Our monthly Newsletters
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.
As some of you may know, I have a great love of music and a terrible sense of humour. It may come as no surprise then that I’m a huge Monty Python fan. One of my all time favourite short movies is Romance with a Double Bass, from 1974, starting John Cleese and his then-wife Connie Booth. The movie is based on an Antoine Chekhov short story about a rather hapless double bass player from the royal court and the princess who both find themselves accidentally skinny dipping. Much wonderful comedy occurs in their attempt to sneak the princess back into the castle inside a double bass case with her dignity still (mainly) intact.
If you’ve never seen this charming movie you should check it out – but be warned, it includes plot-driven nudity and far more of John Cleese than you’ve ever seen (or may want to see).
Keep your fiscal pants from falling down
Unfortunately, salvaging your finances doesn’t involve much hilarity, nor something as simple a double bass case. What it does absolutely require, however, is up-to-date powers of attorney (POA). Unlike a will, POAs are for when “you aren’t dead yet,” but otherwise incapable or unable to make decisions on your own behalf.
In Ontario, there are two types of POAs – one for property (which includes your financial affairs) and another for healthcare. Each is a separate document, and it’s absolutely vital you have these in place. Rather than talking to the specifics of each of these documents, I want to highlight some lessons around the practical uses of POAs that I’ve learned as a financial planner over the years.
- Make sure it’s accessible
As obvious as this sounds, this is actually the most important thing I can tell you. Make sure your powers of attorney know where to get copies of your POAs. I once worked with a family where the mother had locked these documents in a safety deposit box, but the bank branch had closed years before and no one had any idea how to track them down. Eventually the court had to be involved to appoint a family member to look after their mom’s affairs.
- Where healthcare is involved, you most likely should say “or” not “and” with joint attorneys
I recently attended a talk by Dr. Natalie Hertzman, Medical Director of St. Joseph’s Hospice here in London. She strongly emphasized to the crowd that in her experience, many medical situations require immediate decisions. As a palliative care doctor, she has had situations where they were unable to get confirmation from both appointed joint POAs in a timely fashion, leading to compromises in the medical care of the family member. If your healthcare POA says “John and Susan,” the doctors must get consent from both POAs before any action can be taken – and if John isn’t available, Susan has no authority. On the other hand, if it says “John or Susan” then either John or Susan can give instructions and the doctors can act immediately.
- Family members have no right to financial information just because they’re family
If we have one constant issue with POA situations in our office, it’s that most people assume that if they’re immediate family, they’re entitled to information. This isn’t true – if you’re over the age of majority no one can act on your behalf or gain information to your accounts unless you have made them your POA for property or a court has granted them authority.
As a financial planner, some of the most uncomfortable conversations I’ve had are about this topic. Part of the confusion comes from the fact that for healthcare, in the absence of a POA, family does have some legal right to make decisions, but the same does not hold true for finances.
- Sometimes, family is not the best choice for POA
Sometimes it’s not the best idea to make a family member a POA. Take for instance a business owner. In my case, my wife is the POA for my personal financial affairs, but I have a corporate POA appointed for my ownership interest in Quiet Legacy. Why? The business has regulatory and other requirements that would chew up a lot of Bridget’s time to get up to speed on, as her primary occupation is as a teacher. I’m comfortable appointing a trust company to handle my business interests, as they have staff who are trained on corporate rules and responsibilities. It’s way easier and more efficient to delegate this task to them. I’ve made provisions that if activated, they do need to consult with Bridget and honour her wishes when possible, but the legal responsibility falls to them, not her.
At the end of the day, you don’t want to be caught with your financial pants down, hiding behind a double bass. Make sure you check that your POA is up to date and effective for your circumstances. If you do, then you’ll always look on the bright side of life!
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.
Believe it or not I’m an optimist – but sometimes it’s good to look at the dark side to figure out how not to end up in a bad place! This month I’m going to talk about the many ways I see people destroying their wealth.
- Accumulating too much in your RRSP/RRIF
It sounds wrong, but one of the biggest tax traps in Canada lies in wait for those who are too good at saving. Due to quirks of the income tax rules, having too much money in your registered retirement income fund (RRIF) or registered retirement savings plan (RRSP) in your later years can come back to haunt you. Most commonly, chronic savers end up with their estate in the highest tax bracket in Ontario (53.5%) because every dollar in your RRIF or RRSP is counted in your income in your year of death. While you can roll your RRSP or RRIF to your spouse tax-free if they survive you, eventually, the piper comes calling from Ottawa. Ironically, I often see scenarios where the taxes generated in the estate are substantially higher than the taxes saved in the first place.
