Our Monthly Newsletters
What a crazy month it has been…
One of my strongest childhood memories is from 1984, the year I turned 10 years old. I had spent the weekend obsessively playing a video game on my brand-new Commodore 64 computer, in all of its 8-bit glory. I don’t remember what the actual game was today – only that it had a monster-like character, and that night, when I went to bed, I had an intense and vivid nightmare in which the monsters from the game were coming down the highway that entered my small town.
I woke up in a panic, drenched in sweat, and immediately looked out my bedroom window. Other than a single car travelling at 2 a.m. down the highway the better part of a kilometer across the field, all was still. No monsters in sight.
That didn’t matter to me though – I bundled myself up in my covers, buried myself so no monsters would see me, and huddled sleeplessly in the cocoon I had created for my own security. I think it took me nearly a year before I could fall asleep without being cocooned. Regardless of the irrationality of my own thoughts, the reptilian part of my brain had activated, and I believed that the monsters would come as soon as my eyes were closed.
Thirty-six years later, I sit here today with that image in my mind. In 1984, HIV had just been isolated for the first time and definitively connected to the AIDS epidemic. It is hard to imagine today, with HIV being a serious, but treatable condition, but back then, many people lived in irrational fear about even coming into contact with an HIV-positive person. Three years later, in 1987, princess Diana took the hand of a HIV-positive patient in a well-publicized moment of compassion, shocking a world in which even the nurses wore gloves when making physical contact with AIDS patients. Such fear, with the hindsight of three-and-a-half decades, seems incredible to us today.
And yet…. here we are today with COVID-19* affecting stock markets. I can’t help to think back to the parallels to my 10-year-old self, and the world’s initial fear of HIV.
After this week of bad news, I’m sure we would all want to hide in our respective cocoons. That is, ultimately, how our brains react to uncertain news.
write this note after one of the most tumultuous weeks in investment history and certainly the most challenging week in over a decade by just about any measurement. Markets around the world have dropped 30 to 35% around the world and I am sure they will continue to gyrate for some time. Ultimately, as much as we would like to say that markets behave rationally, the truth is that when faced with the unknown, markets behave like the humans who run them. Sometime reptile brains take over and, like my 10-year-old self, they behave irrationally and fearfully. Ultimately, markets do poorly when the future is uncertain.
There is no doubt in my mind, the events of the last couple of weeks ultimately come from a place of fear. That said, I see many positive things going on. Governments around the world are taking steps to stop the spread of COVID-19 and inject financial liquidity into their respective countries – including a massive $82 Billion package announced today in Canada. Like every other pandemic, it’s hard to put a value on businesses when the impact is uncertain. One thing is clear, however, pandemics do not last forever and, more importantly, historically, those who stay invested, and those who add to their investments during the bottoming of stock markets, have the potential to do the better in the long term.
If your time horizon for your investments is long term, don’t stress about current events. While we can’t predict what the future holds for COVID-19, historically, markets impacted by unusual events have recovered.
In any market downturn, if you have a long-term investment horizon, staying invested has been by far the best strategy. Often, when markets rebound, they do it suddenly and trying to time the markets is nearly impossible. Missing just a few of the up days can mean a significantly longer recovery period for your investments.
Be smart: play the long game and stick to your investment strategy. Depending on your risk profile, you may consider moving some extra funds into the market in times like these. Again, we can’t predict the future – but the past suggests that moving money into bear markets in stages way over the next little while (to avoid the day-to-day volatility) has the potential to help grow your wealth.
One of my favourite books is a terrific thing to pick up and read in the midst of all of this: The Ascent of Money by Niall Ferguson, a UK historian. Ferguson covers over 1000 years of investment history, putting market swings in a much bigger context than anyone else I have read. If you find yourself isolated at home, it’s a very entertaining and informative read. Amongst other things, you’ll learn about the Dutch Tulip investment bubble, and the Medici family, who basically invented the bond market, and used the fortune they made to patronize the arts and music. One family member even became the Pope. The Ascent of Money is a fantastic read for all of us as we shelter at home in the next few weeks. I’ve even started re-reading it myself this week.
