Have You Overlooked Assets in Your Estate Planning?

Have You Overlooked Assets in Your Estate Planning?

We have bad news for all the Luddites out there: Technology is here to stay. That means computers and cellphones, and all the software and apps that come with them, are going to become more and more prevalent in the future. 

Technology has infiltrated our daily lives on such a granular level that most of us don’t even realize how much we rely on technology in our day-to-day activities. COVID-19 has made it more difficult to see loved ones in person and even trips to the grocery store carry risks of infection, so many of us have taken to Zoom-happy hours with friends and ordering our groceries online. Whether it is our work meetings, completing tasks and chores, and even social gatherings, technology is everywhere.

How we use technology will continue to expand in the future, but what does that have to do with your estate? Well, as it turns out, a lot. Before we get into the details, let’s discuss what digital assets are. 

Digital assets are essentially anything that has inherent worth that is also in digital form. What establishes their status as an asset is the fact that they come with a “right to use” (e.g. a password). Without a right to use, they are just considered data. Digital assets could include family photos, air miles, hotel rewards, grocery store points, and especially cryptocurrency.

In estate planning, you would keep a list of all your valuable physical assets and you would also consider what would happen to these assets upon your death. Your executor would know these details and would be able to locate these items in your home or safety deposit box and ensure that they are passed on to the right people.  

The same holds true for your digital assets. In your estate plan, you should make a list of all your assets, including your digital assets, and ensure that your executor knows what digital assets you own, where to find them, and how to access them. Remember to include your username and password to all of your accounts on the list, and update that list frequently as your passwords are going to change from time to time.

Additionally, when you are considering your estate and your legacy, you need to decide what you would like to do with your social media profiles. Perhaps you have become a prolific tweeter through your Twitter account, or maybe you use Facebook to remain connected to your long-distance friends and family. Either way, your social media profiles could remain online forever, or they could be deleted per your wishes. Make a decision now about what you would like to do with your social media accounts so that there is no ambiguity regarding how your family should handle them when dealing with your estate. 

Digital assets have been overlooked in the past to the frustration of many estate executors. But as the world continues to evolve, people will rely more and more heavily on technology. This means that people’s wealth and valuables may be held digitally, and therefore, these assets should be included in your estate planning. 

If you are not sure where to start, talk to your trusted executor and write down some notes related to the following information:

  1. What are your digital assets?

  2. Where can your executor find them? 

  3. Update your usernames and passwords regularly. 

  4. Share this information and any updated information with your executor.

As always, please feel free to share this article with anyone you think would find it of interest. 

All in the Family: Estate Planning for Farmers

Many farmers find it difficult to get any interest from their children in continuing to run the farm business – which can cause some complications when developing the best estate plan for farmers looking to retire.

In general, farmers are in an interesting position: they are asset rich due to the increased value of their land but struggle with the increasing costs related to their farming activities.

However, if the farm holds significant value but the children are not interested in working the land, what is a farmer to do?

In some cases, at least one child is interested in farming having grown up in it. If there is only one child interested in taking over the farm, the solution may be simple: gift the farm to the child.

If a child is taking over the business, parents should consider the following:

  • The timing of when the parents will retire.

  • When they will transfer the ownership.

  • Where they will live after retirement.

  • Whether or not they have enough retirement savings without relying on farm income.

If no children are willing to take over the farm business, estate planning and the tax implications become more complicated. However, farmers have some tax planning tools they can use that are unavailable to most people:

  • There is actually a higher exemption from capital gains for both farming and fishing individuals. While qualified small business corporations can claim about $892,218 against capital gains on shares, farmers have an exemption of up to $1 million on either qualified farm property or shares in a qualified farm corporation. This is a really great benefit for sole proprietors or partners in a farming operation.

  • In addition, if a farmer is passing farm property over to a child, they may elect to transfer at the original cost base, rather than the current fair market value. This is essentially passing the gains over to the next generation – much like an estate freeze without all the documentation.

Qualified Farm Property

In order to receive the right exemptions for your situation, it is also beneficial to understand what is considered qualified farm property.

In order to receive the right exemptions for your situation, the property must be used for active farming activities – not rented out or sharecropped.

