Estate Planning for Blended Families

Avoid Disinheriting Your Children

In today’s family, it is not unusual for spouses to enter a marriage with children from previous relationships. Parents work hard at getting these children to functionally blend together to create a happy family environment. Often overlooked is what happens on the death of one of the parents. In most cases, special consideration for estate planning is needed to avoid relationship loss and possibly legal action.

Typically spouses leave everything to each other and when the surviving spouse dies, the remainder is divided amongst the children. The problem? Even with the best of intentions, there is no guarantee that the surviving spouse will not remarry and inadvertently disinherit the deceased’s children.

6 Estate Planning Considerations for Blended Families

The Family Home

  • In the situation of the family home being owned by one parent prior to the marriage, the other spouse may consider purchasing an interest in the family home. In this situation, consider owning the home as tenants-in-common to allow for each spouse to manage their interest in the home separately.

  • Provisions can be made in the will for the surviving spouse to remain in the home until the time of their choosing (or death) before passing on the interest to their respective children.

Registered Retirement Savings Plans

  • To take advantage of the tax-free rollover from their RRSPs each spouse should consider naming each other as beneficiary. If there are no additional investments or assets to pass on to the children, consider using life insurance as the least costly way to provide a legacy for the children.

Other Assets and Investments

  • If each parent has other assets or investments that could provide income in the event of death, a qualifying spousal testamentary trust could direct that the surviving spouse receives all the income from the trust with the possibility of making encroachments on the capital for specific needs. Upon the surviving spouse’s death, the remaining trust assets will be distributed to the appropriate children.

Choose a Trustee Carefully

With trusts being vital to effective estate planning, careful consideration has to be given as to whom will be a trustee. For blended families, children of one parent may not be comfortable with the choice of the trustee for their inheritance. Some situations may call for multiple trustees or perhaps the services of a trust company.

Although effective, using testamentary trusts might result in some children not receiving their inheritance until the death of their step-parent. Life insurance may be the ideal solution. Proceeds from life insurance will guarantee that the children will be taken care of upon the death of their parent.

Advantages of Life Insurance for Blended Family Planning:

  • Can be an effective way to create a fair division of assets when one spouse enters the marriage with significantly more wealth;

  • Death benefit is tax-free and could be creditor and litigation proof;

  • Ability to name contingent owners and beneficiaries (including testamentary trusts);

  • Death benefit could be used to create a life estate under a testamentary trust, providing income to a surviving spouse with the capital going to the appropriate children at the surviving spouse’s death;

  • With a named beneficiary proceeds pass outside of the will so cannot be challenged under any wills variation action;

  • Provides for a significant measure of control and certainty as to when and where the proceeds will end up.

The Elephant in the Room

It is important to remember that whatever planning options are used, total and open communication within the family is essential to maintain family harmony and ensure everyone is aware of the state of affairs. Full discussion will avoid misunderstandings and reduce uncertainty as to what the future may hold for everyone in the family.

Planning for blended families should involve professional advice in creating solutions that satisfy the objectives of both spouses and their respective children. Call me if you require help in this area or as always, please feel free to share this article with anyone you think would find it of interest.

Copyright @ 2021 FSB – All Rights Reserved

Having Your Cake and Eating it Too

Having Your Cake and Eating it Too: Seg Funds in an Uncertain Market

Investing in an uncertain stock market is not for the faint of heart. However, fortunately for Canadians, Segregated Fund products offered by many life insurance companies provide a safety net for nervous investors.

Fund products present some interesting opportunities for people looking to get more security in their investment portfolios without sacrificing their potential for growth.

100% Maturity and Death Benefit Guarantee

While many companies have reduced their guarantees to 75%, a few companies still offer 100% guarantees for both maturity value and death benefit. The 100% guarantee offers these advantages:

  • At the maturity date, the value of the investment will be the greater of the market value or 100% of the sum of deposits less any withdrawals taken. In other words, at maturity (minimum 15 years), your worst-case scenario is receiving full value for all of your deposits.

  • At death, the 100% guarantee will ensure that your beneficiary receives the greater of the market value of your Segregated Fund or the sum of all your deposits less any withdrawals taken.

Reset Feature for Maturity and Death Benefit Guarantee

Resets can have significant value in a volatile market. With this feature, you have the ability to:

  • Reset the maturity guarantee value (usually more than once per year). Accordingly, you can lock in your investment gains at maturity. With each reset, you also have the option of designating a new maturity date.

  • Automatically reset the death benefit guarantee, locking in your investment gains at death. (The frequency of the reset varies by company).

How Significant are Reset Options? You Decide.

  • In 2004, John invested $500,000 in a segregated fund and selected a first quartile but highly volatile equity fund as the investment choice.

  • Over the next few years, John’s fund performed very well and his investment grew to $750,000.

  • In late 2007, John exercised his reset option.

  • The market collapse of 2008 saw John’s investment value fall to $380,000.

  • This same collapse devastated many investors. Meanwhile, John was able to recover not only his original investment but also the full $750,000 at his maturity date.

