 2019), a family cottage passed from Marley’s parents to her and Jose, which they now own 50/50 as joint tenants with the right of survivorship (JTWROS). The total adjusted cost base (ACB) for the cottage at the time that they inherited it is $250,000 while the current fair market value (FMV) is $330,000. Both Marley and Jose stay in the family cottage for a minimum of 30 days each year. Marley has sole ownership of a two bedroom condominium in downtown Calgary. She bought the condo in the January of the year 2019. She has always occupied this condominium as her principle residence. It has an adjusted cost base (ACB) of $399,000 and a fair market value (FMV) of $465,000. Marley has a fair market value (FMV) of $100,000 in her RRSP (with her estate named as the beneficiary). The adjusted cost base (ACB) for her RRSP investments is $30,000. Marley also has $40,000 in her TFSA (with no named beneficiary or successor holder). Assume that now is December 31, 2023. Please answer the following ten multiple choice questions (by circling the correct answer on this document and placing the correct letter answer in the space Estate Planning Mini Case Study Fall 2023 Page 2

provided on page 1 of this document) about the above mini case study. You will receive 4 marks for each correct answer for questions 1 to 9 and 2 marks for the correct answer to Question # 10. There are 62 additional marks awarded for explaining the rationale behind your answer; Estate Planning Mini Case Study Fall 2023 Page 3

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Question 1: Given that Marley is gravely ill and in the Foothills Hospital, which of the following activities will Jose typically have the automatic authority to undertake on Marley’s behalf? 1. Pay Marley’s bills during her sickness. 2. Re-negotiate Marley’s car lease that is about to expire. 3. Make decisions regarding Marley’s health care. 4. Go to Orin’s office and sign the will on Marley’s behalf. 5. Re-invest Marley’s maturing term deposit. a) 1 and 3 only b) 3 and 5 only c) 2 and 4 only d) 1, 2 and 5 only e) 1, 2, 3, 4 and 5 Question 2: If Marley succumbs to her illness and dies, what role would Jose automatically assume relative to Marley’s estate? a) None b) Administrator of Marley’s estate maybe c) Executor of Marley’s estate d) Trustee of Marley’s estate e) Executrix of Marley’s estate Question 3: If Marley succumbs to her illness and dies, which of the following statements is/are true with regard to Marley’s estate? a) Paige believes that because she is a beneficiary of the estate, the provincial court will appoint her Marley’s estate administrator. b) The preferential share portion of the distribution of Marley’s estate will be paid to Jose. c) Because Marley had partially completed a will, she is considered to have an estate that is only partially intestate. no Estate Planning Mini Case Study Fall 2023 Page 4

d) Prior to the court appointment of an administrator for Marley’s estate, no one, not even Jose, has the power to transact on behalf of the estate. yes e) a) and d) are true. Question 4: If Marley dies on December 31, 2023, what are the due dates for Marley’s final income tax return and for payment of the balance of taxes owing on her final return. a) Both items are due on April 30, 2024 b) Both items are due on June 30, 2024 c) The balance of taxes owing are due on April 30, 2024, while the final return is due on June 30, 2024. d) The final income tax return is due on April 30, 2024 while the balance of taxes owing is due June 30, 2024. e) Both the final income tax return and the taxes owing are due on June 15, 2024. Question 5: With regard to the family cottage and Marley’s condominium, which of the following statements is/are true, if Marley succumbs to her illness and dies? 1. Marley’s estate representative (administrator) has the opportunity to decide whether it is more tax effective to apply the principal residence exemption to Marley’s portion of the family cottage or to her condominium. 2. The family cottage will automatically pass to Jose outside of Marley’s estate. 3. The ownership structure of the family cottage makes it exempt from any capital gains tax at the time of Marley’s death. 4. Marley’s condominium will automatically pass to Jose, outside of Marley’s estate, because Jose is Marley’s nearest living relative. a) 2 only b) 1 and 2 only maybe c) 1 and 3 only d) 3 and 4 only e) 2 and 4 only Estate Planning Mini Case Study Fall 2023 Page 5

