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 2
Client performed an estate freeze in favour of her son and daughter a decade ago, and is now turning her mind to retirement and how she and her husband will harvest the $2M value out of the shares.
Client wants Advisor to structure a ‘financially-sound’ cash extraction solution for her to approve – she is a chartered accountant by training.
Client expects insurance to be a major component of the plan, and has asked how the Stop-Loss rules might apply.
Advisor and I discussed a number of business succession issues to bring him up-to-speed with:
Role of life insurance in buy/sell funding
Tax and legal considerations informing the decision between personal and corporate owned insurance
Personal & corporate tax principles behind Stop-Loss
Criteria for ‘grandfathered’ reduced or non-tax results
Insurance strategies for bypassing Stop-Loss
As a value-added part of the financial planning process, Advisor requested to review Client’s Will.
Client wished to provide adequately for his wife, but to control the final disposal of the house.
One of Advisor’s overriding concerns was that the steps he was taking to safeguard Client’s affairs would coordinate with the activities of Client’ s other professional advisors.
Advisor and I got together to go over the Will in order to identify the legal and estate tax issues that would affect the financial plan. During our review, we determined that (in light of Client’s changed wishes and circumstances), it would be necessary for Client to re-attend upon his lawyer to have a new Will drafted and executed.
Advisor was able to reinforce his own expertise and value to Client by providing an overview of how the changed Will would facilitate the intended financial plan, including:
The nature of trusts (particularly spousal trusts in this situation)
How trusts may be used in this Client’s situation
Specific benefits/features that Client may use to carry out the intended plan
Client has a successful family farming operation.
The ownership structure is relatively simple and Client has proposed a particular division between the adult children upon the death of the parents.
Client asked Advisor to comment on the proposed division.
Advisor and I discussed the facts, following which I provided Advisor with a summary of the issues we identified:
How to use a corporate structure to protect the business integrity of the farm operation
Accessing capital gains exemptions and preserving capital gains deferrals
Funding a potential sibling-sibling buyout using newly placed life insurance
Advisor has an elderly Client who has amassed a substantial pool of wealth.
For many years she has provided financial support to her grandson, the eventual principal beneficiary of her estate. Grandson has never been very good with money, often getting caught up in questionable business deals and frequently getting himself into difficulties with creditors.
Client is in poor health and anticipates that her affairs will soon be managed by her attorney, a close personal friend. She is concerned that support for her grandson may not be able to continue after that point. As well, she fears that once she is gone, grandson will squander his inheritance and be left destitute.
Client, Advisor and I discussed some alternatives and related legal constraints. Together we devised a solution that involved:
Expanded attorney powers enabling continuation of support payments to grandson while Client is living
A series of loans and promissory notes to be forgiven at death
Draft Will phrasing for a spendthrift testamentary trust
Parameters for a large annuity to be purchased by the trust
Advisor wants to move strongly into the business market. She recently attended a seminar staged by the STEPUP team, and now has the confidence to approach carefully targeted clients and prospects.
The main strategies outlined:
Personal Criss-cross Strategy
Corporate Promissory Note Strategy
Corporate Redemption Strategy
Corporate Hybrid Strategy the strategies
Key concepts covered in the seminar:
Roles of the financial advisor, lawyer and accountant
Common business and legal terms in the buy-sell agreement
Triggering conditions calling the agreement into effect
Role of insurance in providing accurate cash funding
Comparative features of the insurance ownership strategies
Legal rights and obligations
Minimizing after-tax cost of insurance premiums
Choosing the optimal strategy by reducing the deal complexity
Creditor protection issues
Step-by-step mechanics
Using the $500,000 lifetime capital gains tax exemption
Effective use of the spousal rollover
Holding company variations
Advisor understands that segregated funds have creditor protection features, and is looking for ways to promote those features as client benefits in the sales context.
In essence, Advisor wants to use legal principles to emphasize comparative creditor protection benefits over traditional investment funds.
We reviewed how the strategic selection of:
Annuitant
Beneficiary/ies
Contingent owner
Can assist in protecting against creditors of:
Fund owner
Owner’s estate
Transferee owner
Beneficiaries
For a range of personal and business planning purposes:
RRSP/RRIF retirement funding
Non-registered investment growth
Future income apportionment
Business finance and succession
At a recent seminar, an attendee inquired about executor responsibilities in this alarming fact situation:
Testator’s do-it-yourself Will recommended a do-it-yourself probate kit
Executor applied for and was granted probate, but took no further steps in the year or so after death
In that time, the Estate’s high-tech stock portfolio fell to about 10% of the value at death (now worth less than the deceased’s tax liability on those same stocks)
The beneficiaries were the deceased’s two toddlers, and a different person than the executor was named as guardian
What the future may hold for this executor:
Preparing the deceased’s final tax return and remitting the tax due to CCRA (including potential personal liability)
Accounting to the guardian and beneficiaries for the investment losses (with the spectre of legal action looming)
Ongoing approval/monitoring by the Office of the Children’s Lawyer (Public Guardian & Trustee) and the courts
The kicker: The recommendation to use a do-it-yourself Will kit and do-it-yourself probate kit originally came from a financial advisor. Most – if not all – E&O policy coverage for financial advisors excludes legal advice.