It is also important to consider who actually owns the farm and if they are actively farming the property. For example, if two spouses own the farm property and farm it then they both get $1 million of exemption. If a spouse is not an owner but is actively farming the property, the current owner can transfer farm property over to the spouse at cost to allow for the use of the exemption. Children may also qualify for this exemption.

The current rules have two important provisions:

  • The owner must be actively farming for two years before selling or gifting the property, and the owner must have earned most of their income from farming during those two years.

  • Any other income earned from other sources has to be significantly less than the total gross income earned from farming.

If this is not the case, then there may be no exemption and no ability to gift the farm to a child at cost.

It is also important to consider what year the farming property was first acquired, as the rules prior to 1987 were significantly different.

The rules after 1987 state that farm property must be used to conduct farming, and it must be owned for two years prior by the individual, spouse, common law partner, children or parent of the individual, a trust or partnership.

However, if a farmer owned the property prior to 1987, then the rules are a bit more generous. For farms acquired prior to 1987, the tax authorities allow you to use the tax benefits if you used the property “principally” for active farming in the year you sold or gifted it, or in at least five years during which the property was owned.

Questions to Outline Future Goals

Finally, probably the most important step a farmer can take in planning their estate is to determine their own goals and ask their children about theirs. Some questions to consider:

  • If the children are interested in farming, can the parents afford to retire without farm income and if not, how many people can the farm support financially?

  • If there are both farming and non-farming children are there other non-farming assets that the parents can leave to the non-farming children to equalize the estate? Would life insurance be useful to provide equalization?

  • Do the parents need the children to “buy” the property, for at least $1 million of it to take advantage of the exemption and get the parents retirement funds? And can the children afford to do that?

Questions? Reach out if you are interested in exploring estate planning options.

Please feel free to share this article with anyone you think would find it of interest.

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Impact of Recent Events On Your Estate Plan

A year ago, the projected deficit for 2020 was estimated to be $20 billion. Shockingly, as a result of Covid-19, this projection has risen to over $380 billion by the end of the year. So, what does that mean for tax rates and how will this affect your estate plan?

Even as they continue to unfold, the Covid-19 pandemic and its effects are influencing the way we plan for our future. During the period of lockdown and self-isolation, many people put a great deal of thought as to how to keep themselves and their families safe – not only physically but financially as well. For some, this meant finally looking at the recommendations they had been considering about their life, critical illness and disability coverage. For others, it became a time to reassess their investment, retirement and savings plans, as we all know the results uncertainty can have on the equity markets.

Then, there are the potential long-term effects that this pandemic may have on estate planning and its primary objective of reducing the impact of taxes during life and at death.

As the national deficit continues to balloon, the logical question remains: where is the money going to come from to help cover this? While the government may be loath to raise taxes, and politically that is something it might wish to avoid, there is no question that increased tax revenues are probably necessary.

For the past year or so, financial pundits have predicted that there may be an increase in the inclusion rate for taxation on capital gains. However, there is speculation on the actual amount of inclusion because this percentage has fluctuated historically. For example, when the tax on capital gains was first introduced in 1972, the inclusion rate was 50 per cent, meaning this amount of the capital gain would be taxed. Over the years since, the inclusion rate fluctuated between 50 per cent to 75 per cent. It was lowered again in 2000 to the current inclusion rate of 50 per cent.

In Canada, the top personal marginal rate in most provinces exceeds 50 per cent. This means that the tax payable on a capital gain, realized or deemed at death, could be over 25 per cent. It is highly possible that the inclusion rate will soon be increased to help augment tax revenues to combat the huge deficit. If it increases to 75 per cent, as it was from 1990 to 2000, the effective rate of tax on a capital gain will increase to almost 40 per cent. This assumes that the top marginal income tax rate also does not increase. This will have a significant impact on the future cost of settling an estate due to the deemed disposition of all assets upon death.

One beneficial strategy to avoid leaving family members with an insurmountable tax bill, is to provide sufficient estate liquidity to pay taxes due at death from the proceeds of a life insurance policy. In Canada, we are fortunate to have permanent life insurance policies that insure an individual for their entire life with a premium that is guaranteed not to increase.

