In its original form, initiative was an email periodical which had about a 200 word count base text, complemented with a graphic to show connections, flows or other dynamics, including labels and other supplementary text. Those graphics were not compatible with later technology, so only the original base text has been preserved for the present archiving purpose. The material was current to the year and month of issue (Vol#,No#) but is not a legal opinion.
Vol.1. Vol.2. Vol.3. Vol.4. Vol.5. Vol.6. Vol.7.
Volume 1
[From 2001 to 2007 … ] initiative is a monthly case study and information brief for distribution partners of The Empire Life Insurance Company (Empire Life).
Details are edited to illustrate relevant financial, tax & estate planning principles, generally using Ontario for illustration.
This material is current to the year and month of issue (Vol#,No#) but is not a legal opinion. Retained professional advice should be engaged in relation to any actual Client matters.
The Sales, Tax, Estate Planning, Underwriting & Product (STEPUP) team provides broker support, including seminar education, advanced concept illustrations & Client case consultations.
Doug Carroll is [was at the time] a practicing estate lawyer, and member of STEPUP. He focuses on legal, tax & estate planning concepts, and guidance for related product strategies.
One of the most common questions Advisors ask me in my role as Estate Planning Specialist is, “Why does a Client need a Will if an insurance beneficiary is named?”
Just as we as professionals work together to best serve a Client’s wealth needs, the truth is that neither the Will nor the insurance in and of themselves alone constitute an ‘estate plan’.
In that context, insurance is a critical component for building and preserving an estate. In turn, the Will is perhaps best viewed as the cornerstone upon which all estate planning is based, and the touchstone for all other personal planning decisions.
Among the wide array of issues impacting on Will preparation, and upon which the Will impacts:
Insurance beneficiaries
RRSP/RRIF beneficiaries
Existing or considered common property ownership
Family obligations & living arrangements
Contractual claims & business commitments
Existing formal & informal entitlements/obligations
Creditor/solvency status
Future trusts to be settled
Present and future gifts
General tax matters
Advisor asked if she could change a client’s insurance beneficiary on instruction from the client’s spouse, who was acting under a valid power of attorney (POA).
Based on the facts she provided, I adviser her that the answer was “No”.
Under a POA, one person allows another to makepersonal and/or property decisions, but there can be limits to the subject matter,procedure, timing and types of decisions
The law of substitute decision-making varies across Canada. Some key points & misconceptions we reviewed:
Spouses are not automatically each other’s POA
A POA may be effective after a person is mentally incapable, but execution of the POA itself does not mean the person can no longer manage his/her affairs
A living will is not generally a legally binding POA
In the absence of a valid POA, an expensive guardianship application may eventually have to be undertaken
Advisor asked me to share with him the key principles of trusts in order for him to:
Converse confidently with other legal & financial professionals
Analyze whether a trust might make sense for a given client
Formulate advanced trust strategies that might open up investment & insurance sales & service opportunities
While the law of trusts is complex and evolving, the key to understanding its sophisticated legal uses is to understand the simplicity of the trust relationship:
The settlor (the original property owner) creates or ‘settles’ the trust.
Virtually any type of property (real estate, financial or personal) can be made the subject of a trust.
The trustee (new legal owner) manages the property in the best interests of the beneficiaries.
The beneficiaries ultimately reap the financial rewards of the property.
For hundreds of years (literally), the flexibility of trusts has been used to control personal affairs & estates, protect against financial mismanagement & creditor attacks, and open the doors to effective legal tax reduction, all of which remain available under modern trust law.
Client has asked Advisor if it may be beneficial to transfer his investment portfolio into joint ownership with his son.
On the face of it, such a transfer can result in a reduction of future probate tax.
For example, spouses often hold their home in joint ownership so it will pass to the surviving spouse at death by right of survivorship, bypassing the Will and escaping probate taxes. This works well for spouses given that capital properties may generally rollover to a spouse at cost-base.
For non-spousal situations (whether for the home, investments or otherwise), the complications may outweigh the benefits, including:
Immediate tax consequences of a deemed disposition
Exposure to creditors of other joint owner(s)
Legal and registration costs
Matrimonial law implications
Reduced asset control
Potential lost principal residence exemption
Future capital gains tax
Potential lost tax planning opportunities
Client has been asked to act as executor under a friend’s Will, and wants Advisor’s guidance on how this may affect Client’s affairs. Here are some key points to note.
The term “executor” derives from the act of “executing” the Will instructions, though the proper term in Ontario is “Estate Trustee”.
Naming an executor has no immediate legal impact as a Will only takes legal effect at the date of the testator’s death.
Upon the testator’s death, a person who accepts the executorship will then be obligated to complete the responsibility until legally released.
Though the executor legally owns the property, beneficial (financial) ownership remains with the beneficiaries.
An executor may generally be paid up to 5% of the estate value, based on time expended, estate size, care required, skill applied and success.