Estate Planning Mini Case Study Fall 2023 Page 6

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Question 6: Assume that Marley survives her illness and fully recovers. However, on her way home from the Foothills Hospital, a car strikes Marley and she dies instantly. How will the art collection be distributed? 1. Paige will automatically receive the art collection. no 2. Paige must sue Marley’s estate in order to attempt to enforce her right to the art collection because she believes that Marley made the gift a condition of her death. no 3. Under the laws of the Province of Alberta, the art collection will be disbursed as an asset of Marley’s estate under the provincial jurisdiction of an intestate estate. 4. The art collection will automatically be placed under trusteeship and the court appointed administrator will arbitrarily decide on how it will be disbursed. no 5. Under the laws of the Province of Alberta, Marley’s brother Jose will receive the art collection. no a) 1 only b) 3 only c) 2 and 4 only d) 3 and 5 only e) 2, 3 and 5 only Estate Planning Mini Case Study Fall 2023 Page 7

For Questions 7 to 10 please add the following information: In January of the year 2023, Marley goes to Orin’s (her lawyer) office and completes her will naming Jose as the executor and Paige as the person to whom she bequeaths all of her estate’s assets. She has two witnesses sign the will and leaves the original with her lawyer. In March of 2023, Marley and Paige decide to get married. Paige moves into Marley’s condominium and they make it their matrimonial home. Marley makes no other changes to her estate plan and still remains the only person on legal title of the condominium. In June of 2023, Marley and Paige take the trip to Faro, Portugal as their honeymoon. Paige has a life expectancy of another 40 years. Current conservative interest bearing investments are earning a nominal annual rate of return of 3%. The expected price appreciation in any real estate is anticipated to stay at the rates currently experienced by Marley. All of the other information in the mini case study remains as stated. Estate Planning Mini Case Study Fall 2023 Page 8

Question 7: Unfortunately, Marley still becomes ill and succumbs to her illness and dies on December 31 of the year 2023. Which of the following statements is/are true with regard to Marley’s estate? 1. Because Paige is Marley’s spouse, she will automatically become the executrix of Marley’s estate. 2. Because the condominium is the matrimonial home, it will automatically bypass Marley’s estate and become the property of Paige. 3. Jose will be the one who determines how Marley’s estate will be disbursed in accordance with her will. 4. The province of Alberta does not recognize same sex marriages so Marley does not have a spouse at the time of her death. no 5. Marley is dying intestate and the intestacy laws of the province of Alberta will apply. no a) 1, 2 and 3 only b) 3 only c) 3 and 5 only d) 2 and 3 only e) 5 only Estate Planning Mini Case Study Fall 2023 Page 9

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Question 8: Unfortunately, Marley still becomes ill and succumbs to her illness and dies on December 31 of the year 2023. Assuming that the estate takes advantage of all legal tax minimization strategies available, which of the following amounts is correct with regard to the taxable capital gain that Marley’s estate will be liable for? a) $0.00 yes b) $20,000 c) $40,000 d) $150,000 e) $203,000 maybe Question 9: Assuming that the estate takes advantage of all legal tax minimization strategies available, what are the tax consequences associated with Marley’s death in relation to her RRSP and TFSA accounts? The deemed disposition of these assets will create a taxable income for her estate of? a) $0.00 b) $35,000 c) $40,000 d) $100,000 likely e) $140,000 Estate Planning Mini Case Study Fall 2023Page 10