Recently we lost one of the great sportsmen of the 20th century – baseball legend Ted Williams – who will always be remembered for his outstanding athleticism and character.
Unfortunately he may also be remembered – at least in legal circles – for the acrimonious family controversy over cremating or freezing his final remains.
Regardless how this problem is resolved (hopefully soon and amicably) the situation reinforces the need for all of us to look beyond financial concerns alone when engaging in estate planning. In particular the choice of Attorneys and Executors should be well considered:
Medical decisions of a Personal Care Attorney supersede any wishes of family members, and possibly those of a grantor
Organ donor documents express a grantor’s intention but final decisions lie with the Personal Care Attorney and Executor
Despite any instructions recorded in a Will or elsewhere, the Executor has the last word regarding funeral arrangements
Finally, under Ontario law the Executor has sole authority over the treatment of a deceased’s final remains
The general rule for naming insurance and RRSP/RRIF beneficiaries is that the latest designation in time governs, whether it is in an application, a change form or a Will.
If it is by Will, it is the execution date that is relevant, not the date of death or date of probate grant (if any). In fact a designation in an otherwise invalid Will may be upheld.
While a general revocation clause in a Will is not unusual, the preferred practice is to name the policy/plan explicitly and file a copy of the Will with the insurer/administrator.
Here is an actual case that emphasizes the need for coordinated communication among professional advisors:
Advisor had Client name beneficiaries on his insurance policy
Within months Client attended upon his solicitor to execute a Will (which had a general beneficiary revocation clause)
Only at death was the insurer provided with a copy of the Will
Payout of the insurance was delayed because the insurer had to confirm the proper payee with the Client’s solicitor
Generally, if the policy/plan beneficiaries and estate beneficiaries are identical, the issue is mainly the nuisance cost and delay. If they differ (in proportion or persons), disinheritances or excess entitlements may result.
Even with the best intentions and most conscientious monitoring, a person’s estate planning activities may not be completely up-to-date. Advisor asked me if it is possible to undertake estate planning after a person has died. In some circumstances, the answer is “Yes”.
Take the example of a discretionary spousal bypass trust:
A surviving spouse can elect to divide family property using the Ontario Family Law Act rather than receiving an inheritance via the Will
The spouse is deemed to have predeceased; the inheritances of the contingent beneficiaries (likely the children) are accelerated
Assuming ongoing trust provisions have been drafted into the Will, control of the children’s inheritance is maintained while the family’s total tax bill is reduced
Ideally the Will will have anticipated this possibility and provided for appropriate trustee(s) to manage the property
Whether the strategy has been anticipated in the couple’s prior estate planning decisions, or has been undertaken unilaterally by the surviving spouse at death, the key is that the surviving spouse may have discretion to cater a result that optimizes the structure and value of the inheritance.
Where a minor beneficiary is named in an insurance policy, at a minimum a trustee should be designated to receive the insurance proceeds on the minor’s behalf. Without a trustee, the proceeds may very well have to be paid into court.
Where the minor is not the life insured’s own child, the parents of that child would be a logical choice for trustee. However in situations such as spousal reciprocal policies (where spouses have named one another primarily), naming a trustee for children as contingent beneficiaries is not so clear cut.
Some issues to consider:
Limited powers to distribute funds prior to age of majority
Mandatory distribution of all funds at age of majority
Compensation entitlement for trustee
Minimal investment discretion for trustee
Potential trustee personal liability for investment losses
Accordingly whenever a minor beneficiary is involved, serious consideration should be given to allowing the proceeds to flow into the estate or into an insurance trust where these issues can be pre-planned adequately.
Advisor called me for some clarification regarding contingent ownership of insurance.
Section 199(1) of the Insurance Act enables an insurance policy owner to pass ownership to a contingent owner, bypassing probate and bypassing estate creditors.
The scope of the section extends to ownership of segregated funds.
Some benefits of naming a contingent owner as opposed to naming such person as beneficiary:
A spousal rollover may avoid (or rather delay) taxation on deemed capital gains
Better creditor protection may be available
The existing owner could still be certain of the ultimate distribution of the policy proceeds through the use of irrevocable beneficiary designations and/or pre-selection of settlement options
Where detailed instructions are contemplated, the owner should obtain legal advice to prepare a contractual and/or trust document to be deposited with the insurer.