In its handling of its $380 billion deficit, the Canadian government could borrow money, and if they do, it is a real incentive to keep long-term interest rates as low as possible. The current yield for 10-year Canadian Bonds is less than 1 per cent, and it is clear that a low interest rate environment will persist for a considerable period of time. This is significant because the life insurance company actuaries pay particular attention to the prevailing long-term interest rates when pricing a product. This current era of low-interest rates indicate that the price of permanent life insurance will increase in the near future.

While Covid-19 is not expected to have a general impact on the cost of life insurance, it is unclear whether possible changes in underwriting guidelines could also result in higher costs for certain individuals. Another factor that could increase life insurance premiums are changes to industry accounting practices in the near future, which would require life insurance companies to modify the disclosures about long-duration contracts, such as permanent life insurance.

The bottom line is this: With higher taxes and increased life insurance premiums on the horizon, now is the time to review your estate planning needs and implement or increase your life insurance. Putting off this important task will increase costs for you – or your family – down the line.

How Many Wills Do I Need?

It is important to have a valid Will to avoid the challenges of intestacy – dying without a Will. Indeed, eventually, everyone ends up with a Will of one sort or other, either the deceased gets to decide how assets are distributed by writing one before death or the provincial authorities get to decide based on intestacy rules. So, it’s always best to get a Will written in advance.

The question is, do you need more than one? Getting one Will is trouble enough, so why would anyone want to have two? The reason for having more than one has to do with the kind of assets you own and what you want to have done with them when you die. The decision to have a second Will has to do with whether all of your assets have to go through the process of probate.

What is probate?

Probate is simply the process of proving that a Will is drafted properly and is valid. For this, most provinces charge a probate fee. B.C. and Ontario charge 1.4% and 1.5% of the probated estate respectively, while other provinces charge less or flat fees.

Sometimes people will try to evade probate fees by entering into arrangements such as transferring assets into joint ownership. This and other similar arrangements can potentially lead to problems and more expense. The most effective way of avoiding probate fees is to reduce the assets exposed to them. For example, using beneficiary designations for your life insurance and registered plans (where available) is very effective.

It is also true that not all assets have to pass through probate. The most obvious of these assets are shares that a taxpayer owns in a private corporation. Before explaining this further, let’s look at the two types of Wills.

The General or Primary Will

This refers to the Will that everyone thinks of. It includes all of the assets that normally fall into a Will and are subject to probate. Keep in mind that General or Primary Wills, once probated, become public and anyone who has an interest or desire can obtain a copy. In fact, in BC the Archives provide a research guide to probated Wills to help people who want to get a copy and in Ontario, the probate court staff will provide assistance to locate copies of Wills so the inquisitive can view all documents and get copies. There is a fee but that is the only requirement.

The Restricted or Secondary Will

The Restricted or Secondary Will references only certain assets that do not require probate to pass to the estate and heirs – again, most commonly shares in private corporations but could also include some other assets such as those in other jurisdictions or provinces.

The reason that shares in a private corporation need not be probated is that the remaining directors of a private corporation may usually transfer the corporate interest to the estate and subsequently to the beneficiaries of the estate without an application for probate. The specific rules regarding this may differ by province but the result of by-passing probate is generally achieved.

Unlike a General or Primary Will, a copy of a Restricted or Secondary Will, since it is not probated, is not kept with the probate registrar. This gives rise to the nickname of a Secret Will since the term of these Wills are not public record. This can be very important to a business owner that may not want the general public to know what happens with his or her corporate holdings.

Why can Secondary Wills be Important?

They are used to pass assets without paying probate fees. As a result, there is a cost savings to the estate which could be substantial.

Secondary Wills are very effective in keeping confidentiality regarding the assets which are not subject to probate.

Advantages and Disadvantages

While Multiple Wills may seem appealing, consider both the advantages and disadvantages.

While privacy and lower costs are important it is also vital to remember that there are now two Wills to pay for, a more complex situation exists because you must have two different executors, and the executor under your Secondary Will should be capable of dealing with the complexities inherent in the assets under that document.

