Hi everyone, I’m Sabrina, one of the Wills & Estates lawyers at Varity Law.
I did a probate once where the oldest sister is the only executor, and she & two younger siblings are all beneficiaries, each to receive 1/3 of the inheritance.
After probate approval, I told her to hold back at least ¼ of the total estate to pay for any possible taxes owed by her deceased father. However, since filing for terminal income taxes can take 2 years (the accountant needs to file for the deceased’s income in the year of death, then again for the inheritance distribution), the beneficiaries do not want to wait. They stated that if they took their inheritance and invested well, they could get 10% returns every year! They will lose out on all these investment earnings if the oldest sister holds back so much of the estate funds.
Fast forward two years, the CRA is requiring the estate to pay $30,000 in income taxes. This is because CRA considers the deceased to have sold all their assets at fair market value in the year of their passing, although the children received them for free. The estate needs to pay income taxes on those “earnings”.
The oldest sister, having already distributed the entire estate 2 years ago, asked the other two beneficiaries to each pay $10,000 of the taxes. They all refused, having already invested or spent their inheritance away. The oldest sister, as the only executor, would be personally liable for the $30,000. After consulting with a litigation lawyer and learning that suing the 2 siblings would also cost tens of thousands of dollars, the oldest sister decided to just pay the $30k herself. This situation would have been avoided if she had just withheld the ¼ for taxes, as I advised.
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