Death and money are traditionally taboo topics. Yet, when we avoid discussing them, we may also fail to adequately plan for them, and that can lead to confusion, conflicts, stress and financial loss.
Recently, trust and estate lawyers Margaret O’Sullivan and Stephanie Battista presented our clients with two valuable wealth planning lessons that can help prevent such negative outcomes. They shared stories based on real life situations drawn from their years of experience assisting affluent families, including clear steps we can all take to protect ourselves and our loved ones.
Leanne* was a schoolteacher in her mid-40s with a teenage daughter. Her husband, Tim,* owned a successful IT business and took care of most of the household finances. When Tim passed away suddenly, Leanne was thrown into complete chaos. Not only were most of the family’s financial records hidden behind passwords on Tim’s computer, but his company’s payroll also was due in about a week, and she had no idea where to begin.
In hindsight, Leanne’s situation would have been much better with a personal contingency plan in place. Such a plan would have let her know who to contact, what cash and other assets the family owned, where they were located, and how to access them. She would have had all the names, passwords, account numbers and procedures she needed when Tim was no longer able to take care of the couple’s affairs.
Your personal contingency plan can be as simple as a document with the “who, what, where and how” for your family when they need it. Think about bank accounts, investment accounts, insurance policies, titles to real estate, and details about holding companies and trusts. Please contact us if you’d like a starter template that you can help you address all of this.
Catherine* was the executor of her father’s will, which stated that his assets would be shared equally between her and her late brother, Andrew.* However, since Andrew was separated – but not divorced – from his spouse of 20 years prior, Andrew’s spouse was still legally entitled to his half of the estate assets.
Fortunately, the law pertaining to separated-but-not-divorced spouses is set to change in January 2022 to avoid such extreme situations, but the lesson still stands. It is essential to keep wills and powers of attorney up to date to ensure that your wishes are carried out the way you intended.
A good guideline is to review these documents every 3-5 years, or when there is a change in your circumstances, such as:
For example, if you drew up your personal will early in your career and you now own a holding company with significant assets, you may need a dual will plan to protect your corporate assets from a 1.5% probate tax if you were to pass away.
Another common situation is giving money to a child to purchase a home. Is this an advance on their inheritance? Do you need to equalize it to be fair to your other children? Whenever there’s money in motion among your family members, you might want to consider how this can impact your estate plan.
A growing trend among Canadians is to purchase properties abroad. Whether the property is in the US, Costa Rica, France or Mexico, you should be aware that even something as simple as opening a bank account outside of your home country may require an update to your will in order to avoid potential issues down the road.
Your Cumberland Portfolio Manager can help you identify these wealth planning opportunities, review them with you and confidently recommend the right estate, tax and legal experts to help you address your given situation. Often times, a significant change in your circumstances will also trigger the need to review of your investment portfolio. When these moments occur, we are here to assist you. It’s all part of our commitment to help grow and protect your wealth for future generations.
*Not their real names
Canada is home to more than one million small and medium-sized businesses*. These businesses are of vital importance to our economy, to our communities and to the people who own them.
At Cumberland**, we are often asked to help business owners and successful professionals plan for retirement. When this happens, we find it is often worthwhile to pair our wealth management expertise with the insight of dedicated tax planners.
Recently, our clients were treated to a presentation by Peter Routly, CPA, CA, TEP and Jeff Noble, DMC, FEA from accounting firm BDO Canada, where they specialize in helping high net worth individuals and families maximize their wealth through strategic tax planning.
Among the many insights they shared were three potential real life stories involving scenarios that you may find relevant and relatable.
Mary earns about $500,000 per year, which would place her well into the top tax bracket. To help manage this, she has established a professional corporation which allows her to lower her tax rate.
Since she does not have a pension plan and will not be able to sell her practice to fund her retirement, she needs to find a tax-efficient way to maximize her savings. One potential strategy is to create an Individual Pension Plan or IPP, which can be likened to a supercharged RRSP. An IPP would allow Mary to make significantly higher tax-deductible contributions than a regular RRSP, and essentially create her own pension plan.
