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The Top Ten Family Wealth Transfer Mistakes

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Most Canadians intuitively believe they should have a wealth transfer plan, but most of us have not created one.

A business owner thinks of how to pass on the business to children at retirement.  A husband thinks about what will happen to his family if he has a heart attack and dies.  A wealthy retired couple wants to contribute to a favourite charity.

Few people want to pay extra tax while they’re alive, let alone on their wealth when they’re gone.

Yet surprisingly, an Ipsos Reid survey found that almost half of Canadians have never had a detailed discussion with their family about their final wishes.  Even more surprising is that fewer than 40% of Canadian boomers have a will!

Discussing ones inevitable death can be uncomfortable, but the failure to do so can lead to stress and hardship on loved ones during a very difficult and emotional time.

A wealth transfer strategy is an integral part of any comprehensive financial plan.  It provides:

  • Peace of mind that family is protected.
  • Ensures your assets are passed on in a manner that is consistent with your values and beliefs.
  • Can reduce excessive taxation and probate fees

This is the first installment of a series of more detailed articles on the topic of wealth transfer.

The Top Ten Wealth Transfer Mistakes

1.   Failing to have a current will

A will or other transfer vehicle needs to be in place, and these documents need to be updated when circumstances change.

2.   Having no integrated game plan

Wealth transfer involves legal, financial, tax, and emotional issues.  All must be balanced for the plan to be effective.

3.   Failing to consider all assets

All assets that must be distributed need to be considered, and their valuations need to be kept current.

4.  Not considering the tax consequences of wealth transfer and protecting assets

This includes improperly owned life insurance.  Insurance can be an important planning vehicle, but not considering who owns it could cost your estate or business.

5.   Ignoring the need for liquidity

An estate with a large portion of illiquid assets will be difficult to settle quickly and may not meet the goals set out in the original plan.

6.    Not taking into consideration all the potential beneficiaries

This includes people who either should be looked after or must be looked after.

7.    Keeping too much money in the estate

Distributing assets prior to death may be an important task.

8.    Not considering creating a living legacy

Making use of assets to benefit others while alive is an important consideration.

9.    Not considering the potential tax consequences of gifting or asset transfer between family members

Beware the attribution rules!  This failure can also affect family businesses, if an attempt to distribute the assets equally among family members compromises the business.

10.   Not taking steps to reduce taxes

Individuals have the right to find ways to decrease the amount of tax paid, increasing the amount available for distribution to people & causes that are important to them.

Article written by Brad Mol, Senior Wealth Advisor at TriDelta Financial

Tel: 905 845 4081 Email: brad@tridelta.ca

Four ways single seniors lose out

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Becoming single in old age could cost you tens of thousands of dollars through no fault of your own. The current tax and pension system in Canada is significantly tilted to benefit couples over singles once you are age 65 or more.

I don’t think it is an intentionally evil plan of the Canada Revenue Agency and other government agencies, but something has to change. Given the fact that so many more single seniors are female, this unfairness is almost an added tax on women.

StatsCan recently came out with census data that said that among the population aged 65 and over, 56% lived as part of a couple. This 56% of couples was split out as 72% of men, and just 44% of women. Among those aged 85 and over, 46% of men and just 10% of women lived as part of a couple. This gap is made up of two factors. Women live longer than men, and men tend to marry younger women.

Here are four ways that single seniors lose out:

  • There is no one to split income with. Since the rules changed to allow for income splitting of almost all income for those aged 65 or older, it has meaningfully lowered tax rates for some. For example, in Ontario, if one spouse has an income of $90,000 and the other has an income of $10,000, their tax bill would be $22,571. If instead, their income was $50,000 each their tax bill would only be $17,774, a pure tax savings of $4,797 per year. If you are single, you are stuck with the higher tax bill.
  • Let’s say the 65-year-old couple both make $50,000, and qualify for full Canada Pension Plan. In 2012, that would be a total of $986.67 per month at age 65 for both of them or $23,680 annually for both combined. If one passes away, the government doesn’t pay out more than the maximum for CPP to the surviving spouse. They will top up someone’s CPP if it is below the maximum, but in this case, they simply lose out almost $12,000 a year. They would receive a one-time death benefit of a maximum of $2,500, but that is all.
  • RSP/RIF gets folded into one account. This becomes important as you get older and a larger amount of money is withdrawn by a single person each year — and taxed on income. Let’s say a husband and wife each have $400,000 in their RIF and they are age 75. They are forced to withdraw $31,400 each or 7.85%. If the husband passes away, the two accounts get combined, and now his wife is 76, with a RIF of maybe $775,000. At that amount, she would have a minimum withdrawal of $61,923. As in the first example, her tax bill will be much larger when she was 76, than the combined tax bill the year before, even though they have essentially the same assets, and roughly the same income is withdrawn.
  • Old Age Security. The married couple with $50,000 of income each, both qualify for full Old Age Security — which is now $540.12 a month or $12,962 a year combined. If the husband passes away, you lose his OAS, about $6,500. On top of that, in the example in #3, the wife now has a minimum RIF income of $61,923, and combined with CPP and any other income, she is now getting OAS clawed back.

