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 3
Advisor has a Client who is concerned that his estate may be eaten away by executor’s fees, and is considering placing a term in his Will to deny compensation.
The difficulty with such a term is that it may dissuade anyone from taking on the time-consuming role with its related liabilities, ultimately harming the estate.
Client had heard that executors take 5% of the estate. In truth, the benchmark is a little more complicated:
2.5% of income called-in
2.5% of income paid out
2.5% of capital called-in
2.5% of capital paid out
0.4% of annual assets
and may be less than this benchmark or occasionally more, depending on a number of factors:
Time spent
Estate size
Care required
Skill applied
Success/results
Also to be considered, a spouse or family-member executor/ beneficiary is less likely to take such taxable compensation, preferring to simply distribute the tax-free estate assets.
Finally, while an executor can and should employ professionals to assist in specialized tasks, to the extent that the executor has employed and paid (out of the estate) others to carry out executor responsibilities, the executor’s own compensation should be reduced accordingly.
Client’s life was insured under a criss-cross buy-sell funding scheme for a long-since-abandoned business venture.
Client has recently discovered that his former partner (now his competitor) continues to hold the policy on his life, and he has asked Advisor if the policy can be cancelled.
There are three initial questions that Advisor should ask Client to determine how to proceed:
Is there a validly executed buy-sell agreement governing the insurance?
If so, is there a provision that obligated each of the parties to cancel all policies or assign them to the respective life insured?
If not, did the Client live in and operate that previous venture in the province of Manitoba?
The last question is critical as Manitoba allows a life insured to apply to a court to terminate the policy where insurable interest no longer exists. Presently, no other province has such a statutory provision.
Despite the apparent unseemly result, the Ontario Court of Appeal affirmed in 1998 that no such provision will be inferred from or read into the Ontario Insurance Act.
The Income Tax Act provides incentives for each of us to make contributions to charitable organizations. In fact, it provides a strategic advantage for both the charity and the donor by making it advantageous to make larger contributions than might otherwise be considered.
For a person’s annual tax return, contributions up to $200 entitle the donor to a credit at the lowest federal tax rate, while donations in excess of $200 entitle the donor to a tax credit at the highest rate.
Some simple strategies to help you maximize the credit:
Do not claim the credit in a chosen year, then use the carryforward provisions to accumulate multiple years’ donations on one year’s tax return
Aggregate charitable donations on one spouse’s tax return
Double the donation dollar value, but contribute every other year
Contribute at year-end rather than at the beginning of the year
Consider non-cash donations – particularly property with accumulated capital gains such as publicly listed securities – to obtain additional tax relief while continuing to provide valuable funding to worthwhile causes
Use insurance and annuity strategies for leveraged value
“Key person” insurance is intended to provide funding to a business to allow it to weather the loss of an important contributor to the operation.
While gathering information from a small business Client to prepare her Will, I inquired about the “comprehensive key person” insurance she said she had in place …
Coverage: There was $200K insurance for a business with inherent capital gains of $4M, and a market value of $5M. The true need?
As previously calculated, $200K “key person” reserve for the business
About $1M capital gains coverage for the estate/spouse
Up to $5M buyout funding for the son
Ownership: Client owned the policy, the corporation was paying the premiums and Client’s spouse (second marriage) was beneficiary.
For key person, the corporation should be owner, payor and beneficiary.
This Client’s structure will likely result in a shareholder benefit (taxable) when premiums are paid annually.
Purpose: Client’s desire was to provide cash to her adult son for him to buy the business.
Unfortunately, son came from the 1st marriage, didn’t get along with 2nd spouse, and knew nothing of the business.
Apart from determining how son might obtain the proceeds to perform the buyout, clearly there are more complicated issues yet to be resolved.
Where one spouse owns capital property, it is common to have jointly owned last-to-die reciprocal-beneficiary life insurance for capital gains tax liability at the second death.
However, when simultaneous deaths occur (unlikely as that may be), the beneficiary is deemed to predecease the insured and proceeds revert to the estate of the insured.
Where the spouses’ ultimate estate beneficiaries (their families) are identical, funds can likely be shuffled so that financially this will not matter. However, in situations where the spouses’ respective estate beneficiaries are different (such as a second marriage), a significant – and likely unintended – tax result can arise, whereby the asset and related tax liability fall into one spouse’s estate, but the insurance proceeds are split between the two estates.
Depending on the preferred result desired, here are some ways – alone or in combination – to address this dilemma:
Property-owning spouse owns the insurance solely
Detailed Will drafting, a spousal trust and/or an insurance trust
Transfer the capital property itself into joint ownership
Use insurance contingent ownership rather than joint ownership
Execute a domestic contract addressing these contingencies
Client is looking for ways to reduce her family’s total tax bill. While many direct and indirect (generally by trust) transfers to a spouse or minor children will result in earnings being taxed in the hands of the transferor, there remain a number of legitimate strategies. Among them:
Generally
Loans at the prescribed interest rate
Second-generation ‘earnings-on-earnings’
Sales at fair market value
Paying small business wage & salary income to family
Spouses
Contributing to a spousal RRSP
High income spouse to pay household expenses
CPP splitting
Minors
Contributing to a minor child’s RESP
Positioning investments of minors to achieve capital gains
Transferring the child tax benefit to the minor
Waiting until a minor reaches the age of majority
Investing in an insurance policy on the life of a minor child and then transferring the policy to the child after age of majority
Client has read in the general media about ‘split insurance’ and has inquired whether Advisor can sell such a product.
