We would like to shed some light on a case study that most of you will find quite interesting that relates to all your tax issues during estate planning.
Basic Information About the Case:
Let us imagine for a minute, for the sake of the case study, that Mr. X owns the entire shares of an XYZ company when he was perfectly healthy and alive. Moreover, it’s stated that XYZ company owns precious real estate. Now, Mr. X has established a will stating that all of his shares from XYZ company to be held in a testamentary spouse trust. This will, of course, benefit his wife Ms. X in her lifetime and will benefit the children after her death as well. In this case, the children are considered the trustees of the testamentary spouse trust according to the information given.
The Case of Double Taxation:
According to this case, the real estate has its value determined before the death of Mr. X, which grew and increased more before between his death and his wife’s death. With those circumstances in place, the Income Tax Act declared that the testamentary spouse trust needs to be disposed of its shares from XYZ company. The reason was that the proceeds of the disposition of the shares had been equal to the fair market value before Ms. X’s death. Now, since the increase and appreciation of the value of that real estate reflected in the value of the XYZ company’s shares, then a tax amount was recognized on the testamentary spouse trust according to the gain obtained from the real estate. On the other hand, the cost of the real state to XYZ company remains unchanged (for tax purposes). In addition to that, the same gain from the real estate of the XYZ company is taxed when it’s sold.
Tips on Preventing Double Taxation:
There are a few tax planning and steps in which you can prevent cases of double taxation on your real estate. Unfortunately, these steps aren’t available, concerning the recognizable increase in the value of the real estate after Mr. X’s death, when the children are the trustees of the testamentary spouse trust. However, it’s better if you evade this double taxation case in the written will by which the children aren’t considered the trustees of the testamentary spouse trust. In some cases, it’s possible to avoid double taxation if it’s noticed before the death of Mr. X, but after the death of Ms. X, it’s practically impossible to avoid it.
We advise that you consult a professional when it comes to your tax issues and real estate circumstances. A professional can lay out your options and draw out a thought-out plan for the management of your taxes, and hopefully, have you avoiding any double taxation.