The clawback starts at $69,562, and the OAS declines by 15¢ for every $1 of income beyond $69,562. If we assume that the widow now has an income of $80,000, her OAS will be cut to $414.50 a month or another $1,500 annual hit simply because she is now single. In total, almost $8,000 of Old Age Security has now disappeared. As you can see, a couple’s net after-tax income can drop as much as $25,000 after one becomes single.

On the other side, there is no question that expenses will decline being one person instead of two, but the expenses don’t drop in half. We usually see a decline of about 15% to 30%, because items like housing and utilities usually don’t change much, and many other expenses only see small declines.

In one analysis our company did comparing the ultimate estate size of a couple who both pass away at age 90, as compared to one where one of them passes away at age 70 and the other lives to 90, the estate size was over $500,000 larger when both lived to age 90 – even with higher expenses.

So the question becomes, what can you do about this?
I have three suggestions:

  • Write a letter to your MP along with this article, and demand that the tax system be made more fair for single seniors. You may also want to send a letter to Status of Women Minister Rona Ambrose, as this issue clearly affects women more than men.
  • Look at having permanent life insurance on both members of a couple to compensate for the gaps. Many people have life insurance that they drop after a certain age. The life insurance option certainly isn’t a necessity, but can be a solution that provides a better return on investment than many alternatives and covers off this gap well. If you have sufficient wealth that you will be leaving a meaningful estate anyway, this usually will grow the overall estate value as compared to not having the insurance — and not hurt your standard of living in any way.
  • Consider a common law relationship for tax purposes. I am only half joking. If two single seniors get together and write a pre-nuptial agreement to protect assets in the case of a separation or death, you can both benefit from the tax savings.

Ultimately, the status quo is simply unfair to single seniors, and that needs to change.

Ted Rechtshaffen is a regular contributor to the National Post, see http://business.financialpost.com/author/fptedrechtshaffen/

If you have questions or want to discuss your personal situation, please call Ted at 1-888-816-8927 x221 or email him at tedr@tridelta.ca.

10 Things You Should Do Before You Retire

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Retirement means something different to each of us and is likely different from your parent’s retirement.    Peter Laslett (Cambridge Professor) in 1989 published a book called “A Fresh Map of Life”, establishing a new “Third Age” in our lives.  This new stage is a block of time in our life before we face health issues, during which we can define our own view of what we aspire to in retirement, focussing on personal self-realization and fulfillment.    To get the most out of your “Third Age”, there are things you should do before you reach it.

1   Establish your goals for your retirement.

Having a stated goal or vision for your retirement is the first step in making sure you achieve what you want out of your “Third Age”.   You probably have “pent up” demand for certain activities whether sports, travel, family time or engaging in new interests.   Maybe you will transition slowly into retirement, through consulting or part-time work.   You will need to provide structure to your day, goals to achieve, mental and social engagement.   Most of us will be able to shape this third age to our own interests and enjoyments, at-least to some degree.

Discuss with your spouse/partner what each of your goals are and how you would like to spend your time.    Maybe one of you is retiring before the other, how will that affect things?  Take the time to understand and respect each other’s goals, and find the balance between each other’s desires and any constraints, whether time, interest, health or financial.

2   Medical Benefits

Most Canadians have access to good medical benefits through their employment.   Take advantage of these benefits while you are still employed for yourself, your spouse and any dependents on your health plan.    Get a complete physical and deal with anything that needs to be addressed while you’ve got the support of the company’s paid medical benefits.   Access your company’s EAP (Employee Assistance Program) for any advice you might want; this is one of those underutilized company benefits that you don’t value until you use it.   Once you’ve left the employment world, it can be difficult to find the right expert to help you out.