If you don’t have time for a lengthy book, you can also read this great short article by GLC asset management with contains a fantastic graph of the last 70 years of the bull and bear markets to give context to the many market ups-and-downs of the past.
In the meantime, if you are a client, feel free call me if you have any questions on your investments. We’re trying to be in regular contact with everyone we work with to provide information and updates, but as you can imagine, it’s a big job. We will never be too busy to talk, so by all means call us.
If you aren’t one of our investment clients, live here in Ontario, and you haven’t heard from your investment folks, I’d be more than happy to chat with you and take a look at where you stand in the bigger picture.
We’re here when you need us.
PS – Like everyone else, at Quiet Legacy we are all primarily working from home for the forseable future, but our business phones still route directly to myself and Sarah, and its business as usual for the most part thanks to the wonders of the digital era. We’re still shipping copies of Driven By Purpose, if you are bored and would like something to read after you are done reading The Ascent of Money. The only activity we’ve fully stopped doing for now is public talks for Charities. Grab us as always at (226) 884 5545.
* I am very sorry to mention COVID-19 by name. I feel like every single company I have ever done business with has sent me an email with word in the subject line. . .
The information provided is accurate to the best of our knowledge as of the date of publication, but rules and interpretations may change. This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.
How the lessons we teach stick for life
This year during the holidays, my wife Bridget and I realized that we have reached a stage where very soon, we are going to be the two shortest people in the house. Our two older sons are now well over six feet tall and soon will surpass me in height and tower over their mom. It just a matter of time until our youngest will hit his growth spurt as he turns 10 this year. We stopped to wonder where the last 15 years have gone, and realized in another 15, there is a good chance that we will be spending Christmas with grandchildren.
We reminisced about when our kids were toddlers – it’s hard to imagine that they were ever so small. That said, it’s the experiences they had at such a young age that make them into the kind, considerate and caring young men the are now.
The lessons we teach stick for life.
When my oldest son Brennan was four years old, we went shopping at the mall a few days before Christmas. Four is the age where your child is still filled with wonder and longing, and yet still holds their parents in the highest regards. It is a magical age, where you watch your little one grow and interact with the world around them in the most enjoyable ways. As a parent, few ages are more fun.
There is a dark side to having a four-year-old, however. It is when you make your first real parenting mistakes that you come to regret. I’m not sure what possessed me to think that a trip, days before Christmas, with an excited four-year-old, to a place in which every single storefront was essentially the modern version of the wicked witch’s gingerbread cottage from Hansel and Gretel was a good idea. Every store in that mall was designed to lure children in so parents would be forced to spend gobs of money on toys in order to leave with happy children.
My nightmare parenting moment began when Brennan was taken by the siren call of a two-foot tall Superman action figure, that cost $25, in the window of one such store. He absolutely begged me to buy it for him. When I gently said no, he had a breakdown of near epic proportions that only a four-year-old, days from Christmas, could pull in a highly public place.
Once he finally calmed down, realizing that there was no way in heck I was going to buy him the toy, I saw this as a great opportunity to teach him about saving money and working towards a goal. I told him that he could buy it himself, if he worked to earn money and saved enough. Strangely, this seemed to settle him right down. He asked me what he could do, and we set him up with small chores around the house for which he could earn 25 cents each.
January flew buy and our little capitalist became quite the household helper. He’d put dishes away. He’d vacuum a floor. He’d ask to go visit his grandfather since “Papa would give him money.” By the beginning of March, Brennan had accumulated the $25 to buy his beloved toy.
Together, we excitedly drove to the mall with a small zip-lock bag of his money, which he was very proud to have earned by working. We walked into the mall…
…and the store was gone. Yep. Closed down, out of business, and gone for good, along with the really super cool Superman toy.
it was an epic parenting fail. All that was left was a heart-broken four-year-old with $25.
Our saving grace was that Zellers in the mall was having a massive toy sale and Brennan was able to grab a pile of discounted Diego the explorer toys with his $25. He left the mall relatively happy, albeit somewhat bitter that a toy store had gone out of business. On my part, I was just thankful that he wasn’t mad at me for making him work for something only to have it be gone forever.