Question 10: Are there any additional estate planning issues that you would recommend Marley and Paige undertake? a) Yes b) No Rationale for your answers (worth 62%) Writing only in the space provided for each question, please present the rationale for each of your answers. Do not expand the size of the boxes and the minimum font size is 12 point… Rationale for your answer to Question # 1 (5 marks) Option (a) 1 and 3 only: This is incorrect because paying bills (1) is covered, but decisions regarding health care (3) are typically not within the scope of the power of attorney for property. Option (b) 3 and 5 only: This is incorrect because making decisions regarding health care (3) is not covered by the power of attorney for property. Option (c) 2 and 4 only: This is incorrect because re-negotiating a car lease (2) and signing a will on Marley’s behalf (4) are not typically covered by the power of attorney for property. Option (d) 1, 2, and 5 only: This is correct as they are all financial decicions that the person with POA can decide on behalf of Marley. Option (e) 1, 2, 3, 4, and 5: This is incorrect because making decisions regarding health care (3) and signing a will on Marley’s behalf (4) are not typically covered by the power of attorney for property. The correct answer is (D) 1,2 and 5 only Rationale for your answer to Question # 2 (5 marks) Estate Planning Mini Case Study Fall 2023Page 11

In the absence of a valid will, an administrator is appointed to handle the deceased person's estate. Since Marley has no prior wills, the process of appointing someone to manage the estate would typically involve the court appointing an administrator. The term "executor" is typically associated with individuals appointed in a will to carry out the deceased person's wishes. Since Marley's will is still in draft form and unsigned, the role of executor is not established. The term "executrix" is a female form of the word "executor." Both executor and executrix roles are associated with carrying out the instructions in a will. The term "trustee" is typically associated with managing trusts established in a will. Without a valid will, there is no established trust. The correct role when there is no valid will is often referred to as the "administrator" of the estate, and this person is appointed by the court to handle the distribution of assets according to the laws of intestacy (laws that govern the distribution of assets when there is no will). If the question refers to the fact that nobody automatically assumes a role without legal proceedings, then the answer might indeed be "None," but in the legal process of administering the estate, an administrator is appointed by the court. Rationale for your answer to Question # 3 (5 marks) a) Paige believes that because she is a beneficiary of the estate, the provincial court will appoint her Marley’s estate administrator. False, the court typically appoints an administrator based on legal criteria, not merely because someone is a beneficiary. The role of administrator is appointed to manage the estate, and the court would make this decision. c) Because Marley had partially completed a will, she is considered to have an estate that is only partially intestate. False, a will must be fully executed and signed to be legally valid. Since Marley's will is still in draft form and unsigned, her estate is considered intestate (without a will). d) Prior to the court appointment of an administrator for Marley’s estate, no one, not even Jose, has the power to transact on behalf of the estate. True, until an administrator is appointed by the court, there is no legal representative for the estate. Without a will, no one has the authority to transact on behalf of the estate. Answer: (d) Estate Planning Mini Case Study Fall 2023Page 12

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Rationale for your answer to Question # 4 (5 marks) Final Income Tax Return (for the year of death): For a person who dies in the tax year, the final return is generally due six months after the date of death or on April 30 of the following year, whichever is earlier. In this case, since Marley passed away on December 31, 2023, her final income tax return would be due on April 30, 2024. Payment of Taxes Owing: The balance of taxes owing is generally due on or before April 30 of the year following the tax year. However, when an individual dies between November 1 and December 31, the payment of taxes owing is due six months after the date of death. In this case, since Marley passed away on December 31, 2023, the balance of taxes owing would be due on June 30, 2024. Correct answer (d) Rationale for your answer to Question # 5 (5 marks) As Marley and Jose have joint ownership of the cottage both having a 50-50 split of the property, After Marley’s death the ownership of the cottage will pass to Jose. Making him the sole owner of the property. This will not be included in Marley’s estate. Marley’s estate representative (administrator) has the opportunity to decide whether it is more tax-effective to apply the principal residence exemption to Marley’s portion of the family cottage or to her condominium. False, the principal residence exemption is a tax benefit that applies to the designated principal residence. The estate representative does not have the discretion to choose between properties; the principal residence exemption is typically applied to the property that Marley lived in as her principal residence. The family cottage will automatically pass to Jose outside of Marley’s estate. True, as joint tenants with the right of survivorship (JTWROS), when one joint tenant (Marley) dies, the property automatically passes to the surviving joint tenant (Jose) outside of the deceased person's estate. The ownership structure of the family cottage makes it exempt from any capital gains tax at the time of Marley’s death. False, while the family cottage passes to Jose outside of Marley’s Estate Planning Mini Case Study Fall 2023Page 13

