How Many Wills Do I Need?

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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

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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

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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

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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

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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.