That said, over a decade later, my son has become a chronic saver; he works hard to put money away. Despite the early disappointment, he has developed a mindset for saving that is going to be a huge asset for life. Likewise, his brothers both do the same – in fact, our middle son, Liam, recently managed to save up $500 by the age of 13 to purchase a specialized drawing tablet for his animation work. He’s immensely proud of his accomplishment, as are we.
We’ve also realized that it’s not just that lessons learned at a young age about saving, but its also many other things as well. Our kids have become compassionate and generous young men. Part of that learning was from having them give away some of their toys each year at Christmas to a local women and children’s shelter. While that was a tough thing for them to do at the age of four or five, it helped open their eyes to the world around them and to the fact that sometimes others have greater need than they do.
Who were your inspirations?
I would love to hear from you, our readers, as to who inspired you to become a saver or a giver at a young age and how that inspired the way you look at the world today. If we have enough people, I’d love to put together a newsletter sharing your stories later this year.
All the best for the new decade!
The information provided is accurate to the best of our knowledge as of the date of publication, but rules and interpretations may change. This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.
Sunday July 20, 1969, at 20:17 Universal Time, humanity reached the moon for the first time. It was a monumental achievement, and no doubt, many of you reading have this moment burned into your memories. Alas, I was born five years later, but like you, that moment remains one of the most amazing memories of my youth and drives much of my passion for space and astronomy today. Even though it had happened 10 years earlier, I remember, at the age of five, watching it replay on my parents’ black-and-white television and thinking of my own future in space.
This arguably greatest feat in human history was born out of the tensions of the cold war. The USSR had launched Sputnik 1 in 1957, and the United States didn’t want to be perceived as “weaker” or less technologically advanced than Russia. Soon after, the Mercury and Apollo missions launched prior to the historic Moon landing of Apollo 11.
The road was not smooth
Space is not, and never will be, safe for humans. Apollo 1’s crew was killed prior to launch due to a fire in the command module and Apollo 13 encountered issues in flight, barely returning home. More recently, two space shuttle missions ended in tragically as well. Similarly, disaster has struck USSR efforts, including a fire very similar to that of Apollo 1 and a depressurization of the cabin in Soyuz 11. Despite this, those involved in the space program – astronauts, engineers, mathematicians and scientists of all stripes accept the risks keeping a keen eye on the goal. Without accepting risk, humanity would be unable to progress.
So many incredible things in our lives today stemmed from space race:
- Memory foam was used to protect astronauts from G-Forces at launch.
- Key ingredients in baby formula were developed as a spinoff of an algae-based recycling agent for long-term space travel.
- Lightweight emergency blankets were developed as an attempt to coat spacecraft with an insulating layer.
- Modern food safety standards arose from efforts to ensure food going into space had no contaminants
- Complementary metal-oxide semiconductor (CMOS) sensors, which power your smartphone and DSLR cameras, were developed to eliminate the need for fragile and heavy film cameras in space.
This is just a very small list of things that resulted from the efforts to leave our planet. Humanity persistently reaches for the stars, and, I hope, will set foot on Mars in our lifetimes. The space program illustrates the best of humanity – that it’s possible to achieve remarkable things with extreme effort and a willingness to acknowledge and face risk, but most of all, that great things can be accomplished if we just “dream big” a bit more often.
You can dream big too
If there’s one recurring theme I see repeatedly when working with clients on planning, is that most of us seriously underestimate the kind of impact we’re capable of when we give. We recently worked with one generous couple and showed them that they could donate at a rate five times higher each year then they already were. By implementing some smart planning strategies, they’re going to be saving more in tax, without having a large impact on their estate later.
If you’re a business owner and have a Holding Company, the newest rules give you a strong incentive to give. Doing so helps you apply the new passive income rules, as well as provides opportunities to get tax-free capital dividends out of your company by donating publicly listed securities in-kind to charity, in the amount of 100% of the Capital Gain on the donated security. In some cases, this can be a huge amount.
Finally, some of our best “dream big” successes have been using gifts of Life Insurance for charitable purposes. For example, one case we worked on this year will see a donor’s estate make a transformational gift to charity of $500,000 – at a net cost of $91,020. That $500,000 gift will save their estate just over $250,000 in tax, leaving their kids with 2.5 times more than the value they paid towards the insurance, and 5 times as much to charity. We’re all “over the moon” at how things have worked out.