She is also looking at establishing a discretionary family trust, funded through a loan, to hold some of her and her husband’s investments. This will effectively allow them to cover their university-aged daughter’s living expenses on a tax-free basis.
Bob owns a successful manufacturing business that generates about $1 million of annual net income after paying himself a salary of $200,000. As he approaches retirement, he has many tax planning options to consider, including the implications of selling the business or transferring ownership to his son.
He is also exploring the option of setting up a Retirement Compensation Agreement or RCA. An RCA would permit his company to make tax-deductible contributions to a fund from which Bob will make withdrawals once he retires.
At that time, if he decides to spend significant time at his property in a low-tax jurisdiction in the Caribbean, Bob may be able to keep his Canadian home and citizenship but draw his retirement income at a significantly lower tax rate.
Chris and his two co-founders are about to sell their tech startup to a venture capital firm for $30 million. With his $10 million share, he is looking at two tax planning strategies.
The first is to create a discretionary family trust, funded through a loan, that will allow him to split his investment income with his wife and three children. Since his family members have no other income, they can potentially draw household income of more than $150,000 per year on a tax-fee basis.
The second is to place $1 million in a life insurance policy with an investment component that can grow significantly on a tax-free basis over the next several decades, and ultimately leave his children with a significant tax-free inheritance.
These are just three possible life stories, and there are nearly limitless variations based on your personal goals, business situation, family status, and how aggressively you wish to pursue your tax strategy.
One thing for sure is that, as a client of Cumberland**, you can look forward to expert retirement planning and proven wealth management combined with the integration of advice from some of the country’s very best tax planners.
The global pandemic has altered many perspectives on the working world – from recognizing our dependency on essential workers and appreciating the struggles of small businesses to honouring the sacrifices of healthcare staff and adapting to the realities of schooling and working from home.
During this time, we’ve heard from a number of people who have decided to rethink their relationship with their financial advisor. This is unsurprising, as periods of unusual stress or uncertainty often reveal who is really looking out for us.
Imagine for a moment that you are a dentist, a skilled practitioner who prides yourself in exceptional dental services. Your practice extends beyond dental care. A clean, comfortable waiting area, a friendly receptionist, strategies for calming nervous patients, accessibility help for elderly or patients with mobility issues, maybe a toy box for children.
And even when a patient is in the chair, you and your staff act as first-line medical professionals, alerting patients to underlying health problems, from stress and anxiety, to eating disorders, to cancer. This goes far beyond oral health to caring for an individual’s overall wellbeing. It’s not dental care. It’s dental caring.
When it comes to financial advice, financial advisors may have a duty of care, but they lack a duty of caring. Quite often, they are seen as a commodity, and there are many who act accordingly.
Boilerplate advice, boilerplate investments, one-size fits all. Just save your millions and retire. The media doesn’t help the cause of good financial advice, because caring financial advice doesn’t make the news. What makes the news is fraud, high-pressure sales tactics, and hidden fees.
Our industry hasn’t helped much, with investment return ads that nurture an audience of performance addicts – with financial needs and goals either non-existent or taking a back seat.
Here’s an example. I recently had a client come to me who had had three financial plans done previously by three different advisors. The issue? These financial plans were done upfront as a sales tool, and were never referred to or updated later. It was a means to an end, and nothing more.
No wonder my client was frustrated. While someone may have been monitoring the tactical part of his portfolio (his investments), no one was reviewing the strategic part – his life and financial goals – even though these were changing over time.
Just as you need and deserve a caring dental provider, you need and deserve a caring financial advisor. Someone who looks beyond your assets and future income potential and focuses directly on you and the life you’re living – and keeps looking on your behalf as your life changes.
That part is critical, because you’re sure to have financial needs that change and go beyond just saving for retirement. You may want to expand your business, or provide for a special-needs child, or buy or sell a vacation home, or plan for your future legacy, or any number of things.