While there was a challenge in Ontario to this type of planning that resulted in a threat to multiple Wills by a court decision (see Milne Estate), that decision was reversed by a higher court in 2019. As of the date of this article, secondary Wills remain a viable estate planning option.

As with any estate planning, no action should be taken without the advice of a competent legal and accounting advisor.

Reference to STEP Canada Vancouver seminar material “Tips and Traps of Probate Planning” and STEP Trust Quarterly Review, Volume 17, Issue 1, 2019

Diversifying in Uncertain Times

Uncertain about where to invest during Covid-19? It may be time to diversify through a Participating Whole Life policy

The Covid-19 pandemic combined with global social unrest have led to an era of unprecedented uncertainty, contributing to global economic concerns and stock market volatility. Potential economic fallouts stemming from disputes between China with both Canada and the United States, along with a new recession looming just over the horizon, have left many wondering if their investments are robust enough to withstand the turbulence of the current times and any future instability.

Diversifying your assets through a Participating Whole Life policy may be key to ensure future financial security for you and your children. The new generation of Par Whole Life policies is now viewed as a separate asset class due to their stable returns. It’s important to understand that the new features of Participating Whole Life policies are not those of our parents’ generation. The new version of these policies includes the following:

  • A stable rate of return, consistent with or better than fixed income or bond-type investments of similar duration;

  • A guaranteed investment designed to increase in value every year, meaning your investment will not decline due to market conditions;

  • Tax-advantaged – your investment grows tax-deferred, possibly even tax-free;

  • Liquid – you can access your investment by several different means, some of which are tax-free;

  • Increased flexibility – some Par Whole Life Policies have been re-designed to afford a measure of deposit flexibility not previously available;

  • This investment could be protected against the claims of creditors or litigants;

  • If you became disabled, your annual investment amount could be made on your behalf and never have to be repaid.

In addition to being a viable option for investment diversification, a Participating Whole Life policy would also ensure that your family is protected from the uncertainty of death. With the re-investing of policy dividends, this type of policy is guaranteed to increase in death benefit each year.

Reach out if you are unsure where to put additional investment funds or if your investments are keeping you up at night due to these unprecedented times. As always, please feel free to share this information with anyone you think would find it of interest.

Preparing Your Heirs for Wealth

If you think your heirs are not quite old enough or prepared enough to discuss the wealth they will inherit on your death, you’re not alone. Unfortunately, this way of thinking can leave your beneficiaries in a decision-making vacuum: an unnecessary predicament which can be avoided by facing your own mortality and creating a plan.

Avoiding the subject of your own mortality can also be an extremely costly to those you leave behind.

If you have a will in place you are ahead of the game. However, authors of the 2017 Wealth Transfer Report from RBC Wealth Management point out that a will is only a fundamental first step, not a comprehensive plan.

“One generation’s success at building wealth does not ensure the next generation’s ability to manage wealth responsibly, or provide effective stewardship for the future,” they write. “Knowing the value (alone) does little to prepare inheritors for managing the considerable responsibilities of wealth.” Overall, the report’s authors say the number of inheritors who’ve been prepared hovers at just one in three.

Two thirds of the survey’s respondents say their own wealth transfer plans aren’t fully developed – a critical barrier to having this discussion in the first place.

While the report focuses on wealthier beneficiaries in society, the lessons remain true for most: to make the best decisions about your wealth transfer, there needs to be planning and communication with your heirs.

1. Recognize that action today can help you create a better future

First, it’s important to acknowledge that creating an estate plan means contemplating your own death – an inescapable element of the process. It can also involve some awkward conversations, particularly if you’re not in the habit of talking about money with family and loved ones.

Without planning the outcome you leave may not be the one you would choose:

“Despite their efforts, parents don’t always succeed in translating good intentions into effective actions. They tend to resort to the informal, in-house learning methods they received in childhood,” say the RBC report’s authors. “Without intending to, parents repeat the lessons that contributed to the weaknesses of their own financial education. In the end, they are not equipping the next generation with the right skills to build lasting legacies.”