Make it your mantra to do some smart planning this summer and make a “buzz” just like our astronauts did 50 years ago. It may take one small step, but man, what sights you will see in return!
This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor, and always take your spacesuit and associated life support systems with you when exiting the Earth’s atmosphere.
All images are courtesy of NASA’s Public Domain Archive.
Giving Publicly Traded Securities from a Private Corporation
Long time readers might recall that to end each year I like to tell the story of fun and interesting cases I’ve worked on over the years. I’m blessed because the folks we work with don’t lack in personality, such as Anna the Secret Santa, from last year, or Joan and Ted, from The Most Financial Planning Fun I’ve ever Had.
When I met Sammy, he was in his late 60s. Sammy had an amazing life story – he was born in desperate conditions in a third-world country, ravaged by war and violence and run by a dictator. It was, as one might imagine, not a great place to grow up. The village in which he was raised had no sewer system, nor running water. It was impossible to build basic infrastructure in a place where war was a constant threat.
Determined to find a better life, Sammy hid aboard a cargo ship in order to escape. It seemed to him better to risk being lost at sea, than staying where he was. Eventually that ship found its way to Halifax, where he arrived here in Canada as a refugee.
Sammy built a new life for himself. He married, settled down, and built a family with his wife Mary. Every day, he would say, was like winning the lottery – which, as it turns out, was an apt turn of phrase. One day, Sammy did in fact, win the lottery, and found himself a millionaire.
Can you imagine what it would be like, coming from such humble beginnings, grateful for every day you woke up in freedom, to find yourself wealthy in an instant? What do you think you would do? The stats say that most lotto winners end up blowing it all, often in a matter of a few years.
Sammy instead, decided that he would give almost all of it away.
Some went to his church, as a thank you for the support he received from that community on his arrival to Canada as a desperate young man fleeing violence. Some went to family. The bulk of it, however, went back to his home country, to the village he grew up in, where he helped pay for the installation of sewer infrastructure. It was an unglamorous, but much needed gift.
I suppose that you could say that most lotto winnings go down the toilet, but in this case, Sammy’s lotto winnings allowed people to have a toilet!
Sammy used the rest of his winnings as collateral for a business loan here in Canada for a friend in need. A year later, the business failed, and the bank foreclosed on the loan. Despite this, it never bothered Sammy that he had so much money, and it was all gone. Instead, what kept him up at night was the difference in how his banker treated him with, and without the money.
“Ryan,” he told me once in tears, “that money was never mine. God lent it to me to do good in the world, and we did that, and I am proud of it, and have no regrets. But I can’t get over how the bank treated me like a God the day I won the money, but then treated me like dirt when they took the last of it away. I’ll never forget that feeling until my dying day.”
He never did, and that’s how we started working together. On my end, I was so very grateful to have spent some time with Sammy and Mary. They were wonderful people, with such a great grasp on the important things in life. A couple of years after we met, Sammy died at a relatively young age, as his early life had taken a heavy toll on his long-term health.
His was a life very well lived, indeed. It has been many years, and I still think of him fondly.
As a tribute to his kindness, generosity, and impact on the world around him, nearly 750 of us showed up for his funeral, in a church designed to hold only 500. All this for a man who had only a handful of family members in Canada.
Happy Holidays, and all the best to you in 2019. I hope Sammy’s story inspires you this holiday season to give generously to make the world a better place.
October 2018 Charity and Estate Newsletter
As you may know, I’m a ridiculously loyal client when I find great service. I’ve had the same hairdresser for 20 years. When I started going, I wanted her to dye my hair grey, because I had just started teaching at Western University, and someone had mistaken me for a first-year student in the men’s room. Now, Octavia likes to point out that the grey has taken hold naturally. And, in one of my bigger life crises, she’s nearing retirement, and I’m probably never going to get my hair cut again. (Fortunately, big hair seems to be making a comeback, although I might need a combover by then anyways.)
Similarly, I’ve been going to the same mechanic, Williams Downtown Automotive, for 25 years –ever since I bought my first car while a student at Western. Ian, the owner, earned my loyalty by being straight-up honest. He did a fine job getting my rather rusty Chevy on the road, and continues to do so with all the vehicles I have driven since.
