Making plans for personal treasures, collections and property.
This article has been compiled from “Planning ahead for your personal treasures,” featured in Perspectives Volume 2, Issue 2, Fall 2013 (page 3), and “Keeping your vacation property in the family,” featured in Perspectives Volume 1, Issue 1, Summer 2011 (page 25).
Whether jewellery or art, classic cars or antiques, wine, coins or otherwise, many individuals have a selection of cherished personal items. These belongings often have a long-standing significance within the family, are the result of a dedicated hobby, or represent decades’ worth of time and resources in collecting. And while most individuals associate a value — whether sentimental, monetary or both — with their treasured items and the history behind them, some unfortunately overlook the importance of preserving that value through to the next generation and planning ahead for personal property from an estate perspective. In fact, when many individuals think of estate planning, the primary focus is often on financial assets, but it’s equally important to consider what the best approaches may be for incorporating collectibles and other personal treasures into an estate plan. By giving these items special consideration when preparing an estate plan, it helps to ensure the transition of valued possessions is as smooth as possible, in accordance with wishes and intentions, so that they can enrich the lives of the next generation of owners and collectors.
Within an estate, it’s fairly common for personal property to be the components individuals have the most uncertainty about when it comes to value. While many individuals often know their items are valuable to some degree, they may not have a clear idea as to what the precise worth is. From a planning standpoint, this can create uncertainty and issues determining who should receive personal treasures and how they should be passed down, especially when individuals feel strongly about ensuring they treat children and other beneficiaries equally in both the wealth and personal property they pass down, and aim to structure their plans in a way that promotes equality. To help facilitate the equal division of all property and assets among the next generation, hiring a professional appraiser for items like antiques, jewellery and collectibles can be very helpful to determine accurate values, which can then be a reliable catalyst for decision-making.
Beyond the direct impact on promoting equality, other main benefits of personal property valuation include:
Generally, when individuals pass away, they are deemed to have disposed of all of their assets — including personal possessions — immediately before their death at fair market value. In certain circumstances, there may be tax-deferral opportunities, such as leaving personal assets to a spouse. If an individual is the last-surviving spouse or leaves the assets to a non-spouse, however, this may trigger a capital gain or loss on the personal property upon death. From a tax perspective, this highlights another important reason to carry out thoughtful and proactive planning for all forms of personal property to help minimize tax consequences and avoid unnecessary expenses to the estate.
The potential tax consequences are another reason that knowing the value of items and collections is beneficial, as it helps guide what the most appropriate estate-planning options may be. Some collectors unfortunately fail to realize the value of their items and thus don’t make specific provisions in their Wills. On the other hand, some do know the value of their property and the potential tax liability, so they omit it from their Wills due to concern around the tax bill that may result if the assets pass through their estate. What’s crucial to recognize, however, is that in this type of situation, the estate executor could be held liable for the tax that is not reported by your estate.
In general, personal property is divided into two categories for tax purposes: personal-use property and listed personal property, each with its own tax rule.
Note: The tax rules and regulations for personal property are complex and can result in an income tax liability regardless if an individual gifts assets during their lifetime or upon their death. As such, it is important to consult with a qualified tax advisor who can advise on how the rules may apply to or affect your estate and to help you make informed decisions.
Depending on intentions or the type of property (for example, jewellery, art or furniture), some individuals may wish to donate personal property to charity. In considering this option, one of the first steps individuals should take is to ensure the charitable organization is willing and able to accept the property that is intended to be donated before making a lifetime gift or including instructions for the donation in your Will. Once that has been confirmed, it’s likewise important that individuals seek guidance from a qualified tax professional to determine the potential tax consequences of the donated gift. This is because the disposition of these items may trigger a taxable capital gain that would be included in your income in the year of the gift. Whether it’s a donation during your lifetime or upon death, the individual or the executor may be able to claim a non-refundable charitable tax credit for the amount of the gift. Note: The credit is normally based on the fair market value of the donation, so one or more independent professional appraisals is highly recommended.
Special tax rules apply when selling or donating “certified cultural property” to an institution or public authority designated by the Minister of Canadian Heritage. Certified cultural property is an object or collection that has been deemed by the Canadian Cultural Property Export Review Board to have outstanding significance and national importance to Canada.1 Talk to your qualified tax and legal professionals about donating property of this kind and to ensure your Will contains the wording appropriate to convey the property to your chosen recipient.
When planning for the future of your personal treasures, it’s important to consider the emotional impact among family members and heirs. There are a range of factors that may affect how others within the family feel about the possessions being passed down, including the type of item it is, whether it’s a family heirloom, if it’s a hobby or item a child is particularly interested in, or if more than one heir has a vested interest in the same item.
With this in mind, individuals should aim to strike the right balance to navigate planning in a way that is most appropriate from a tax perspective and that fulfills their own personal wishes and intentions, but at the same time takes into account the impact of decisions on family and heirs. Beyond monetary value, the potential strong emotional and sentimental values drive home the the importance of having conversations with family members and beneficiaries in advance, so they understand your wishes, intentions and reasoning for how cherished items will be distributed, and so there are no unexpected surprises down the road. Leaving accurate, detailed information related to personal property to accompany a Will can also help to alleviate potential stress for executors and decrease the likelihood of family uncertainty or conflict in estate administration. Details should include:
With one in five Canadian family units owning secondary residences or vacation properties,2 making decisions for how to keep these retreats within the family for generations to come, as well as the most effective way to achieve that, is something more individuals are and will be faced with over the coming years. Without proper planning your beneficiaries could be confronted with a large tax bill at death from both probate and the capital gains tax payable.
Regardless of whether individuals wish to give the property during their lifetime or in their Will, forward thinking and planning can go a long way in helping to identify the most appropriate approaches from a capital gains tax perspective and to streamline the transition. The following are some key aspects and potential options individuals may wish to consider.
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