The second RRSP/RRIF tax trap happens at the time of the first spouse’s death. The surviving spouse often finds themselves thrown into Old Age Security (OAS) clawback status, as their RRIF minimum on the combined total pushes their now individual income over the clawback threshold of $76,910 in income. This can come as a surprise for folks who, when their spouse was alive, were able to income split and stay well below this threshold.
How to avoid:
Consider using excess RRSP funds to make charitable contributions. This helps drain the RRSP over time in a tax-effective way. In December of 2016, I wrote an article on a strategy involving an insurance gift to charity paid for by RRSP holdings, in which we were able to gift $400,000 at a net estate cost of $1300 to one of our clients.
2) Designating the kids as joint owners of assets (like a house) to avoid probate.
Fifteen years ago, I worked with clients whose mom had, after a conversation at her bridge game, decided it was a good idea to jointly register her house (a capital gains exempt asset) with her kids at the bottom of the Toronto housing market. Fifteen years later when mom sold the house, the family found out this resulted in capital gains assessments to her two children who did not live in the house. The net result was $75,000 in income tax between the two kids. All this to save $1800 in probate fees!
Never put someone on the title on your primary residence unless they live there too. For you its tax exempt – for them, it’s a secondary property and subject to capital gains.
Similar issues can arise if you jointly register your non-registered assets like Guaranteed Investment Certificates (GICs) and bank accounts with your children. While this can sometimes work, it can also create issues.
First, changing the ownership can trigger a disposition for tax purposes. Second, a number of Supreme Court rulings over the past 10 years have made this a bit of a legal “grey area” for estate purposes.
How to avoid:
If it’s a house, it’s almost always best if only the people who reside in the house are on the title. Non-registered accounts are often better handled through the use of an insurance-based GIC or segregated fund, where a beneficiary is named. These products, unlike their non-insurance equivalents, will bypass probate, without any of the legal grey areas of joint tenancy.
- Trying to make a fast buck because of a hot stock tip
For whatever reason, human nature is often run by the fear of missing out (FOMO). As you have likely seen, marijuana stocks, and cryptocurrencies have been dominating news headlines for the last few months. Some people have made a pile of quick and “easy” money, and started telling their friends. More recently, many people have been wiped out as the valuations on these “investments” have had huge swings. I have a hard time understanding how a company with no sales can be valued higher than the largest breweries in the world, or how a currency created by computer can be considered more valuable than those backed by governments.
How to avoid:
Don’t go there. Seriously. If you still feel the urge, go buy a copy of Niall Ferguson’s book, The Ascent of Money, which is an engaging read through nearly 1500 years of financial market history, covering other “hot tip” time periods, such as the great tulip bubble of the 1600s. You will learn very quickly the human race has had centuries of hot tips leading to nasty results!
- Waiting too long to implement smart estate strategies
There are many reasons people put off estate planning but it usually comes with a large cost. With a long enough timeframe, you can make significant changes that save you a pile of taxes on your estate.
One key timeframe is age range of 60-65. Many people have significant assets at this point in life, much of which is tied up in RRIFs or RRSPs. As you might recall from Point #1, this is not necessarily ideal. Since OAS (and OAS clawback) kicks in at age 65, and you must start withdrawals at 72, many times we can reduce your RRSP holdings gradually between 60-65 with minimal tax implications. If your RRSP is large by age 72, your marginal tax rate may jump significantly, counteracting the benefits of your years of saving.
Additionally, we use insurance to help offset estate taxation, either directly by naming your heirs as beneficiaries of the tax-free payout, or indirectly by naming a charity, and having the estate use the tax receipt generated at the time of death. Ideally, you should set this up between ages 40-60. While this strategy is still feasible later in life, often the costs and potential health issues make this far more costly than starting while young.
People often view insurance premiums as an expense, not a smart investment in the future. Done right, these strategies can leave your family in a significantly improved financial position once you’re gone.
How to avoid:
Start having planning work done as soon as possible and don’t procrastinate. Every year you wait makes it slightly more difficult.