2. Understand the tax implications early.

To many, the taxes due on death will almost certainly come as a shock. In many cases, the single largest tax bill you will pay could be the one that your executor handles for you.

In Canada, leaving your assets to your spouse will defer these taxes until he or she disposes of the property or dies. However, if a spouse is not inheriting your assets and real property, planning for this “deemed disposition” is needed to allow your heirs time to make appropriate decisions about your property and legacy.

You may want to consider strategies that will greatly reduce the impact of the taxes to your estate. These strategies could include the use of joint last to die life insurance.

To illustrate how the growth in value of property can result in taxes payable at death, consider an asset which many Canadians own and enjoy – the family cottage.

Recreational real estate in many cases has “been in the family for years.” It often will have appreciated in value significantly since its purchase. Say you purchased the family cottage for $100,000. If the property is now worth $500,000, half of that gain – $200,000 is added to your income and taxed as such in the year you die. That will result in a tax bill of approximately $100,000.

If your family does not have the liquid funds available to pay this bill, the cottage or some other asset will need to be sold to pay the Canada Revenue Agency. Purchasing life insurance to pay the taxes due at death is one way to bequeath the family cottage to heirs. This will allow your children to continue to enjoy the property without having to raise the money to pay the taxes.

All capital property – except your principal residence and investments held as a Tax-Free Savings Account – is dealt with in a similar manner. If your stocks, real property, and other assets have appreciated in value since you first purchased them, half of that amount will be added to your taxable income in the year you die. If your assets included commercial or rental property against which the Capital Cost Allowance has been claimed, there may also be a recapture of depreciation. Again, deferral is available when assets are left to a spouse but if they are left directly to children or other heirs, the taxes become payable when you die.

As if this is not bad enough, the full value of your RRSPs or your RRIF must also be deregistered and included on your final tax return if the RRSP or RRIF is not left to a surviving spouse.

3. Get help to build your plan, then share it with those who matter.

Estate planning typically isn’t a “do-it-yourself” project. Instead, you’ll probably need to rely on a network of professional advisors who can bring their expertise to different parts of your plan.

Once you have your plan in place, it’s time to ensure that the people who are impacted by it are aware of your wishes.

Members of your professional network can help explain your plan to beneficiaries and help those who inherit your assets to understand your preferences and the decisions you’ve made.

Let’s get together to review or create your wealth transfer plans and discuss how you can get assistance in communicating those plans to the people who matter the most.

As always, please feel free to share this article with anyone you think would find it of value.

The Estate Bond

Growing your estate without undue market risk and taxes

Often we see older investors shift gears near retirement and beyond.  Many become risk-averse and move their assets into fixed income type investments.  Unfortunately, this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.

Or maybe the older investor cannot fully enjoy their retirement years for fear of spending their children’s inheritance.

The Estate Bond financial planning strategy presents a solution to both of these problems.

How does it work?

  • Surplus funds are moved out of the income tax stream and into a tax-exempt life insurance policy.

  • Each year a specified amount is transferred from tax exposed savings to the life insurance policy.

In essence, we are substituting one investment (the life insurance policy) for another (fixed income assets).

The result ?

  • The cash value in the life insurance policy grows tax-deferred and may also increase the insurance benefits payable at death.

  • Since the death benefit of a life insurance policy is received tax-free by the beneficiary this strategy results in a permanent tax shelter.

In other words, there is an increase in the funds available to heirs and beneficiaries after death and a decrease in the taxes payable before death.


The Estate Bond in action

Robert, aged 60, and his wife Sarah, aged 58 are satisfied that they will have sufficient income during their retirement years.  They used the Estate Bond concept as a means to guarantee their legacy to their children and grandchildren.

Investment: $30,000 for 20 years into a Joint Second-to-Die Participating Whole Life policy which is guaranteed to be paid up in 20 years

Immediate Death Benefit: $848,900

Death Benefit in 30 years: $2,075,800 (at current dividend scale)

Cash Surrender Value in 30 years: $1,589,400 (at current dividend scale) *

* If surrendered, the cash surrender value would be subject to income tax but there are strategies that could be employed to avoid this tax.  Assumes using Participating Whole Life illustrated at current dividend scale.  Values shown in 30th year at approximate life expectancy.