The benefit of a caring advisor is the planning, advice and investment expertise they provide is aligned with your needs and goals – and it’s reviewed and updated to ensure that it stays aligned. From saving and investing for retirement, to taxes, to succession, to your estate – the expertise and planning is unique to you and will change as your needs evolve.
During times of unusual stress or uncertainty, whether it’s due to economic challenges, a global health emergency, or unforeseen events in your own life, the guidance and communication you receive from a caring advisor will be even more frequent, proactive and personalized – not less.
How can you tell if an advisor you meet – by design or by chance – is a caring advisor? Like any relationship, trust your intuition.
What will caring advisors do? They will probe – by asking questions and listening. It’s not just because they’re polite. It’s because they need to know what you want to do in life with your money, your life situation, your personal and business goals, your fears and challenges.
They will try to open you up to get to the root of “you.”
What will an uncaring advisor do? They will talk, not listen. They will tell you what they can do for you before they even ask what you need and what you hope to accomplish. And your financial plan will sit on their computer gathering digital dust, even as your needs change.
If you’re looking to fast-track an intuitive assessment of an advisor, ask them this simple question: why are you a financial advisor? You’ll get a lot of different answers from different advisors, but the caring ones will shine through.
As a Canadian, there are few luxuries more appreciated than having a warm place to escape the winter. Whether that means a condo in Palm Beach or Naples, a bungalow in Oahu, or a ranch in Austin, owning real estate in the US can come with a few financial complexities that you should know about.
At Cumberland, financial planning around US assets is part of what we do for our clients. Often, this involves collaborating with estate, tax and trust experts to ensure that your strategy is sound.
One such expert is Hadielia Yassiri of Green Marker Wealth Continuity Advisory, who recently presented a webinar for our clients. If you’re wondering whether you could fall into a US tax trap, here are three red flags she recommends looking out for.
If you have a “substantial presence” in the US, you could be considered a US resident for tax purposes. That means you may be forced to pay the IRS tax on your worldwide income.
The Substantial Presence Test is a formula based on your time spent in the US. Add all the days you’ve spent in the US in the current calendar year, 1/3 of the days in the last calendar year, and 1/6 of the days from the year before that. If the total is 183 days or more, you could be considered a US resident for tax purposes.
There are two potential solutions, depending on the specifics of your situation. One might be the Closer Connection Exception, which requires you to prove that you have closer ties to Canada. The other might be to apply for an exemption under the Canada-US tax treaty.
As we all know, the US is a different jurisdiction than Canada with its own set of rules.
Joint property rules are different. For example, in the US, if a couple owns a property in joint name and one partner becomes incapacitated due to illness, the healthy partner may be blocked from selling or refinancing the property until either their spouse passes away or they spend tens of thousands of dollars in state court applying to act as their spouse’s attorney.
Capital gains taxes are also different. If you sell your US property at a gain, you will have to pay capital gains tax in the US and report the sale in Canada as well. You will be paying additional Canadian capital gains tax but your US tax liability can be claimed as a foreign credit against your Canadian taxes so you can avoid double taxation. You may also be subject to US withholding based on the total sale price of the property under the Foreign Investment in Real Property Tax Act (FIRPTA).
And, of course, the US is famously more litigious than Canada. If you rent out your US property and somebody slips and falls by your pool, they could sue you for millions, and that litigation could follow you all the way back home.
In short, if you own US real estate, it is wise to review your planning around income tax, capital gains tax, estate tax, incapacity and creditor protection to make sure you won’t be facing any surprises.
If you pass away while meeting the current US estate tax threshold of owning US assets worth more than US $60,000 and a worldwide estate greater than US $11,580,000, you could be subject to US federal estate taxes and state probate. These taxes may be significant – for example, the combined estate and probate taxes on a property in Florida can be as much as 44%.
In 2017, the threshold for triggering US estate taxes was raised from the previous level of about US $5.8 million, and it is now widely believed that it could again return to that lower level. If you are in the danger zone, it makes sense to review how you are using vehicles such as corporations and trusts to potentially reduce the impact of US taxes on your worldwide estate.