There isn’t a chance in you-know-where that I’m going to have Octavia service my car, and under no circumstances would I ever want Ian to cut my hair. Nor would I want either of them to do brain surgery should the need arise. Similarly, I’m not going to have Joe, one of London’s finest neurosurgeons, fix my car, or do my hair. He might be able to shave my head (it’s a related skill to brain surgery), but on the off chance I want a perm, he’s probably not the right guy.
As funny as this seems…
…there’s a serious message I want to send. These folks are all amazing at what they do. They all got there through training, hard work, and many hours perfecting their craft. The same is true in my industry, and it’s important that you understand how to find the right professional to work with you.
In this month’s newsletter, I want to talk to you about the area of expertise that we hold as CFPs – Certified Financial Planners. It’s something I’m very passionate about – so much so, that I’ve even helped design questions for the CFP qualification exam a few years back.
What is the role of a CFP?
As a CFP, our area of professional expertise is much like your family doctor – we’re the nexus of your financial care. Our job is to know you and be your advocate as you work through the financial system. Not every investment or insurance provider has a CFP certification. To become a CFP, you need to have several years of industry experience, go through rigorous training and demonstrate your planning skills. To me, this is what makes the difference between a salesperson and a planner.
CFPs have areas of expertise. For example, I specialize in working with people who have been chronic savers and now find themselves with significant tax issues on their estate. In particular, we’re exceptionally good at using charitable giving to minimize taxation.
Unlike most investment folk, I start with a deep dive into your personal value system, before we start making recommendations on investments or insurance. I recall working with one client a few years ago who was an ardent environmentalist, but her previous investment advisor, a stockbroker, had put 37% of her investments in the oil sands! Now she has less than 3% of her portfolio in fossil fuel companies of any kind. Because we specialize in aligning personal values with planning, we were able to help her fund her retirement in a way that resonated with her personal beliefs.
In another of my favourite examples, we recently helped a client give away more than $200,000 to charity at a net cost to their estate of nearly $0. It took a lot of planning and knowledge of tax and charitable law on top of investment expertise.
Investment regulators are starting to catch on.
In the last few months, some of the regulatory bodies in Canada have discussed clamping down on who can call themselves a financial planner. Believe it or not, there are virtually no regulations about the qualifications your investment advisor needs to use this title. Personally, I am looking forward to the day where my profession requires recognized and comprehensive credentials, so consumers can see a clear distinction between an investment salesperson and a true financial planner.
Image via CC2.0 license from Flickr by Becky Matsubara
Once upon a time, there was a very talented, but nameless, Prince. He built a fabulous empire, filled with creativity, raspberry berets, song and dance, and it was worth a fortune. A $260 million fortune, to be precise.
And the Queen – oh the Queen, how well she could sing! The Queen was a natural woman, filled with soul, and gave generously to improve civil rights, to her church, and to bring music to the people. She had R-E-S-P-E-C-T from everyone. In the end, after her lifetime of generosity, her kingdom was worth $90 million.
While their music has now fallen silent, their kingdoms are filled with noise and strife, and much warfare. And do you know why? Neither the Queen, nor Prince had made plans for succession. They both died without a will.
As you have probably guessed, the Queen (of Soul) in our oh-so-true fairy tale, is Aretha Franklin, who died in the last few weeks. The Prince is, of course, Prince (or the artist formerly known as Prince). Or, legally, Prince Robert Nelson, one of the most creative songwriters in modern pop history and a well-known performer. The battle for Prince’s estate is already a thing of legend, in which 45 people came forward to demand a piece of the kingdom, and time will tell how messy things will be for Aretha Franklin’s estate.
Both were phenomenal artists, the best in their fields. One of my favourite cartoons in the last few months was Aretha Franklin being welcomed to the pearly gates by musical royalty: Elvis (The King), Michael Jackson (Prince of Pop), Prince, Duke Ellington and Count Basie. It was a touching and brilliant tribute, one that especially resonated with me as a former professional musician. (I’ll also admit to being more than a little misty-eyed: I found out later in life that my mom and her best friend had spent a week hanging out with Duke Ellington in the 60s, and had no idea who he was. But that’s a story for another newsletter.)
