Consider Tax Implications Before Settling Estate Disputes
Not all beneficiaries to an estate are equal in that there may be different tax consequences for a beneficiary depending on the identity of the individual. It is, therefore, prudent to get advice on the tax consequences of any settlement prior to resolving an estate dispute.
At law, a deceased individual is, generally, deemed to have sold his or her assets for fair market value at the time of death. The deceased tax payer will be responsible to pay the capital gain on any increase in value to the asset(s) in excess of the original cost to him or her. However, the deemed disposition can be delayed until the death of a surviving spouse or common-law partner if the property is indefeasibly vested with the surviving spouse/common-law partner within 36 months of the death. Practically speaking, this means that the asset in question may be worth more to a surviving spouse or common-law partner than to another beneficiary.
The increase in capital gain will eventually have to be paid (there is no escaping the authority of CRA) but while payment is deferred the asset in question can be invested generating income. Even at an investment rate of 5% an additional $100,000 over ten years will produce $50,000 in income.
The Lesson: Tax implications should be considered prior to settling any estate dispute. The practical consequences to different beneficiaries must be taken into account and disputes may settle more readily if there is more money to divide between the litigants because of how the asset was treated.
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