Despite the relative complexity of owning US property, most would agree it’s still worth the effort. As a client of Cumberland, we will facilitate the planning and advice you need to help minimize the risks and maximize the pleasure of those balmy winter days.
Remember that BIG fish you caught when you were five and came back to tell the story?
Some of my fondest memories were made at our family cottage on Lake of the Woods in Ontario. We would spend a couple of weeks out there every summer with my dad’s parents and cousins fishing, jumping off the boat house, learning to water ski and hiking through the old gold mine with grandma leading the way (it was her short-cut back to the cottage).
While it’s a joy to reflect on these memories, there are some future implications to owning a cottage that can be less pleasant if you are not careful. Indeed, if it is your dream to pass your family cottage down to future generations, thoughtful planning needs to take place.
Cottages are often one of the most valuable assets in a family – both in monetary and sentimental terms. This may be why they tend to become one of the more contentious aspects of estate planning.
Some may argue that it’s best to put sentiment aside and simply sell the cottage. With this approach, you can avoid financial complications like unfunded tax liabilities, and practical complexities like deciding how the heirs should share the use of the cottage. You can simply divide the after-tax sale proceeds among your beneficiaries as you see fit.
If this is your choice, it is advisable to clearly communicate your intentions well in advance. Disputes are more likely to arise if news of selling the cottage comes as a surprise to anyone. This is particularly true if the cottage is being sold or gifted to just one family member. It’s better to discuss your decision now than to have it create conflict later.
Alternatively, you may feel that it is preferable to keep the property in the family in order to preserve tradition and enable future generations to continue creating fond summer memories.
If this is your decision, communication is again essential, particularly if the cottage will become a shared asset among more than one household. Collectively deciding how the property will be owned, used and maintained will be vital to the cohesion of the family going forward.
Here are some financial planning considerations to discuss with your advisor:
Drafting a shared asset agreement or establishing a trust are two ways you might handle at least some of these considerations. These legal structures can help you plan for tax implications and establish the rights and responsibilities of your beneficiaries.
Deciding how to handle the family cottage requires thoughtful conversations and practical education around the available options. If you’ve been thinking about addressing this important issue, your Cumberland Portfolio Manager is someone who can help facilitate the process for you.
What are your investment objectives? What is your time horizon to meet them? How much risk are you comfortable taking, and how much risk is appropriate to reach your goals? All of these questions and more can be discussed and answered in the process of creating your personal Investment Policy Statement, or IPS for short.
The ins and outs of an IPS were examined in a recent episode of Take Control of Your Wealth, a podcast produced by Christie Matwee MSc, MBA, CFA and Shawnalynn Perron MBA, CIM, FEA, who are both Portfolio Managers at Cumberland Private Wealth Management Inc.
Here are some of the key points which they discussed:
An IPS is typically a written document that clearly communicates your financial needs and risk tolerance, and defines the strategic mix of equities and fixed income that will help you achieve your goals. It’s like a road map that helps you and your Portfolio Manager define the goals, preferences and restrictions that should guide your investment strategy.
An IPS is commonly used within the private client, high net worth, charity and institutional space, but it can be a tool for anyone to lay the foundation for a sound investment strategy and help stay on track over time.
For an institutional investor, it might be an investment manager, a consultant or even the institution itself. But for individuals, an IPS is often written in close collaboration with their Portfolio Manager.
If you don’t have an investment policy statement and you’re wondering why nobody’s prepared one for you, it may be a result of the way your portfolio is managed and your particular relationship with your manager. An IPS is typically prepared when your Portfolio Manager is making investment decisions for you on a discretionary basis.
At Cumberland, we are discretionary portfolio managers. That means we are held to the highest standards and have a fiduciary duty to act in our clients’ best interest. An IPS is essential to help us understand, articulate and agree upon what those interests are for each client.
Broadly speaking, the key components of an IPS are your Investor Profile, Investment Objectives, and Investment Constraints. In other words: who are you, what are you trying to achieve, and what are the appropriate risks or restrictions that need to be considered when it comes to managing your portfolio?
When we define your Investor Profile and Investment Objectives, we want to understand everything about your current situation and future goals.