Alas, the greatest destroyer of wealth we see is divorce. No matter your age, the emotional and financial costs associated with divorce take a heavy toll. Aside from the adage of “choose your spouse well,” the best you can do if you find yourself in a divorce situation is to mitigate the costs.
How to mitigate:
Collaborative divorce is a growing trend, and we have seen it rising in popularity. The collaborative divorce process is designed to lead to more positive financial outcomes than the traditional method, by attempting to bypass the litigation often involved in divorce. This leads to (hopefully) lower legal costs. At the heart of the process is the concept that both parties agree to aim for the best mutually-beneficial outcome, rather than favouring one side over the other. More information can be found at: http://www.oclf.ca/
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.
As we’ve discussed a number of times, most likely it’s going to suck to be dead. And while there isn’t too much you can do other than deferring that reality, fortunately, there’s a lot you can do to mitigate the financial effects. (Not for you, mind you. You’re not going to need money where you’re going.)
The concept of life insurance largely predates what we think of as modern society. As early as 5,000 BC, sailing ships in China came up with the idea of protecting one another from pirates at sea using shared risk for their cargos. The idea was if pirates slaughtered a crew for its cargo, at least some of the assets being shipped would make it to port via another vessel. Good for the business, but maybe not so much for the family of the poor sailors. We need to go forward another five millennia to find a better example of life insurance that leaves the surviving family members in a better place.
The burial club…for military men
The modern concept of life insurance seems to date back to about 100 BC, in Rome, where Caius Marius created a “burial club” for his troops, where everyone pitched in to pay for the funeral costs of fellow troops, and provide a stipend to surviving family. This was driven by a concern that Romans not buried with proper funeral rites would come back as ghosts and angrily haunt their friends and family.
It probably wasn’t hard to get the troops to buy in to this plan. We’ve all worked with someone who we really, definitely don’t want to be working with for eternity. Still, I don’t know about you, but I for one am glad that workplace clubs have gotten a bit more “positive” in nature over the last two millennia!
Life insurance today
While rules around insurance have changed a lot in the last 2000+ years, the basic concept has remained: you die, someone else gets money. Here in Canada, the key piece of this is that the government treats inheriting insurance money as a tax-free payout, hence the power and purpose of using life insurance for planning your estate. If you stop to think about it, relatively few assets are subject to zero tax in Canada: Your principal residence, your tax free savings account, and that, quite frankly, is about it. Everything else you might own has some kind of tax consequence. That leaves us with a lot of neat and interesting options.
(Still, it sucks to be dead. I suppose that goes without saying.)
Ryan’s top three reasons to have insurance as part of your estate plans
- Replacement of lost income, or a guarantee there will be money for your beneficiaries.
There is absolutely no way to know how much money you’ll have when the grim reaper comes knock-knock-knockin’ at your door. As much as you have money today, you might not have any when the doorbell-of-doom rings and a guy with a cowl and scythe comes looking for you. Insurance will ensure (See what I did there?!) that your family has funds no matter what.
This is particularly important for families where there are young dependants, or situations where you’re providing for someone else. It’s especially important if you have a family member with a special need or disability, and funds absolutely must be in place for their protection.
- It’s often a cheaper way to pay the tax on your estate.
We often set up policies that pay taxes that come due on the death of the second spouse. In many cases, especially the younger you start, the insurance may be a lower cost-per-dollar to cover tax costs than actually paying the eventual tax bill itself.
These taxes most often arise from your RRSP, RRIF, defined contribution pension plan, or taxable capital gains (from investments, secondary properties, business assets, etc.), all of which get added to your income in your year of death. For many people this can be a very substantial amount of money.
As a quick proxy, add up all of your registered money in RRIFs, RRSPs and defined contribution pensions, as well as one half of the capital gains of your non-registered investments. Now, divide that number in half. That will give you a pretty close approximation of your worst-case tax owing on your estate in most provinces.
(You can take this strategy a step further, and use the insurance proceeds as a charitable gift as well, but that’s an article for a whole other day.)
- If you have a corporation which holds significant passive investment assets, life insurance can be an extremely tax-efficient way to transfer funds out of your company, through your estate, tax free to beneficiaries.Under the current small-business rules, the insurance grows tax-free in your corporation, and eventually will pay out tax-free via your capital dividend account. It also helps to avoid some double-taxation traps on transfers of private companies. While the recent tax proposals might have an effect on this, at the moment, from what we know, this appears to continue to be a valid and viable planning strategy, and not affected by the proposed changes to date.One immensely important thing: generally, the beneficiary of your corporate owned-insurance policies should almost always be the corporation, not your family or any other beneficiary. If you don’t follow this rule, the tax consequences can be very, very severe.
