|
|
| |
| What's on the Minds of Clients |
|
 |
|
|
Estate planning is about life - in the present and
in the future. Most importantly, estate planning is about the life of
your family and loved ones - and the peace of mind you get from helping
to preserve their financial security.
Complete
financial planning is not about choosing mutual funds and other
investments. It should be about what you want out of life. Once that is
clear an advisor can match investments to your needs.
In
a recent column in the Dow Jones Investment Advisor Nick Murray stated
that advisors need to become skilled at asking six threshold questions.
|
1)
What will happen to your family if you die tomorrow? A year from now?
10 years from now?
2)
How can you build a retirement income that you and your spouse can not
outlive?
3)
If you plan to leave principal to the people you love, how will you do
that with minimum taxation?
4)
How will you educate your children? Grandchildren?
5)
Who will provide for the last five years of your life? Your parents'
lives?
6)
Would you leave meaningful legacies to the institutions that have
intervened in your family's life? What are some highly efficient ways
to do this?
"On
these great questions are comprehensive plans build . . . Plan to serve
the whole client, or to watch someone else do so." NICK MURRY
|
|
| An Estate Planning Checklist |
| |
Raise
the subject of high taxes and a lively discussion can result with
almost anyone. Ask about succession planning, however, and it's a
different story. Talking about death doesn't come easily. Yet, saving
taxes is often the biggest benefit from a well-constructed estate plan,
along with many other important benefits. Here's a checklist of some
important aspects you should consider in your own plan.
|
|
| |
Yes
|
No
|
|
| |
|
|
Your Will |
| |
|
|
Have you prepared a Will? |
| |
|
|
If so, have you reviewed its provisions in the
last five years? |
| |
|
|
Will your Will be easy to locate upon your death? |
| |
|
|
Have you discussed its provisions with your
spouse/dependants? |
| |
|
|
If you have dependants, have you provided for
everyone? |
| |
|
|
If you have minor dependants, have you named a
guardian? |
| |
|
|
Is the named Executor still appropriate? |
| |
|
|
Has he/she agreed to serve in this capacity? |
| |
|
|
|
| |
|
|
Your Assets |
| |
|
|
Will your Executor be able to locate all your
assets easily? |
| |
|
|
Are beneficiary designations of RRSPs, insurance
policies, etc. all up to date? |
| |
|
|
|
| |
|
|
Your Estate and Taxes |
| |
|
|
Have you considered the effect of income tax or
capital gains tax? |
| |
|
|
Have you considered ways to reduce such taxes on
your death? |
| |
|
|
Will significant probate fees apply on your Will? |
| |
|
|
Do you know how to reduce these fees? |
|
| |
If
you answer "No" to even one of
these questions, you have some work to do. Remember, there are other
aspects to consider as well, as this is by no means an all-inclusive
list. Always consult with professionals in this complex field. Feel
free to talk to us if we can help. For more information, see Estate
Taxes/Charities/RRIF or RRSP.
|
|
|
|
| RRIF or RRSP Insurance (Universal
Life optional) |
| |
RRIF or RRSP
Insurance
If
a client dies with RRIF or RRSP holdings and the client does not have a
spouse to whom the assets can be rolled over, or dependent child or
grandchild, then the full amount of that RRIF or RRSP will be taxable
income in the year of death.
Often,
if the client wished to pass that money on to a beneficiary, the client
would purchase life insurance in an amount equal to the potential taxes
payable. The insurance would be used to pay the tax and the assets
would pass in whole to the intended beneficiary. The government would
get its tax dollars and the beneficiary would get the asset.
Under
the new charitable giving rules this application of life insurance can
be taken one step further. A client could buy life insurance coverage
equal to the value of the RRIF or RRSP and leave that insurance benefit
to a favourite charity via the client's will. Upon the client's death
the life policy will be paid to the estate of the deceased, the estate
will transfer the proceeds to the charity, and the charity will issue a
tax receipt to the estate. The end result is that the tax credit
available as a result of the charitable donation will offset the tax
payable due to deemed disposition on the RRIF or the RRSP. The client
avoids the payment of taxes on the RRIF or RRSP at death, and will have
made sure that the beneficiary takes the full amount of the asset,
while the charity receives a sizable donation.