You will need to consider how you want to replace those medical benefits after retirement, both before and after the age 65.    ManuLife and SunLife provide an insurance benefit product that mirrors your employment coverage if you sign up within a short period after retiring (usually 60 days).  Many professions offer access to medical insurance through their professional organizations.    Based on your personal medical history, investigate products for both traditional hospital/drug/dental/eye and also newer services such as physiotherapy, etc.   Consider what you may need now and what you may want after the age of 65 to complement public medical coverage.

3   Company Car vs Personal Car

If you have been fortunate enough to have a company car during your employment, you are going to have to get a new car when you are finished your employment.   Sometimes your employer will be willing to sell you the company car for book value or a reduced amount.   Consider this option particularly if the car has been well cared for and under your control.   Remember though, there is usually a taxable benefit associated to buying a company car at below market value.

4   Other Employment Benefits

You may have other company benefits through your employee.   Maybe you have life insurance, disability insurance, or critical care insurance.   In most cases these will expire when you retire.  If you need them after retirement, it’s usually better to purchase them when you are younger.   The time to investigate them is several years before retirement to decide what you want to replace with your own insurance coverage that will continue after retirement.  Not everyone needs insurance; consult a trusted professional to figure out what’s right for your situation.

Professional dues and continuing education is frequently covered by your employer.   Many professional associations offer reduced annual dues with retirement.  If you plan to continue working after retirement in your profession on a part-time basis, you will need to include these costs in your plans.

5   Major/Minor House Repairs

Take an inventory of whatever major or minor house repairs need to be done and get them done before you retire.    Maybe the roof is approaching 20 years+; maybe you need to modernize the bathrooms or kitchen, maybe the backyard needs a new deck.    Fit these unusual expenditures into your last few years of employment while you still have regular money coming in so that you won’t have any major bills in the first several years of retirement.   If there are any expensive surprises, you want to address them before you retire and have options on how to pay for them.

6   Knowledge Transition

If you have been with a company or in a role for many years, maybe even more than 10 years, you’ve got a lot of company history, practices, and accumulated knowledge that has helped make your team and company successful.    Share this accumulated knowledge before you retire.   Develop a plan with your team and your manager for knowledge transfer.   Sharing this knowledge in a structured manner acknowledges your contributions and better equips your team to be successful after you leave.    Instead of your retirement being an on/off switch think of it as a gradual transition during which you will prepare yourself for your next life stage, knowing that you are leaving a capable team equipped for success.

7   Update your Wills/Power of Attorney

Many of us prepare our wills and power of attorneys’ once and then forget about them.    They should be updated regularly for both changing legal situations and changing personal decisions.   If you haven’t updated for your will for 8-10 years, this is the time to have your lawyer review it for anything that needs to be updated.

8   Have a Personal Financial Plan Prepared

An in-depth personal financial plan is the road map that will consider your combined financial assets,  government and employment retirement benefits.   It will determine the best way to meet your life goals with the resources at your disposal.   It can help you value lump-sum payments, deal with stock options or other employment or retirement incentives and determine the most tax efficient investment option.   It will identify actions to minimize your tax bill and maximize your government benefits (timing of CPP, minimizing OAS clawbacks, etc).   It will help you reduce risks within your portfolio to match your lifestyle needs.  It will give you a plan for annual withdrawals from your investment resources to meet your life goals and life span expectations.    And it will identify tax efficient estate distribution, whether within the family or to your favorite charity.  Have a financial plan prepared by a professional to ensure you get insight into how best to use the resources at your disposal to meet your financial goals in retirement.

9   Practice Financial Discipline

If your financial plan calls for you to reduce your annual expenses after retirement, practice this discipline for a couple of years before you retire.    Test your assumptions for reasonability, whether its about the frequency of eating out, reduced clothing bills, etc.   Make sure you will have a comfortable lifestyle and the discipline to stick within your budget.   Use your last couple years of employment to pay off your mortgage if you haven’t already or to pay off your credit cards every month.   Practice financial discipline before you retire so you will be well prepared to live within your budget during retirement.

10   Enjoy Life

Enjoy your retirement.   Your “Third Age” is your time to enjoy life in whatever way suits you and your spouse/partner best.   Look after yourselves, be it your health or your wealth.    And Enjoy.