Choosing the right type of life insurance
There are a whole pile of different types of insurance you can use, but for most estate planning purposes, it’s important to choose something that will last as long as you do. That usually means one of three options – a universal life, whole life, or term-to-100 policy.
Most importantly, it means you should work with someone who really understands how these policies work and compare. It often is misleading to compare these types of different insurance policies, and insurance companies solely on premium price and projected illustrations. A competent, trained specialist can help you sort through the otherwise mind-numbing features and benefits available, and the pros and cons of each in light of your own circumstances.
For most of us, life Insurance is not a whole lot of fun to think about, but it sure can make a big impact in your own estate planning. We’ve come a long way from pirates and burial clubs, but at the end of the day, doing it right and boring with insurance sure makes sense for most estates.
I don’t know about you, but when I was a kid… I was promised we’d have jet packs by now!
Image Attribution Seg9585
Every night for the last 14 years, I’ve read a story to at least one of our kids. The days of them being too old for this will soon be upon us, but it’s a wonderful tradition we enjoy very much. We’ve read thousands of stories over the years, but inevitably, the family favourite is anything from Calvin and Hobbes, the legendary and timeless comic strip by Bill Watterson.
My favourite strip was written Dec. 30, 1989. In it, Calvin marks the new year of the decade with incredulity. In Calvin’s words: “Big deal! Where are the flying cars? Where are the Moon Colonies? Where are the personal robots and zero gravity boots?”
I can understand where he’s coming from. It’s been almost thirty years. I – sorry I mean Calvin – still doesn’t have zero gravity boots!
The one exception
One of the smartest investment managers I’ve ever met once commented that the only investment standard you can rely on to predict the future is that everything reverts to the average. The real challenge though is knowing what the average is, and being patient enough to wait for the valuation to return there.
What she meant by that was that sometimes prices for equities (or anything for sale, really) go way above or below what they should but, inevitably, will return to where they should be based on their long-term rates. It was probably the most astute piece of advice on investing I’ve ever been given.
Now, not everyone spends a lot of time looking at investment markets, so let’s use an example we’re all familiar with – housing prices. Over the last 100 years housing has increased at about the rate of inflation over the long term. In particular, a reasonable standard over that time period is that a house should be affordable if its cost is three to four times the household’s annual income. According to a very interesting article in the Globe and Mail in April 2017, housing in the GTA in September 2016 was more than eight times the average household income in the city at $627,395. Ironically, just after the article was written, the average price became $919,449, or 12 times the average household income in the GTA.
It doesn’t take a lot to imagine that 12 times family income is reaching a point where prices would have to lower. Sure enough, housing prices have started going down since last April, and the most recent data from the Toronto Realtor’s Association website shows prices started dropping over the fall.
So, knowing the value of items always reverts to the average, we know that either incomes have to increase significantly (by about 300 to 400 per cent) or housing prices need to drop. I don’t think it takes a lot to imagine which is the most likely scenario.
The problem is, I can’t tell you when that potential reversion to the average will happen – it could be tomorrow, or it could be in five years. But someday in the future, things will revert to normal and it’s likely to be painful for many GTA homeowners, unless they get some pretty hefty raises at work!
Applying this to your non-real estate investments
One of the most important fundamental aspects of investing is ensuring you rebalance your investments to keep your overall asset allocation on target. As some holding increase or decrease in value, your original allocation of investments will change. Rebalancing keeps taking you back to “the average” proportion of holdings in your portfolio with which you started. I build this into almost every portfolio I set up for our clients. If we believe that the only thing predictable about the future is that everything will eventually revert to the average, rebalancing is our only way to predict the future.
It’s not about what the hot pick is in your portfolio – it’s about ensuring your portfolio has the right balance of investments, based on your personal financial situation… In short, it’s boring investing. Not the sexy prediction of the future you likely wanted but, trust me, it’s the hottest investment tip I can give you.
In the meantime, please let me know if you hear of a company doing R&D on those zero gravity boots Calvin was talking about. Because, (and please forgive me the horrible pun) you know, that company’s stockings can only go higher, right?
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.