For example, we’ll document your age, marital status, dependents, employment situation, assets, debt, income, whether you earned the money from employment or inherited it, or maybe from selling a business or real estate.
We’ll also delve into whether you are looking to fund retirement, create a family legacy to pass on to future generations, preserve capital to pay off a mortgage, or generate income to live on, or perhaps you have everything you need and just want to preserve your purchasing power and keep up with inflation.
From this understanding, we can take into consideration not only the need for return to achieve your goals, but also the risk involved in doing so, keeping in mind that aiming for higher return typically comes with higher risk.
So, if there are conflicting objectives – such as maximizing returns and minimizing risk at the same time – we need to decide which is most important and find an appropriate balance between the two aims.
We’ll also take into account any specific constraints you may have, which always includes the time horizon to achieve your goals, and usually includes other issues such as liquidity needs, tax considerations, legal or regulatory requirements and any other unique circumstances.
To summarize, your Investment Policy Statement is like the foundation and frame of your house. It provides the structure and shapes the portfolio for exactly your needs and risk tolerance. You can’t just start with the asset mix – it’s important to think through what you’re really trying to accomplish to ensure that the portfolio ultimately achieves its goals.
Your IPS can also be referred to when you’re tempted to adjust your asset mix based on short-term considerations such as market volatility. A good Portfolio Manager will help you refer back to your IPS and remember why you’re invested the way that you are, which can make it much easier to stay on track over time and feel comfortable.
For more than a decade, advisors and financial planners across the country have been pushing clients to open and invest in one of the greatest tax strategies Canadians have at their disposal, the Tax-Free Savings Account (TFSA).
Many have followed this advice, but a recent study conducted by Pollara showed that 31% of Canadians plan to use their TFSA as an emergency fund. While the TFSA is well-suited for this purpose, we want to outline why you should consider making the TFSA a part of your larger wealth management strategy.
This question comes up often, but for most of our clients, the answer is to take advantage of the benefits of both types of investment accounts.
When you make an RRSP contribution, it’s usually tax-deductible in the current year. However, both your original contribution and any gains you’ve earned will be fully taxable when you withdraw them in the future. The idea is that you’ll be in a lower tax bracket once you retire, and therefore will benefit from having deferred the taxes until then.
When you make a TFSA contribution, it’s not tax-deductible, but your future withdrawals are not taxed – including any dividends, interest or capital gains that you may have earned. That means you can grow your investments for as long as you want and withdraw funds whenever you need them with zero tax consequences.
Generally speaking, the RRSP is great for long-term, tax-deferred retirement savings, and the TFSA is a flexible way to invest for short- and long-term goals while avoiding taxes. They work very well together.
The first thing you want to do with a TFSA is make the most of your available contribution room. To illustrate the reason why, let’s look at a case study.
John is a 50-year-old entrepreneur who has built up a sizable RRSP. However, he has never opened a TFSA. That means he has been accumulating unused TFSA contribution room since 2009, and now has a total available limit of $75,500.
If John made the full $75,500 contribution this year, contributed $6,000 (the current maximum) in every subsequent year until age 80, and achieved a 6% annual return, he’d be on track for some pretty impressive results:
|John’s Age||Projected TFSA Value|
By age 90, John would have accumulated well over $1.6 million, tax-free. If his spouse followed the same strategy, his family could have about $3.3 million tax-free set aside.
Now imagine John wants to provide some financial assistance to his 18-year old daughter – say to buy her first home several years down the road. Why not take advantage of her tax-free investing potential too? He could gift her $6,000 per year which she could invest in her own TFSA. If she achieved the same 6% annual return as John, she would have over $100,000 tax-free put away before she turned 30.
Now what happens to John’s TFSA after he passes away?
If he elected his spouse as his Successor Holder, they could inherit his TFSA without tax, and it could continue to remain invested and earn income on a tax-free basis. This is an extremely valuable feature of TFSAs that is not available with regular investment accounts.