Further Reading

There are a significant number of books available on how to plan for your retirement.    Some that I have read and can recommend include:

What Color is Your Parachute?  For Retirement – John E Nelson & Richard N Bolles

The 7 Most Important Equations for your Retirement – Moshe A. Milevsky

Don’t Just Retire Live It, Love It! A Personal Planning Guide To Enhance Life After Work – Rick Atkinson

 

Written by Gail Cosman, CA, Senior Wealth Advisor, Tridelta Financial

Why you need a Personal Financial Plan

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Over 25+ years as an executive in the business world, I have witnessed the value of a good financial plan to a company’s success. Corporations with excellent financial organizations reach their financial goals, or understand the key reasons they were missed. They have metrics for measuring progress and address gaps as they occur. They predict cash overages/shortages and have plans for how to deal with them. And most importantly, the organization’s missions/values and strategies are embedded in their financial plans.

In the same way, a financial plan is a critical tool for you to achieve your financial goals; when done well it will reflect your personal goals and values. Do you want to leave funds for your children, do you want to support a local charity or association you participate in, do you want to travel regularly, do you want to live financially independent in the near future, do you want to have a high “sleep at night” factor in your investments? All of these goals should be embedded in your financial plan.

A basic financial plan can help you identify “your number” (how much you need to retire) to guide you in your retirement investing. A good financial plan will do more than that: It will time your cash-flows in order to minimize your taxes and maximize your government benefits. It will provide a range of sensitivities on age, investment performance, and inflation so you can make the decisions today to prepare yourself for a variety of possible scenarios for your future. It will provide investment allocations that will maximize your capital preservation while minimizing your risk.

At critical stages in your life you should do a financial plan – such as when approaching retirement, a change in your family situation, or if you are looking for a 2nd opinion on your investment portfolio. There are many sources of a good financial planner, whether through the internet, the FPSC website or through your own network. Search for someone you feel comfortable with, have a sense of trust and respect to prepare a financial plan that reflects your goals, your values and your risk profile.

Gail Cosman
Senior Wealth Advisor
TriDelta Financial

4 Challenges to Planning Your Parent’s Retirement

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Are you a baby boomer? Have you had the conversation with your parents? Now is the time to plan their retirement (image/istock)

The Baby Boomers are doing some serious retirement planning these days.

Just one problem. They forgot to plan for their parents.

They may be 55, but their parents now need their children more than ever before.

I have many clients that have at least one parent with Alzheimer’s disease — often in their 80s or 90s. The Boomers face many social, physical and mental challenges with their parents. These can be very difficult on their own.

In addition, there are several financial challenges that arise that must be faced and in every case, intergenerational or cross-family financial discussions are the key to a positive outcome. Here are four challenges to deal with and possible solutions:

1. We saved for our retirement, but didn’t plan on paying for everyone else’s as well.

Every retirement planning discussion should include the following question: “Are your parents and in-laws likely to be a financial burden, fairly independent, or are you expecting a meaningful inheritance?”

While many people have a hunch about it, they really need to have a better handle on it, as it is key to their own retirement plans. In my firm, we recommend that, if possible, they have a conversation with their parents that starts with: “We are doing some personal retirement planning, and we were asked a question about our parents. We don’t need to get into huge detail, but we wanted to have a discussion about whether we might need to provide some financial support to you or whether we thought there would be a meaningful inheritance. (Wait for laughter to stop.)”

It is possible that this question will have a pretty short response and won’t go further, but in most cases it does open the door to a more complete discussion.

2. Why are we responsible for Mom and Dad? What about your brothers?

Sometimes life isn’t fair. There is always someone who shoulders  more of the load. It doesn’t stop just because Mom is getting old and needs support.

Support for older parents is both in terms of time and energy, and also can be in terms of money.

In many cases, women in particular have to retire early and give up an income to look after parents. This in itself could affect their retirement plan. Should they be entitled to get paid by the parents? Should they get a larger inheritance?

In an ideal world, the child that provides most of the caregiving is not in need of any compensation, and the parents can pay for any needs that arise.

In the real world, sometimes there does need to be some financial compensation for all of the time that one child puts in. With siblings, you will likely never get full agreement on these arrangements. It is usually something that should be co-ordinated between the caregiver child and the parent, and other siblings should be notified of the facts. It isn’t a vote.

3. We should have had the insurance discussion sooner.

If you are 45 years old, do you know what insurance coverage your parents have? Do they have critical-illness insurance, long-term care insurance, individual life insurance, joint first-to-die, joint last-to-die life insurance? Did their insurance coverage expire at 65 or 75?