As you can see, reset options give you the ability to lock-in gains. Implementing a reset when prices peak, the guaranteed amount of your seg fund will be increased.

Designation of Beneficiaries Enables Protection

One fact about Segregated Funds that is often overlooked is that as a product of a life insurance company, you can name a beneficiary for the proceeds at your death. This creates the potential that your segregated fund investment may be free from the claims of creditors or potential litigants.

Investing Using a Balanced Portfolio Close to Retirement

Volatile investment markets create a significant amount of stress and emotional turmoil, particularly amongst older investors. The closer you get to retirement, the higher the stakes. Therefore, many investors have forsaken the potential of higher returns for a significant portion of their portfolio. While this does reduce risk, it probably will result in lower returns.

By using Segregated Funds and taking advantage of the 100% Maturity Guarantee and reset options, one could achieve balance in their portfolio without necessarily locking in low yields.

Estate Conservation for Mature Investors

The 100% death benefit guarantee means that you can remain invested in an equity portfolio while not risking the estate value of your investment portfolio. Regardless of what happens in the market, your investment fund is totally guaranteed at your death. This guarantee is available for deposits made p until age 90.

By naming a beneficiary, upon your death, all of your segregated fund investments will flow to your beneficiary without any probate fees, administrative costs or risk of any Wills Variation Act litigation.

Capital Protection

Market downturn is not the only risk to which capital can be exposed. For many professionals and business owners, there are situations that may involve litigation either by creditors or other parties who feel they have a claim against your personal and business assets. By naming a preferred beneficiary, this risk is potentially eliminated.

Complicated Estate Protection

For domestic situations involving previous marriages and the desire to protect capital for present or previous family members, the beneficiary designation could be made irrevocable. The irrevocable beneficiary designation confers rights and protection on the beneficiary, which would not be as enjoyable through the “primary beneficiary” title.

Another advantage of Segregated Funds is that the use of named beneficiaries allows for a confidential transfer of wealth at death. In uncertain times having the comfort of a maturity and death benefit guarantee provides investors with a significant safety net.

Let’s connect to discuss if Segregated Funds will complement your current investment strategy. As always, please feel free to share this article with anyone you think would find it of interest.

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Pay Attention to your Beneficiary

Pay Attention to Your Beneficiary Designation

It’s more important than you think

Naming a beneficiary is a valuable feature of life insurance and segregated funds policies so it is important to carefully choose your beneficiaries.

Estate – the default choice

Many people choose to name their “estate” as their beneficiary. Although this is an easy short-term solution, it is important to review the risks of doing this. If you are stuck for a significant “other” beneficiary, don’t forget to change it to a more appropriate option later. Why?

  • The proceeds will be subjected to probate fees and the benefits received will be co-mingled with all the other estate assets which may be exposed to various third parties.

What’s in a name?

Simply naming an individual or trust as beneficiary will keep the proceeds out of the insured’s estate and also protect the death benefit from the claims of creditors or litigants.

VIP Beneficiary

A “preferred beneficiary” is a spouse, parent, child or grandchild and receives VIP treatment in the form of protection. All the proceeds of the life insurance product (including Segregated Funds) are protected against claims of the creditors or litigants of the life insured not only upon his or her death, but any cash values in that policy are also protected during the lifetime of the insured.

  • A minor “preferred beneficiary” will require a trustee for their portion until they reach the age of majority.

  • Note that the preferred beneficiary status does not apply to siblings.

Trust your trustee

Think carefully about to whom you assign the task of trustee. It can be a difficult role to fill, often challenged by trying relationships. Be sure to discuss the role with your intended trustee and make sure they are comfortable with it and understand the responsibilities of the role.

Contingency Plan

Often parents of minor children are concerned about what would happen should they both tragically pass away at the same time. For this reason, the children are often named as “contingent beneficiaries”. If the children are minors, the trustee named to act on their behalf will receive the proceeds directly upon the death of their parents avoiding any estate considerations.

As life changes, so do beneficiaries

If you have an older life insurance policy it is probably a good idea to review the named beneficiary as your circumstances may have changed.

It may be time for a change if…

  • You have divorced – if you have a divorce agreement that required you to maintain your spouse as the beneficiary, have the conditions of that requirement now expired (e.g. children are now of age) and is no longer required?

  • If you have remarried – is your ex-spouse still named as the beneficiary?

  • If a policy was assigned to the bank or other lending institution – have the assignment removed if the loan is paid off.

  • If you have new dependents – children, grandchildren or even dependent parents.

  • If your children are now grown up – and have families of their own, does this change how you want your life insurance proceeds to be paid?

  • If your children are married, their spouses may have access to these proceeds too. Is their relationship solid, or is there a risk of half of your life insurance proceeds being paid out as part of a divorce settlement? Perhaps you should consider naming your grandchildren as beneficiaries instead?

The need for life insurance no longer exists

Often, older individuals find they have no one to whom they wish to leave their insurance proceeds. In this situation, naming a registered charity will provide a charitable tax deduction in the full amount of the proceeds at death.