Summary
The
changes to the charitable giving rules are perhaps the most significant
to this area of tax planning that have been seen in a decade. They have
arisen from a desire for the government to shift the funding burden fro
itself to the general public. Both charities and individual and
corporate clients stand to gain tremendously from the new rules.
For
further advanced Estate Planning such as the above consult a Financial
Planner at Ogden
Financial Planners Ltd.
|
|
|
 |
|
Estate Freeze |
|
WHAT
IS AN ESTATE FREEZE?
An estate freeze is designed to transfer the
future growth of a business or an investment to future generations (the
"children") rather than leaving this growth in the hands of the current
owner (the "parent"). In its most fundamental form, an estate freeze is
a transfer of assets, which have potential future tax exposure, to the
next generation. This enables the parent to know what his or her tax
liability will be and, therefore, the parent can prepare for such
liability in advance. To transfer future growth, a parent may simply
wish to transfer shares by gifting those shares (investments etc.,) to
a child. However, such gifting may cause certain problems to arise,
such as immediate tax exposure and loss of control for the parent over
the assets. These problems can be avoided if the parent implements a
properly constructed estate freeze.
|
EXAMPLE
OF ESTATE FREEZES
S. 85(1) ESTATE FREEZE
|
|
| Perhaps, the most common
type of estate freeze involves a holding company. In this situation,
(and pursuant to section 85(1) of the Income Tax Act),
the parent transfers his or her shares in the operating company to a
holding company and, in return, the parent receives fixed value
"freeze" shares from the holding company. Under the Income
Tax Act, if the parent and the holding company make a joint
election within a certain time period, they can select an amount that
will be the parent's proceeds of disposition of the common shares and
the holding company's cost of the operating company's shares. If the
only consideration received by the parent for the common shares of the
operating company is the freeze shares of the holding company, the
election can be made so that the proceeds of disposition equal the
adjusted cost base of the common shares transferred. |
The children, under a
section 85(1) freeze, would subscribe for common shares of the holding
company at a nominal subscription price because all of the value at
that time would be in the parent's freeze shares. After the exchange
has occurred, any future growth in the value of the shares will accrue
to the new common shares, which may be held in an inter vivos
trust for members of the family or can be subscribed to by the children
directly. If the only consideration received for the original common
shares is the special shares, there will be no capital gains. However,
if for example, the parent has capital losses, he or she could elect to
have transferred the shares at an amount in excess of the adjusted cost
base, and thereby, triggering a capital gain that could offset the
capital losses incurred. |
|
|
Charity Never Fails - Especially When It's Your
Estate |
|
CASE
1: Estate with no insurance to gift to beneficiary
|
| |
Estate's
Market Value at Death
|
(A)
$ 1,500,000
|
| |
A.C.B.
Adjusted Cost Base
|
500,000
|
| |
Capital
Gains for Tax Purposes at Death
|
1,000,000
|
| |
New
Capital Gains Tax @ 66.66%
|
666,000
|
| |
Assumed
Marginal Tax Rate @ 49.1%
|
(B)
327,000
|
| |
Net
After Tax in Estate (A
minus B)
|
$ 1,172,700
|
|
|
CASE
2: Estate with insurance included to charitable beneficiaries
|
| |
Estate's
Market Value at Death
|
$
1,500,000
|
| |
A.C.B.
