What is estate liquidity?
Estate liquidity is the amount of cash and easily-sold assets available to pay an estate's obligations — debts, funeral costs, the final income tax return, deemed-disposition capital gains tax, and probate fees — without being forced to sell property or a family business at a discount.
Why do Canadian estates run short of cash?
Canada has no estate tax, but death triggers a deemed disposition of capital property at fair market value, which can create a large capital gains tax bill on cottages, rental properties, investments and private company shares. If most of the estate is tied up in those illiquid assets, the tax and debts can exceed available cash.
How can I improve my estate's liquidity?
Common strategies include permanent life insurance to fund the tax liability, holding some assets in cash or marketable securities, naming beneficiaries on registered plans and insurance so they bypass probate, and estate freezes to cap the growth (and future tax) on business interests.
Does life insurance help with estate liquidity?
Yes. Life insurance proceeds are generally received tax-free and can be paid quickly, making them an efficient way to cover the deemed-disposition tax and debts so heirs are not forced to sell the family home, cottage or business.