Let’s review your beneficiary designations and make sure your life insurance proceeds end up where you want them to be. As always, feel free to use the share button to forward this article to someone who might find it of interest.

Copyright © 2020 FSB Content Marketing – All Rights Reserved

How To Protect Your Estate

You have spent your life working hard and accumulating wealth for you and your family to enjoy. While you are living you pay taxes annually on both your earned and investment income. But did you know that your assets may also result in a tax liability upon your death or the death of your spouse? In Canada, a taxpayer is deemed to dispose of all of his or her assets at death. If the value of these assets exceeds their cost, then, without proper planning, taxes could be payable.

But the good news is, it might be possible to reduce or at least delay the payment of this tax by organizing or re-allocating certain assets that would result in a tax liability at your death. There is also a way to cost-effectively accumulate tax-free funds to pay all or part of any taxes that may become due upon your death.

Of course, every situation is different, so you should consult with a financial advisor before making any big decisions. Below is a simple guide that will help you structure your estate in the most tax-advantageous method.

Assets

Most people are aware of what assets they own, but let’s separate them into two different groups to better understand how they are treated at death.

Assets That Could Result In A Tax Liability

Real estate, other than your principal residence, for instance, is subject to capital gains tax on your final tax return. For example, perhaps you bought a vacation home in 1990 for $100,000, but when you die it is valued at $500,000. There is a deemed disposition resulting in a capital gain of $400,000 of which half is taxable in the year of your death. If your real estate was rental or commercial property, you may also be subject to additional tax at death in the form of recaptured depreciation.

Other assets that give rise to capital gains at death include shares in public and private corporations, farms, antiques and other collectables. If the private company shares are of a Qualifying Small Business Corporation, the first approximately $900,000 of capital gains could be received by a Canadian resident tax-free. For qualifying farm or fishing property, the first $1,000,000 of capital gains may be tax-free.

There is a provision under the Income Tax Act that states that the taxes arising from capital gains at death can be delayed by leaving the assets to a spouse. In doing so, the tax will be deferred until the spouse disposes of the assets or dies.

Registered assets such as RRSPs, RRIFs, pension plans are also deemed to be disposed of at death with the full balance being taxable as income. This is in addition to any withdrawals or income payments made in the year of death. Again, a taxpayer can name a spouse as beneficiary to allow those registered plans to be rolled over into the spouse’s registered plan avoiding tax in the year of death.

Assets That Do Not Result In A Tax Liability

There are generally four types of assets that are not subject to tax at death. These are your principal residence, Tax-Free Savings Accounts, the tax-free portion of capital gains, and the death benefit of a life insurance policy.

Financial vehicles such as TFSAs, RSPs, and life insurance allow for the naming of a beneficiary. When this is done, the proceeds at death pass directly to the named beneficiary outside of the will. This results in no probate fees or administrative costs being assessed on the value of these assets as well.

Death And Taxes

It is difficult to completely eliminate a tax liability upon death. However, there are options you have to help the estate pay your final tax bill, while still providing for your heirs. Below are some common strategies for dealing with the ultimate tax bill.

Building a Cash Reserve

There is nothing wrong with saving money. Saving money or building a cash reserve to pay taxes at death, however, is not a very viable option. For one thing, you don’t know for certain when the funds are going to be needed or how long you have to save for it. Saving doesn’t buy you time and often the money doesn’t stay saved. If you are looking to save specifically to pay for taxes at death, you would be much better off paying life insurance premiums.

Selling Assets

Needing to sell assets to pay taxes at death can result in a “fire sale”, with property realizing less than their full value. Another consequence of liquidation is that the asset is no longer available for future growth and income for the benefit of the heirs. Often the sale of an asset results in even more taxes and expenses. Unfortunately, without adequate life insurance, there may not be any other option.

Life Insurance

The death benefit of your life insurance is paid tax-free to your beneficiary, and your policy could provide liquidity to your estate when your heirs need it to pay the tax liability associated with other assets. This is a solid strategy used to mitigate tax burdens associated with an estate while at the same time providing for last expenses, such as debt and funeral costs, in addition to creating future income for the family.

Freezing the Estate

For larger estates, an estate freeze might be implemented which “freezes” the value of the estate and passes the future growth onto the next generation. This can be a complicated and expensive process but for significant estates, the future tax savings can be substantial.

Borrowing to Pay the Tax

On those occasions where no prior planning has been implemented, an executor might seek to borrow in order to pay the taxes due at death. Apart from the necessary collateral that would have to be pledged, one big downside to this option is the fact that the loan has to be repaid with interest. At the end of the day, the loan and interest payments would total much more than the amount of the tax. This might be an option if none other was available but it is definitely not a desirable one.

Questions about your estate?

Your estate having to pay taxes upon your death is a testament to your success. That’s the good news. How much bad news there is can be greatly reduced or even eliminated by proper estate planning that an experienced financial advisor can help provide. Remember, the sooner the planning begins the better the results that can be achieved.

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

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.