The Three Question Fact Find (Part Three)


Part 3 of 3 (For Families)

The third and final question for the family market turns the focus off yourself and on to the people that will be left behind when you die.  If you haven’t been tracking through the first two posts in this series take a minute now to review where we’ve come from.

Question One – Do you have any Debt?  Blog and video.

Question Two – Do you have a plan to sustainably protect and grow your assets?  Blog and video.

 

Question Three – Where do you want your money to go after you die?

 

This one seems obvious.  The answers I receive most often focus around some version of “my family”, occasionally people will name a favourite charity.  That’s all well and good and I never take issue with any answer people might give, it’s your money after all and whatever legacy you choose to leave is up to you.  The answer I have never received however is; “I want to leave a large percentage of my life savings to the government.”  The sad fact is that without proper planning that’s exactly what’s going to happen.

When it comes to your final estate your money will essentially be in one of four buckets.  Registered Investments (RRSP/ RRIF), Non-Registered Investments, Real Estate and Cash.  If you are married or in a common law relationship all your assets can transfer to the surviving spouse relatively smoothly and tax free.  If however, you are unmarried, your spouse has predeceased you or you wish to transfer a portion of your assets to anyone other than your spouse on your passing, the government has stipulated some rules in terms of who can get what and whether or not there will be any taxes to pay first.

Quick disclaimer:  I am neither an accountant, nor a lawyer so be sure to consult an expert in those fields first before you make any final decisions.

For the sake of argument let’s assume you have limited cash and your real estate is your primary residence.  Let’s also assume that your non-registered investments are in the form of common stocks and your registered investments are in the form of mutual funds.

So, what happens when you die?

First, the executor of your estate will want to sell your house.  No problem, the proceeds of that sale transfer to your heirs tax-free.  It’s been said that your home is the only tax shelter you can live in.  If there is any additional property, like a cottage or a rental home then those would generate a capital gains inclusion but that is beyond the scope of this article.

Next, the executor will want to liquidate the rest of your assets and transfer the resulting cash to your heirs.  This is where it can get sticky and the government can really mess with what ultimately ends up in the hands of your heirs.

Your stocks will be sold at whatever the market rate is on that day.  This will result in either a capital loss or a capital gain.  Either way 50% will be considered income (or loss) on your final tax return.  Depending on how long you’ve held the stock this could result in a significant increase to your annual income in your final year of life.  Consider what a few shares of Amazon were worth even just 5 years ago vs today?  The mutual funds in the RRSP/RRIF will also be sold but because you received a tax credit when you originally bought those investments 100% of the value of those assets will be added to your income regardless of whether they have gone up or down.

Now consider this, as of this writing income over approximately $215,000 in any given year is taxed in Ontario at 46.16%.  It doesn’t take long for an individual with a $75,000 annual income and $150,000 in assets when they die to end up paying in excess of $100,000 or more in income tax on their final estate.

Have you picked your jaw up off the floor yet?

Now, there is a way we can fix that, or at least make somebody else pay the government so your heirs receive more of your estate.  By using life insurance to create a fifth bucket of money you can transfer a portion of your assets to a participating, (tax advantaged) life insurance policy while you are living.  Thereby reducing the taxable value of your estate and generating a payout to your heirs that is completely tax-free.  In most cases we can offset a large portion, if not all, of the income tax that will come due on your final estate and preserve your wealth for the next generation.

This tactic works best when your assets are evenly distributed between registered and non-registered money so that the act of transferring funds to life insurance does not attract income tax while you are living.  If that is not possible and you have to pull money from an RRSP to fund the life insurance policy, it’s still better to pay the tax gradually, while you are living, than to generate a massive tax bill on your final estate.  This tactic also works well in the situation of a blended family when you are trying to make sure assets accumulated prior to the second marriage remain with the children of the first marriage.

Of course, this is just one possible scenario, there are many others.  The bottom line is, where do you want your money to go after you die?

For more information or help with your financial plan contact:  lauren.sheil@f55f.com or simply leave a comment below.

The Three Question Fact Find (Part Two)


Part 2 of 3 (For Families)

Continuing where we left off the other day.  The second question for the family market starts to focus in on your hopes and dreams for the future while still living your best life now.  Before we go any further though you might want to review where we came from and read the first post in this series.  Question One – Do you have any debt and watch the video on the same topic here.  Da L-Dawg Show – Episode 5 – Do you have any debt?

Now, let’s move on.

Question Two – Do you have a plan to sustainably protect and grow your assets?

I believe it was Charles Schwab who said that the only thing that matters to investors is yield.  While yield (or percentage growth) is important the key concept in my question for families isn’t how fast we grow your assets, it’s how we sustain that growth over the long haul through market cycles and the overall eb and flow of life.  Growing assets is easy, protecting them from market volatility and personal setbacks takes discipline, planning and a little grace.

Just about anyone can help you save for retirement.  Banks, Credit Unions and Investment Advisors can all provide you with investment vehicles designed to help you grow your assets but a financial plan is more that just an investment plan and making a mad rush to beat the RRSP income tax deadline every February isn’t sustainable.  A good financial plan answers two additional questions; “How much is enough?” and “What happens if I die too soon, live too long or my plans get interrupted?”

Answering the how much question is the easy part.  By looking at your current lifestyle, discussing your goals, and taking into consideration your life expectancy we can make a reasonable assessment of how much money you’re going to need, when, and for how long.  At that point it’s just a matter of reverse engineering where you are now, versus where you need to get to and determining how much money to set aside, for how long and at what yield.

Presto!  You now have an investment plan.  But that is still not a complete financial plan.

The tricky part comes in answering the second question.  If you die too soon your family could be put in a difficult situation, forced to make drastic changes just to survive.  The loss of your income due to death, disability or other economic pressures could present challenges keeping debts paid, funding children’s education or just keeping the lights turned on.  Not to mention the very real possibility of our medical system figuring out ways to keep you alive longer than your money can reasonably last.  This is were old school investment planning, the how much and now long discussion, meets insurance planning and becomes a full-fledged financial plan.  The effective use of life, disability and critical illness insurance, along with certain principle protected investment funds are an often-overlooked part of the planning process no matter your stage of life.

So, do you have a plan to sustainably protect and grow your assets?

Stay tuned for question three – Where do you want your money to go after you die?

For more information or help with your financial plan contact:  lauren.sheil@f55f.com or simply leave a comment below.