It may seem like an innocuous act of kindness by the executor, yet paying estate expenses out of pocket can lead to consequences if the estate is considered a graduated-rate estate (GRE).

First: A Brief Background on the GRE

A GRE is a valuable estate planning tool due to its tax benefits. Before 2016, Canadians could establish testamentary trusts in their wills to hold assets, with income taxed at the same graduated rates as an individual. As of 2016, testamentary trusts established at death became subject to tax at the highest tax rate, with the exception of a GRE that is taxed at graduated tax rates for up to 36 months from the date of death. The GRE allows the estate to save taxes, thus increasing the inheritance to be received by a beneficiary and potentially providing opportunities to claim donation tax credits and implement post-mortem tax planning for private corporations.

In general, to qualify, the estate must designate itself as a GRE on the first year’s tax return. No other estate of the individual can be designated as a GRE. The estate must use the deceased’s social insurance number on each tax return during the 36-month period following death. While these GRE-qualifying rules are commonly understood, estate planning specialists warn that many executors may not be fully aware of how easily the GRE status can be tainted.

GRE Status & Executor Actions

How can executor actions jeopardize the GRE status? In many instances, family members who are also estate beneficiaries may be appointed as executors. They may decide to pay certain estate expenses out
of their own pockets, such as funeral costs, tax on estate assets or maintenance of the deceased’s home. This may be done out of kindness or convenience, to speed up the estate settlement process or because an estate doesn’t have liquid assets. Since they are the estate beneficiary, they may feel indifferent about incurring the expense personally. Yet, in doing so, these actions would be considered a “contribution” to the estate, which would cause the estate to lose its testamentary trust status and, ultimately, the valuable GRE status.

Other circumstances may put the GRE status in jeopardy, including if the estate borrows money from a beneficiary and fails to fully repay it within a year. These examples highlight the potential consequences of certain actions that executors may not be aware of.

As you review your estate plan or to learn more about the GRE and the role of the executor, please consult an estate planning specialist.