Adjusted Cost Base
|
500,000
|
| |
Capital
Gains for Tax Purposes at Death
|
1,000,000
|
| |
New
Capital Gains Tax @ 66.66%
|
666,000
|
| |
Assumed
Marginal Tax Rate @ 49.1%
|
327,000
|
| |
Non-refundable
Charity Tax Credit from Insurance Donation |
325,000
|
| |
Income
Taxes |
0
|
| |
Net
to Estate After Tax
|
$ 1,500,000
|
|
|
|
|
|
Creditor Protection |
|
SPECIAL
PROTECTION
|
|
Generally
speaking, most life insurance products are protected from creditors of
the insured if proper beneficiary designations are made, well before
the time of any insolvency. Provincial legislation has more or less set
out the criteria that must be met in order to preserve this special
protection.
|
|
LIFE INSURANCE PRODUCTS
|
The
products that are covered by the special protective blanket fall into
three separate categories:
| 1. |
life
insurance; |
| 2. |
segregated
funds; and |
| 3. |
RRSPs
and other annuities issued by life insurance companies. |
All
of these products contain "an undertaking to provide an annuity" which
is the main criteria that has come out of years of court cases in which
the issue in dispute was "what is an insurance product".
|
|
|
PROPER
BENEFICIARY DESIGNATIONS
|
The
provinces all have similar legislation relating to irrevocable
beneficiaries and beneficiaries of a particular class.
In Ontario, for an insurance product to be protected, there must be
either:
| 1. |
a
designation of an irrevocable beneficiary, or |
| 2. |
a
designation of either spouse, child, grandchild, or parent of the
insured. |
In
Quebec, the class of relatives is wider and includes all descendants
and ascendants of the owner of the policy. The relationship in Quebec
is between the owner and the beneficiary. In all other provinces, the
relevant relationship is between the life insured and the beneficiary.
|
|
|
|
|
IRREVOCABLE
BENEFICIARY DESIGNATION
|
|
As
its name indicates, an irrevocable beneficiary designation is just
that. It cannot be revoked or altered without the consent of the
beneficiary. While this may work well in a situation where there is
total certainty, it can create many problems where there is a change in
circumstances. Breakdowns occur in many sorts of family relationships,
whether they be spousal, parental or otherwise, and accordingly
irrevocable beneficiary designations should be well thought out before
being implemented.
The policy holder surrenders all effective control over the policy and
any cash value it may have. The policy holder retains little, if any,
benefit or control over the policy other than the ability to let the
policy lapse by failing to pay premiums.
It should also be pointed out that in this designation of an
irrevocable beneficiary, there is no restriction as to whom the
beneficiary can be, other than the policy holder or the policy holder's
estate. An irrevocable designation of one's self is not permitted.
|
|
DESIGNATION
OF FAMILY MEMBERS
|
The
allowable family beneficiaries that maintain the creditor protection
are set out in most provinces' legislation (other than Quebec as noted
above) and are as follows:
| 1. |
Spouse |
| 2. |
Child |
| 3. |
Grandchild |
| 4. |
Parent
of Life Insured |
It
is acceptable when naming anyone from the above group of family members
to have a trustee named as well, i.e. to Jane Doe in trust for
(spouse's name, or child's name, etc.).
When designating one of these family members, the insured has greater
control than with an irrevocable beneficiary in that the beneficiary
can be changed, but only to another person from one of the four classes
as outlined above.
The definition of "spouse" generally includes only married spouses and
not common-law spouses. There has been a case recently in Alberta (Re
Greunding) that took a different approach, but that situation
will no doubt result in the rewriting of legislation and at the time of
writing, it is unclear if common-law spouses will be included in the
definition of "spouse".
"Child", however, can include children born of a common-law union.
|
|
|
EXTENT
OF PROTECTION
|
|
The
above examples of beneficiary designations will, in most cases, prevent
creditors from seizing the insurance product during the life of the
insured. Once the designation has been made, the protection is in place
(subject to a few exceptions set out below).