In brief, the four things that an executor generally does:
Have the Will proven under the probate process (if necessary)
Collect and inventory the assets forming the estate
Manage and distribute the assets to the named beneficiaries
Obtain a release from the beneficiaries to close out the estate
Client has asked Advisor to help protect her estate from being depleted by excessive probate tax when she dies.
Advisor already knows that by naming an insurance beneficiary the proceeds will escape probate, and he is looking for other ways to reduce her probate exposure.
In my discussion with Advisor we covered some common strategies in addition to named beneficiaries, including:
Transfers to joint ownership
Holding corporations
Inter vivos trusts
Outright gifts
Estate freezes
Above all, Client should be cautious that it may not be worth the gamble to avoid an Ontario probate tax that maxes out at 1.5%.
By comparison, assets flowing through a person’s estate (including insurance proceeds) can benefit from tax savings in the 40-50% range, not to mention potential creditor protection and control issues which can be more effectively managed through a properly executed Will.
Broadly, estate planning is about looking after yourself and those near you during life, and caring for those others (particularly children) when you are no longer around.
At a minimum, guardians should be named in the parents’ Wills; but even in situations where a surviving parent remains, proactive measures can be taken to assist that parent and the children.
The financial advisor has a key role to fulfill in consultation with other professional advisors:
Generally making known the investment and insurance alternatives in the market, tax-sheltered or otherwise
Advising on ownership and beneficiary designation choices that can facilitate the handling of the survivors’ entitlements
Making Clients and other professionals aware of the creditor protection/exposure aspects of given financial products
Being informed about the features & benefits of Wills, powers of attorney and testamentary trusts (particularly insurance-funded testamentary trusts)
And perhaps most importantly, helping Client/parents to understand that this type of planning is about providing certainty and comfort – financial and emotional – that their children will make the most of their lives
Advisor was wondering whether there really was any monetary magic about using trusts in estate planning, or if it was all simply misinformed myth.
The truth is that it is neither magic nor myth, just well-grounded tax planning.
Inter vivos trusts (created by a person during life) have little or no tax benefits, as they are subject to taxation at the top personal marginal tax rate.
However, testamentary trusts (created by Will or by a court as a result to death) are taxed using the marginal tax brackets available to individuals. Accordingly, they are ideal vehicles for both simple and complex tax strategies such as:
Tax bracket management & income splitting
Advanced multi-trust arrangements
Tax-free spousal rollovers
Beneficiary income sprinkling
Long-term, multi-generational wealth planning
Client asked Advisor whether she is legally obligated to give $1 to each child in order for Client’s Will to be legal. The answer is “No” but that’s not the end of it.
A person’s testamentary freedom – the ability to deal with her property at death – is an important tenet of our legal system, but it is tempered by both common law (court cases) and legislation (particularly the provincial Family Law Acts).
A spouse can use the FLA to bypass a deceased spouse’s Will, treating the relationship as ending just prior to death
A spouse has special possessory rights in the matrimonial home, even if the deceased spouse owned the home absolutely
As well, under the Ontario Succession Law Reform Act, if inadequate provision is made for the spouse, children or other dependents, an application may be made for financial support to be paid out of the estate. Of note,
“Dependents” are not necessarily only children; it can be also be elderly parents and siblings to whom the deceased person was providing support at the time of death
The “estate” is interpreted broadly, and can result in insurance and RRSP/RRIF beneficiary designations being overturned
Advisor always counsels her Clients to name beneficiaries on their insurance policies in order to avoid probate and escape estate creditors.
She is now wondering whether naming a trustee on a policy creates an ‘insurance trust’. The answer is that such a designation creates a trust relationship but lacks the tax and legal benefits of a classic insurance trust.
The first type is like a bare trust and can result in the funds being minimally inaccessible while the beneficiary is a minor, and fully payable when the minor reaches age 18.
By contrast, an insurance trust can be created (usually by Will) to manage the inheritance of any beneficiary, but it does not form part of the estate for probate purposes. Depending on the size and purpose of the insurance proceeds, an insurance trust can achieve a number of goals for both Client and Advisor:
Ongoing control of terms and timing of inheritances, particularly for minors and for spendthrift protection
Annual tax savings that make probate avoidance irrelevant
Protection from both estate and beneficiary creditors
Stage set for next-generation involvement of the Advisor
Advisor has been looking for tax-advantaged ways for his small business clients to provide employment benefits to their key employees.
He has heard that the use of a Health & Welfare Trust (HWT) may allow an employer to enjoy tax-preferred treatment not otherwise available if employee benefits are paid directly to employees.
Essentially a HWT allows an employer to establish an arrangement whereby individual insurance benefits are accorded the same or similar tax treatment as if those benefits had been part of a group benefits program.
Advisor and I discussed the requirements and limitations of this strategy, during which discussion I was able to confirm with Advisor that a HWT can:
Be enterprise-wide or serve as a top-hat / golden handcuff program for key employees
Enable employer premium deductibility
Make premiums non-inclusive in employee income
Facilitate tax-efficient benefit pay-outs, particularly for critical illness insurance (subject of course to CCRA’s administrative policies)