Alternatively, if he intended to have his daughter inherit his assets, he could name her as his Beneficiary, and she would receive the proceeds of his TFSA tax-free. Because the TFSA would not pass through his estate, the delays and costs associated with a legal process known as probate would be avoided. These fees vary by province, but in John’s case, would likely amount to tens of thousands of dollars.
While it is true that your TFSA can make a great emergency fund, it can also be a powerful way to accumulate tax-free wealth for your retirement, your growing family and your future estate.
If you have unused TFSA contribution room or questions about whether you are maximizing the opportunities available to you, please speak with your Portfolio Manager.
Have you started to make plans for your future estate? Are your children aware of your plans, and prepared for their future financial responsibilities?
If not, you are not alone. Canadians will hand down about $1 trillion worth of assets to younger generations over the next 25 years, and at least half lack an up-to-date, signed Will.
For many, talking about a wealth transfer can be awkward, stressful, or daunting. Perhaps it’s because many find it difficult to discuss death and ultimately plan for it. Or, maybe it’s because we’ve all heard stories of conflicts arising among family members.
Regardless, failing to properly plan for what happens to your assets can end up doing exactly the things you would rather avoid – adding fees, increasing taxes and worst of all, creating conflict.
Here are some strategies to improve the odds of a positive outcome for your family:
Open communication may not be comfortable at first, but it will help your children understand the choices being made and eliminate any surprises in the reading of your Will, which will already be a highly stressful time. It also allows your children to express their interests and concerns, which may affect your decision-making.
Discussing topics such as trusts, investments and taxes will also strengthen your heirs’ financial knowledge, which can improve their confidence and ability to manage their inherited wealth more prudently.
If you intend to transfer financial assets to younger generations, consider getting them used to working with a professional wealth manager now. Odds are, they are already very comfortable with technology, so a digital platform for investing might resonate more than traditional means.
Our Portfolio Advisor Tool (PAT) is often found to be a great solution for children and grandchildren. It enables them to manage their investments in a similar fashion to the online banking tools they already use, except with professional portfolio management to guide their investments and access to one-on-one education when they need it.
When your heirs have an opportunity to invest in an environment where they are already comfortable, it will likely increase their engagement, boost their understanding of wealth management, and can ultimately increase the odds of a successful estate transfer.
You want an estate plan that fulfills your intentions effectively. The right plan will help you realize your legacy while minimizing taxes and probate fees, maximizing the positive impact you have on the people and causes you care about the most.
At Cumberland, we can collaborate with you and your tax and legal experts to put your plan in place. Here are a few of the strategies and associated benefits you might consider:
Gifting Assets While Alive
This lets you see the benefits of your gifts while you are alive and can result in lower probate fees and tax upon death, especially if your heirs are in a lower tax bracket.
Having a Current Will
A current Will ensures that you control how your assets are distributed, aligned with your wishes and your tax planning.
Joint Ownership (with right of survivorship)
Sharing ownership of assets with a spouse in this manner can potentially allow the transfer of assets without probate fees or taxes.
This type of trust is created while you are alive and can allow you to plan the timing and amount of assets distributed to your heirs, potentially with creditor protection and avoidance of probate fees.
This type of trust is created upon death and allows you to control the timing for distribution of assets to your beneficiaries, which may be helpful if you wish to manage their ability to spend the assets.
Estate planning is often a sensitive topic, but procrastinating can be a big mistake. By having the conversations now, getting your children started with money management, and putting a plan in place, you can set your family up for a healthier and wealthier future.
Wondering how your taxes might change or perhaps you are thinking about succession planning and how tax reform might impact your plan all due to the recently announced Federal deficit?
Listen to our Podcast featuring Sunit Paul, Partner & Senior Tax Advisor from BDO, to discuss some worthy strategies.
Read an insightful article ‘Suddenly Single: How to Plan for Female Clients’ in Enterprising Investor by Barbara Stewart, CFA, a researcher/ author on women and finance, formerly Partner and Portfolio Manager at Cumberland Private Wealth. Erin O’Brien, CPW Partner and Portfolio Manager shares her approach and strong value-add.