With all other beneficiary designations, the insurance is protected
from creditors only once the insured has died and the insurance becomes
"payable" to the beneficiary. It then becomes the beneficiary's
property and cannot be claimed by creditors of the insured.
|
|
EXCEPTIONS
|
As
with everything in law, there are some "wrinkles" or exceptions. They
are as follows:
|
1.
|
The
Bankruptcy and Insolvency Act provides that where a policy owner
designates an irrevocable or preferred beneficiary which in turn
creates a "protected policy", or pays premiums or otherwise transfers
non-creditor-protected funds into a creditor-protected policy, and then
goes bankrupt within one year, the Trustee in Bankruptcy can move to
seize the money that would have been available had that transaction not
occurred.
|
|
2.
|
If
a policy owner carries out any of the above transactions between one
and five years before bankruptcy, the Trustee in Bankruptcy can move to
have the transaction voided if the Trustee can prove that at the time
of the transaction the policy owner would have been unable to pay all
debts without those said funds.
|
|
3.
|
With
a few exceptions, the Crown, both federal and provincial, is not bound
by the creditor protection provisions in provincial legislation. There
have been some cases, however few, where Revenue Canada has been able
to seize insurance products for unpaid taxes. Despite the legal and
practical difficulties that the Crown would face in forcing a surrender
of a life insurance annuity or RRSP, it can happen, and sometimes does.
|
|
| ©
Royal & Sunalliance. Reprinted with permission. |
|
|
|
|
| Investing with Seven Figure Deposits
|
|
With
the advent of insured estates there is a growing wealth class in Canada
never before seen. Proceeds after tax on assets passed on to the next
generation is growing significantly and requires special applications
to guarantee that such funds will be passed on to the next generation
with minimum tax consequences in the form of family trust and
investment returns that are safe with sufficient income not to waste
the growth during income periods.
A
diversified investment portfolio is key in the administration of such
funds, allowing for growth with conservation of capital.
In
situations where no dependants are left to inherit the estates, special
planning to designate charitable beneficiaries are important.
Proper
wills to enforce the desires of the donor and to eliminate probate
wherever possible are encouraged.
Various
investment strategies can be explored for the novice to ensure the
security of investments. Wrap accounts are popular for large deposits.
For amounts of $ 250,000.00 or more a wrap account gives the investment
dealer, broker, bank and trust the flexibility to move funds around to
accommodate the risk factors of the investor.
For
amounts over $ 1,000,000.00 the investor will most likely choose a
number of options to build a portfolio that best suits their risk
factor and returns. For example, a suggested portfolio would look
something like this:
| 1.
$ 250,000 |
Money
markets with a combination of Canadian Cash and US |
| 2.
$ 250,000 |
Segregated
funds with guaranteed funds. Creditor proof and insured 100%. |
| 3.
$ 250,000 |
Dividend
Income funds and Bonds both Canadian and Global. |
| 4.
$ 250,000 |
Stock
plans and Mutual Funds for future growth in equities. |
Timing
on fund transfers and rebalancing are an essential element for your
planner as the needs of the investor change with time. The health and
wealth of the investor will play a big part in the future of these
funds. Special arrangements can be made to protect these assets whilst
the investor is in reasonably good health. Ask your financial planner
what these arrangements are and consider all the options available to
you.
For
further advanced Estate Planning such as the above consult a Financial
Planner at Ogden
Financial Planners Ltd.
|
|
|
 |
|
| List
of Items I Own (PDF document opens in new window) |
|
| Estate Planning and Wills
|
|
Estate Planning is all about people, from
individuals to large families. Basic needs in planning estates range
from:
- Saving
Taxes
- Building
Cornerstones
- Choosing
Trustees
- Assigning
Beneficiaries
- Protection
and Conservation
|
Wills are essential most of the
time, to define who's in charge, who gets everything, who is your
back-up. Remember family comes first and keeping promises to
beneficiaries is essential.
For
information on Alter-Ego/Joint Partner Trust and Inter Vivos Trust
click on AIM
Tax and Estate Information . . . then scroll down and click
on "10 Simple Steps".
For
further advanced Estate Planning such as the above consult a Financial
Planner at Ogden
Financial Planners Ltd.
|
|
|
 |
|
|
|