Aside from being phenomenal musicians, both Aretha Franklin and Prince shared a major failure: They died without a will or, in legal terms, “died intestate.” As a result, much grief and battling is occurring over their respective estates.
What happens to their estates will be determined by the intestacy laws where they died, as well as where they held property. As you can imagine, that makes things complicated.
Here in Ontario, if you die without a will, the Public Guardian and Trustee (PGT) of the Province of Ontario will represent your estate – whether you had $10 to your name, or $100 million. Relatives may petition to take over as estate trustee, but only do so on the authority given by the PGT. No matter what, your estate will be distributed by a formula, which you can find here: https://www.attorneygeneral.jus.gov.on.ca/english/family/pgt/heirclaim.php
Things can get messy though, if you own assets in different jurisdictions – it’s possible your estate can be subject to other province’s (or country’s!) rules as well. Needless to say, costs (and family grief) can add up quickly.
An old will is problematic too
I can’t emphasize how important it is to update your will. One of the most important things to know is that, in Ontario, your will is invalidated upon marriage – but not separation or divorce.
Even if your marriage situation is stable, it’s quite likely you’ve had major changes in your life over the last 5 years. If so, pull out your will, dust it off, and revise if necessary. And remember, being an executor or estate trustee is a big job – make sure the person you named is up to it, and try to have multiple backups. You can’t know for certain that the person you named will be willing or able when the time comes.
And please, please, please, get a qualified estate lawyer to draft your will – it’s worth spending a tiny bit more to ensure your estate is not tied up in legal costs. I once worked with a family where a badly worded will resulted in more than $125,000 in legal costs, all of which had to be paid from the estate – effectively leaving beneficiaries with nothing. An estate specialist can anticipate many problems that non-specialists would not think to address in your situation.
Remember to support your favourite causes
More than 80% of us donate to charity in our lifetime – but only 4% do so at death. From a tax planning scenario, giving at death is often hugely effective. I always like to say that you can give to three places at death: family, charity and tax. Pick any two you like.
Remember the tale of the queen and prince
So, give your heirs some Respect, Say a Little Prayer, and this Manic Monday, put on your Raspberry Beret and go see your lawyer. I Feel for You in wanting to procrastinate, but Nothing Compares 2 U when you break the Chain of Fools, so that When Doves Cry, there will be no Controversy for your kingdom.
I have at least two more paragraphs of song titles I want to end with, but U Got the Look that you will go Daydreaming if I continue.
Enjoy yourself this fall, and put on a few of these great tunes to celebrate the lives of these two remarkable musicians.
Last month we talked about falling meteorites – so I think it’s appropriate to talk about the extinction of the dinosaur this month!
If you’re a movie buff, you likely know that one of the summer’s hot movie tickets is yet another Jurassic Park movie, where extinct dinos are brought to life by crazy scientists. (You would think after five movies, they would realize you probably shouldn’t have brought dinos back to life, but who am I to judge?)
Events in the last few weeks have served a strong reminder that many things we take for granted in our financial life don’t have an unlimited lifespan – and that includes money for life in retirement.
The heart of many people’s retirement income is their pension. Like many of you, Jim has worked hard his whole life to earn that pension. Every paycheque, money goes into his pension, paid for by Jim and his employer. When he retires this fall, he’s looking forward to having 70% of his income replaced by his work pension, or so he thinks.
Life’s gonna be good! Or will it? Jim came to me to try and figure this out, as he had an offer to retire early, and wanted to figure out if it will be financially viable to retire early.
The fossilizing nest egg
Unfortunately, once we started looking at things, Jim’s pension started to look like a real velociraptor’s breakfast. Unlike in days of yore, Jim’s employer doesn’t have a defined benefit plan, which provides a fixed amount in retirement. In Jim’s case, his employer moved to a defined contribution plan, which works a lot like an RRSP – Jim chooses his investments from a selection of offerings, and he gets whatever the balance happens to be at retirement.
Jim’s retirement is depending on those funds – but hopefully there isn’t a market downturn over the next few months, or he might have to hold off a bit longer. We’ve encouraged him to move a chunk of his holdings to cash as retirement draws nearer while we sort out the long-term plan. We know his funds are sufficient right now to handle retirement – but they might not be if a market downturn happens. If Jim had a defined-benefit pension plan, this wouldn’t even be a concern to him.