Alternative investment in action

Investment: $30,000 for 20 years in a fixed income investment earning 2.5% AFTER tax

Immediate Death Benefit:  $30,000

Estate Benefit in 30 years: $1,005,504

It should be noted that obtaining this rate of return in today’s fixed income environment would be challenging. 

Additional benefits of the Estate Bond

  • The estate value of $2,075,800 in 30 years is not subject to income tax. 

  • The proceeds at death, if paid to a named beneficiary, are not subject to probate fees.

  • If the beneficiary is one of the preferred class (spouse, parent, child or grandchild) the cash value and the death proceeds are protected from claims of creditors or litigants during the insured’s lifetime.

  • The use of life insurance with a named beneficiary also results in a totally confidential wealth transfer.

  • Robert and his wife can both enjoy their retirement without affecting their family’s inheritance.

The Estate Bond strategy is designed for affluent individuals who are 45 years of age or older and who are in reasonably good health. For those who meet these criteria and have surplus funds to invest, this concept can provide significant benefits and results.

Connect with me if you have any questions about the Estate Bond strategy or would like to determine if it is right for you.  As always, please feel free to share this article with anyone you think will find it of interest.

Protecting Investments for Your Heirs

Many investors over the age of 60 find themselves in a quandary regarding investments that they intend to leave to their heirs.  The primary concern involves the desire to conserve the investments they are bequeathing while at the same time earning a reasonable rate of return.  As we all know, the volatility of the equity markets can be cruel and this can be most detrimental when investments do not have time to recover after a downturn.  As a result, many mature investors choose to accept low rates of return in order to avoid loss in the funds they wish to leave to family members.

If you share these concerns, then Segregated Funds (also known as Guaranteed Investment Funds) may be the solution.  Segregated Funds are similar in performance and cost to Mutual Funds but come with some very attractive advantages.  Since Segregated Funds are offered by life insurance companies, they contain guarantees both at maturity and at death.  Upon maturity the value of your investment is guaranteed to be the higher of the market value or up to 100% of the amount invested. At death, the guarantee is the higher of the amount invested (less withdrawals), fair market value or a previously reset market value.  It is this death benefit guarantee that is particularly appealing for estate planning.

This guarantee allows for the potential of higher returns without taking on more investment risk.  Without the alternative of segregated funds, a mature investor wishing to protect capital might be forced to invest in a low interest rate fixed income vehicle, which after income tax, may return less than inflation.  With Segregated Funds that same investor could select a well managed investment fund guaranteeing that the beneficiaries could receive no less than 100 % on the funds invested regardless of market performance.

Segregated Funds usually contain a provision which will lock in gains made prior to death.  Depending on the insurance company these resets automatically occur every one to three years up until age 80.

Market volatility is not the only challenge to investments being willed to heirs.  The process of probating a will can also be of concern.  This process can be a lengthy one, sometimes lasting months, occasionally even years.  The cost of probate is also not insignificant especially if lawyers are required to assist.  Also, assets left in a will can be subject to challenge in court causing even further delays not to mention anxiety (and legal fees). Segregated Funds, however, being a product offered by a life insurance company pass by way of a beneficiary designation.  This not only by passes probate, but also does not incur any administrative or executor costs. 

The beneficiary designation also avoids any court challenges such as would be the case in a will’s variation action.  Another important consideration is that, with a named beneficiary, it can be creditor proof and not subject to litigant claims.  The confidential nature of the beneficiary process compared to the public aspect of probate is also be worth considering.

In order to assess if Segregated Funds are right for you as a mature investor, ask yourself the following:

  • Do I want better returns without taking on more investment risk?

  • Do I want to avoid probate fees and administrative costs which will reduce the inheritance I leave to my family?

  • Do I wish to avoid any delays in my heirs receiving the funds I wish them to have when I die?

  • Do I want to avoid any creditor or litigant claims on the funds I am leaving to my heirs?

  • Do I want to keep bequests that I make at my death completely confidential?

If you have answered “yes” to any of the above, then you should investigate the use of Segregated Funds in your estate planning.