The reality is that this is your business. All of these insurance policies, other than joint last to die, will have an impact on your parents’ financial well-being. They may mean the difference between them being able to look after themselves financially or require your financial support.

This conversation is also a good eye-opener for the 45-year-old — and it may raise some opportunities.

Opportunity No. 1: It may be too late for your parents to be properly set up due to health issues, but now is the time that you should be ensuring that living benefits like critical-illness insurance, in particular, is explored.

Opportunity No. 2: If one of your parents is in reasonably good health — even if they are 75 years old — taking out a life insurance policy on a parent may be an important part of your retirement plan. I know this may not seem right at first glance, but if the 45-year-old is going to have to look after the parents financially, it can impair his personal retirement plan. If his insured parent dies in 20 years, the son will receive a tax-free insurance payout at age 65 — a perfect time from a retirement perspective. In many cases, the return on investment of this type of insurance policy can be 7%+ on an after-tax basis.

4. Do Mom and Dad have powers of attorney in place? What about their will?

Once again, what might not be considered your business can quickly become your most important business. They should have a power of attorney over personal care. This provides guidance on who can make medical decisions on the patient’s behalf, if he is unable to make his own decisions. It usually deals with items like whether you want doctors to make ‘heroic efforts’ to save your life, or not.

There should also be a power of attorney over property. This gives someone the ability to sign documents on another person’s behalf. Without it, many necessary financial transactions and decisions will happen at a snail’s pace.

As for their will, do you know where to find it? Has it been looked at in the past 20 years? Are the executors of the will up to date? Have the named executors died 10 years ago? These issues could become a nightmare for the survivors if they aren’t reviewed and clarified.

I believe the most important issue here is opening up the lines of communication with older parents. It is important to position the conversation in terms of your own personal planning, and addressing questions that you need to answer to complete your plan.

As the Baby Boomer children, you need to have these conversations with your parents. It will benefit everyone in the long run — and there is no day better than today.

This article was originally published in National Post. You can follow him on Twitter for more financial advice.

Click here to download our 2012 Retirement Income Guide

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Give More, Spend Less: The Strategy for a Financial Donation

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major-charity-contribution-giftThis is a story about a couple that wanted to make better use of their hard earned money by leaving a significant legacy to the Alzheimers Society. They came to us for advice on how to execute their charitable contribution strategy, so we devised a plan. Let’s call them Joe and Susan.

As the retirement phase approached, Joe and Susan had some concerns to consider. They traveled frequently and wanted to maintain their lifestyle in retirement without fear of running out of money. At the same time, they wanted to pay as little tax as possible and help advance Alzheimer’s research to rid the world of this cruel disease.

We told them:

  • They have lots of financial flexibility to travel.
  • They will not outlive their money, but would likely have a $2 million Estate and a lifetime tax bill of $530k.
  • The $530k in taxes can be cut significantly with proper planning.
  • A good part of the tax savings can go towards charitable causes like the Alzheimer’s Society with the right strategy.
  • They can even afford to retire earlier, and potentially spend more time volunteering.

The strategy:

Joe & Susan already contributed $5,000 a year to charity, but after learning how efficient we could structure their situation, they felt they could afford to give more, and wanted to. We showed how they could substantially increase donations without it costing them much more than they had already been contributing. The Alzheimer’s Society would benefit greatly from this decision.

What we did:

  1. We set up a joint insurance policy that will pay out when they both pass away.
  2. Fund the policy with $11,000/year for 20 years. After 20 years, the policy will be fully paid for and their favourite charity will be the beneficiary of the policy.
  3. Because of the structure, Joe and Susan will receive a full donation tax credit every year of $4,400, so their net cost is just under $6,600 a year.
  4. As a result, the charity will receive a $1 million benefit!
  5. Essentially, Joe and Susan put $6,600/year in for 20 years, a total of $132,000, and the total benefit to their favourite charity will be $1 million.
  6. If Joe and Susan live to full life expectancy, the AFTER TAX rate of return on this charitable investment will be over 10%, guaranteed. There is not likely a better investment return available – especially given the low level of risk.

Joe and Susan can still give roughly $9,000 a year to charity – either through cash or stock – and help make a more immediate impact. You don’t need to donate $11,000 for this to work for you. The strategy is scalable and can be structured to match your particular situation.

To get a quick sense of your financial possibilities and what you can afford to give, use our free online calculator. Be sure to connect with us on Facebook or Twitter. This article was written by Brad Mol, Senior Financial Planner

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