Who wants a gold-plated pension plan? Jim does!
Let’s be honest – most of us would love a defined-benefit pension plan, but most employers no longer offer these plans as they have a potential negative effect on their bottom line if retired employees live a long lifespan. Fortunately for Jim, there is another option – buy an annuity.
An annuity is basically a “purchased” defined-benefit pension plan. You go to an insurer (or, sometimes for non-registered money, a charity that you want to also donate to) and give them a lump sum in return for guaranteed income for the rest of your life. Think of it as the inverse of life insurance.
A lot of people I talk to at first glance don’t like annuities – ironically though, most of them, when asked, wish they had a defined-benefit pension plan. For some reason, we have a hard time psychologically make the connection between the two, even though in many ways they are very similar in what they provide.
An extinction-level financial event happened last month.
On June 29, one of Canada’s largest insurers – Manulife – announced they were no longer going to sell fixed annuities. This may be one of the biggest shockwaves in the investment community in years. While many small insurers have removed certain product lines, up until this point, no major insurance company has removed annuities from their product offering. For consumers like Jim, this can only be seen as bad news going forward. Less competition usually leads to less favourable rates, and, potentially, if Manulife doesn’t see annuities as a viable business line, other major insurers could be looking at exiting the market as well.
Imagine a world where you can’t find a way to get income for life… It’s scaring Jim, and it’s scaring me a bit too as a planner. We use annuities and defined-benefit pensions to address longevity risk in retirement plans. In my experience, the greatest risk in retirement is not how much you earn – but how long your cash flow will last. Other than defined-benefit pensions and annuities, the options are few and far between, and usually much more expensive.
If, like Jim, you are retired, or retiring shortly, and don’t already have a fixed source of life-long income in your plans, I encourage you to review your financial plan to see if annuities are a useful tool – before they’re potentially a relic of the past.
Last week was a week of firsts at the office. Prime amongst those, was a call from our client Maria, who told us that her son had just been struck by a meteorite the size of a golf ball! Now, you might be wondering, how did she know it was a meteorite? Well, it was still hot and smoking, and it fell from the sky! Based on the pictures she sent me, I’m pretty sure it was a meteorite.
The reason Maria called us was not that Liam was injured – fortunately, Liam was alright, although, needless to stay, a bit surprised! Instead, she called knowing that I’m a member of the Royal Astronomical Society, and could probably point her towards people that would help preserve the meteorite, and perhaps be interested in some scientific research. We were happy to do so!
Interestingly, the odds of you being hit by a meteorite have been somewhat calculated – depending on the assumptions, we all have a lifetime chance of somewhere between 1 in 3200 to 1 in 840,000,000…might be time for little Liam to buy a lottery ticket!
The call though, was a good – but unusual – reminder that strange, unexpected things can happen that we probably can’t forsee…and that’s the topic of this month’s newsletter.
Plan for the unexpected
While its true, you can’t forsee every possible outcome doing financial and estate planning work, there are three main steps you can take to ensure that you plan for unexpected events and emergencies:
- Everyone should have an emergency fund!
- Your planning work should look at what happens if you or another family member gets sick. This is why Disability and/or Critical Illness insurance are often important parts of your plan during your working years.
- Your planning work should take into account what happens if you, or someone close to you were to pass away. This is where Life Insurance is so important – in your working years to replace lost income, and in your later years to offset tax on your estate.
Protecting your kids and grandkids
We live in a society where it can likely be argued that we have gone overboard in protecting our kids (Listen to this hilarious Irrelevant Show sketch, for example, which contrasts parenting today vs the 70’s), I find that way too few financial plans address adequately protecting our kids.
I’m a firm believer that every child should have a life insurance policy placed on them as soon as possible. While no parent wants to contemplate losing their child, it does happen, but the advantages of having insurance on your kids or grandkids early in life hold true even if they live to a very advanced age.