estate, it may still be subject to capital gains tax upon Jose's eventual sale. The tax implications would depend on factors like changes in property value and any available exemptions. Marley’s condominium will automatically pass to Jose, outside of Marley’s estate, because Jose is Marley’s nearest living relative. False, the automatic passing of assets outside of the estate is determined by the ownership structure and beneficiary designations, not solely by being the nearest living relative. In this case, Marley's will or the laws of intestacy would determine the distribution of the condominium. Therefore, the correct answer is (a) 2 only. Estate Planning Mini Case Study Fall 2023Page 14

Rationale for your answer to Question # 6 (5 marks) Paige will automatically receive the art collection. No. Rationale: Verbal instructions, especially those made in confidence without a legal document, may not be legally enforceable. In the absence of a valid will or legal document specifying the gift, Paige would not automatically receive the art collection. Under the laws of the Province of Alberta, the art collection will be disbursed as an asset of Marley’s estate under the provincial jurisdiction of an intestate estate. Yes. If Marley died without a valid will, the laws of intestacy in the Province of Alberta would govern the distribution of her assets. In such a case, the art collection would be part of the estate and distributed according to the laws of intestacy. Under the laws of the Province of Alberta, Marley’s brother Jose will receive the art collection. Verdict: No, but the distribution would follow the laws of intestacy, which might involve the closest living relatives in this case Jose. However, the specific distribution would depend on Alberta's intestacy laws. Rationale for your answer to Question # 7 (5 marks) The first statement is false even though Paige is Marley's surviving spouse, she does not automatically become the executor. Marley, in her will, named Jose as the executor. As it is not mentioned Marley and Paige have a joint title on the condominium that means that Paige would not get automatically the property and bypass Marley’s estate. The properties ownership will be determined by the will. Jose in the other hand will be the one who determines how Marley’s estate will be disbursed according to her will. Thanks to the additional information provided we know that Marley is not dying intestate. She does have a valid will as of the time of her death. Answer: (b) 3 only Estate Planning Mini Case Study Fall 2023Page 15

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Rationale for your answer to Question # 8 (8 marks) 0.00 Rationale for your answer to Question # 9 (9 marks) Estate Planning Mini Case Study Fall 2023Page 16

RSP: Marley has an RRSP with a fair market value (FMV) of $100,000 and an adjusted cost base (ACB) of $30,000. The deemed disposition of the RRSP at the time of death triggers a taxable income equal to the FMV. Taxable Income: $100,000 TFSA: because a TFSA has tax free growth, the value of the account will not be subject to tax upon her death. Taxable Income: $0 Now, let's calculate the total taxable income for Marley's estate: $100,000 (RRSP) + $0 (TFSA) = $100,000 Therefore, the answer is (d) Estate Planning Mini Case Study Fall 2023Page 17

Additional Estate Planning Issues for your answer to Question # 10 (10 marks) Advanced Health care directive Estate freeze Joint tenants with the right of survivorship Power of Attorney for Personal Care: Consider creating a Power of Attorney for Personal Care, which designates someone to make healthcare decisions on Marley's behalf if she becomes incapacitated. This document is separate from the Power of Attorney for Property. Beneficiary Designations: Review and update beneficiary designations on RRSPs, TFSAs, life insurance policies, and other similar accounts to ensure they align with Marley's current wishes. Beneficiary designations typically override instructions in a will. Estate Freeze: If Marley has significant assets, she may want to explore estate freeze strategies to lock in the current value for tax purposes and facilitate the transfer of future appreciation to heirs. Estate Planning Mini Case Study Fall 2023Page 18

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Additional Estate Planning Issues for your answer to Question # 10 (continued) Estate Planning Mini Case Study Fall 2023Page 19

Below is the list of names (alphabetically by surname) of any of the five group members who did NOT participate in the preparing of this solution. If everyone contributed their share and participated in the solution please leave this table blank… First Name Last Name (Surname) Please place your group number in the box below… Estate Planning Mini Case Study Fall 2023Page 20