Any life insurance policy placed on a child should ideally have a “guaranteed insurability rider” that allows them to get more insurance as an adult without having to give medical evidence. (I’m exceptionally grateful to have had this in place for all of our children, especially given that one of our children has a medical condition which will likely make it hard for him to get insurance as an adult.) Kids are usually easy an inexpensive to insure – so doing this early cost little, and has a major benefit to their lives later on.
And – from a tax planning point of view – insurance policies owned by you on your child or grandchild can be passed tax-free to your child or grandchild later in life – allowing you to transfer wealth efficiently from one generation to the next.
Meteorite-proof Financial Safety Helmets
At the end of the day, a rock hurtling at us at 71km/hour from space is such an unlikely event, Liam may be the only person you ever hear of in your lifetime who gets hits by one. That said, if you stop for a moment and create a list of unexpected and unusual things that have happened to people you know and love , I would imagine that that list is lengthy. I think it is safe to say that we will all have one or two things in our lives that will hit us or our family out of the blue and have major impact in our lives.
As astronomers, we wish for clear skies – but we plan for clouds, just in case.
Ever since I moved to London 25 years ago , I’ve been immensely proud and grateful of our business community’s support for the many amazing charities and non-profits. Collectively, we have made a sizeable impact. Without our support, so many amazing projects in this city would have failed, or never even have existed. We are, without a doubt, a city of generosity.
For many business owners, supporting often comes in two main currencies: time (perhaps the most valuable currency we have as business owners), and money – often in the form of sponsorships or donations from our companies. With a little bit of creativity though, we can make our support even more impactful than you might imagine. And, believe it or not, the new small business tax rules around passive investment assets may make donating this year even more enticing.
Consider gifts of Publicly Traded Securities from your Corporation
Looking to reduce the amount of passive income in your corporation under the new rules? Here is a great strategy to implement this year to save yourself some hassle next year under the new rules.
If your Holdco (or Opco for that matter), has passive investments with a capital gain that trade on public exchanges, you can donate these securities in-kind to a charity. When you do so, you not only receive a donation receipt, you also get a full waiver on the capital gains tax that is normally owing on the sale of the security.
To make things even more enticing, due to the specific wording in the income tax act, you can now add the full value of the capital gain to your Capital Dividend Account (CDA). After your fiscal year closes, you can now issue the shareholders a tax-free dividend for the amount in your CDA. The net result is that by donating, you can take money tax-free out of your corporation for the same amount as the gain of the donated investments.
Donating personally, vs. corporately
If you are thinking of donating in cash, talk to your accountant about the benefits of donating personally vs. corporately. Beyond the Federal Budget changes for small business, the recent Ontario budget has made changes to the donation rules for individuals that increase the donation credit for certain income levels. Depending on your circumstances, it might be advantageous to take more income from your corporation, and then donate personally under our new regime, then to donate right from your company.
Have a corporately owned Life Insurance policy you don’t need anymore?
If you have a key-person life insurance policy, or a policy on shareholders that you no longer need, consider donating it to a charity by transferring ownership. If the policy is more than 3 years old, it can be assessed by an actuary, and your corporation can receive a receipt for fair market value, which is often significantly higher than the policy’s cash value. This is a particularly effective strategy for insurance policies with little to no cash value, that are several years old. Recently, I saw a policy with a $500,000 death benefit be valued for close to $250,000. That’s a pretty substantial tax reduction for your company, for something you might otherwise just be going to give up.
Transferring the policy to a charity may trigger a tax disposition if the policy has substantial cash value, but this will be offset by the charitable receipt. Take note under the new rules, the disposition will be classed as passive income – so best to donate before the end of the 2018 tax year so it doesn’t affect your eligibility for the Small Business tax rates on active income.
Beware of Charities as beneficiaries of your corporately owned insurance!
One last tidbit on corporately owned insurance policies : its almost never a good idea to have a beneficiary on your corporately-owned life insurance policy that is anything other than the corporation. Recently, I’ve seen a few generous business owners list charities or family members on corporate owned policies. If the policy pays out, the tax implications will be unpleasant in most circumstances – normally, I suggest a business owner owns such a policy personally, and not in the corporation.
Generosity needs qualified advice.
At the end of the day, make sure you are talking to your lawyer, accountant, and other financial professionals to maximize your giving, and make sure that your gift is structured in the best way for your corporation, and your personal assets.