As a starting point, Advisor will want to make sure that Client understands that ‘split-dollar’ is not a type of insurance but rather a mode of sharing the contractual rights and obligations of an insurance policy.
It is generally intended to allow one party to control the insurance death benefit and the other party to use the tax-sheltering features of an exempt life insurance policy.
Common uses of split-dollar funding include:
Family intergenerational wealth building/protection strategies
Tax-effective corporate investment income sheltering
Perquisite – and golden handcuff – for valuable key executives
Assisted funding of a supplemental executive retirement plan
A formal written agreement should be executed in order to create as much certainty as possible, particularly for:
Allocating premium payment obligations
Protecting against inadvertent taxable benefit assessments
Preparing the parties regarding potential exposure to creditors
Pre-determining ‘break-up’ and dispute resolution recourse
Advisor is in the midst of arranging for insurance coverage for Client who is an American citizen resident in Canada. Client is wondering whether this will be caught under the U.S. 45-50% estate and gift tax regime.
While Client should obtain an opinion from a qualified U.S. tax professional, in principle Client could be caught if one or more of the incidents of ownership are present:
The right to change the beneficiaries or their shares
The right to surrender the policy for cash or cancel it
The right to borrow against the policy reserve
The right to assign the policy or revoke an assignment
A reversionary interest by which the insured or his or her estate may regain one or more of the above rights in the event of a beneficiary predeceasing the insured or certain other contingencies
(Source: CCH Estate Planning Guide)
The good news for Client is that this U.S. federal tax is scheduled to be phased out by 2010.
The bad news is that many of the states (which until now piggybacked to participate in this tax) have enacted or will enact legislation to replace this revenue source, making for a potentially much more confusing tax regime.
A Will provides certainty as to who will receive what of a deceased person’s property, when property transfer will occur, and how (and by whom) it will be carried out. In the absence of a Will – called an intestacy – unnecessary emotional and financial strain can wreak havoc.
Intestacy rules vary by province of residence and death. In Ontario, an intestate estate is distributed to survivors as follows:
Spouse alone: All to spouse
Spouse & 1 child: Preferential share*: $200K to spouse; Distributive share: 1/2 spouse; 1/2 child
Spouse and 2+ children: Preferential share*: $200K to spouse; Distributive share: 1/3 spouse; 2/3 children
Children alone: Children equally (Children of a predeceased child share as a class)
No spouse or children: Next of kin share by defined formulae
* The preferential share is much less or not available at all in some provinces
Particularly troublesome for families with young children, there is limited access to inherited funds on behalf of a minor beneficiary, and virtually no restriction on that beneficiary’s access to those funds at age of majority (18).
Advisor referred Client to me to assist in what was thought to be a relatively simple estate administration.
As it turned out, Client owned her house as 75/25 tenant-in-common with her recently deceased common law husband; they had been together for over 30 years. They had always intended to change to joint ownership, and likewise kept meaning to execute Wills. At husband’s death neither of these steps had been taken, resulting in his interest in the house falling into his intestate estate.
Here is where the odyssey began:
Upon intestacy, a spouse – legal or common law – has the first right to be named as executor
Ironically though, a common law spouse is not a listed person entitled to share in an intestacy
We considered a property division under family law, but that only applies to legally married spouses
We tracked down three great aunts – none of whom husband had ever even met – in three separate rural Atlantic provinces’ nursing homes
Thankfully, all three women released their estate interests (which they did not have to do)
Several months (and some legal fees and disbursements later), Client had her home free and clear
So, do common law spouses need wills? – Definitely!
The RRSP – meaning “registered retirement savings plan” – might be viewed as the cornerstone of individual investment planning for one’s retirement years.
The main tax advantages of using an RRSP are:
Dollar-for-dollar tax deduction in year of contribution
Tax-deferred accumulation of funds remaining in the plan
While the amount one may contribute in a given year is limited to a percentage of ‘earned income’ (up to a dollar cap), carry-forward provisions enable a person to catch up on forgone contributions in future years. ‘Earned income’ has a fairly broad definition, including:
Income from office or employment
Royalties from authorship or invention
Net rental income from real estate
Proprietor/partner active business income
Qualifying support payments received
Amounts received under a supplementary unemployment benefit plan
Net research grants
CPP/QPP disability pensions
Client turned 69 this year. Apart from another candle on the cake, this is a very significant year in Client’s retirement planning. By December 31, Client’s RRSP must be matured in one of three ways, or in a combination.
While a lump sum cash-out is possible, it is likely to produce a large immediate tax bill. Accordingly, the decision is whether to convert to a RRIF or to purchase a qualified annuity.
RRIF
Basics – Like an RRSP, it allows tax sheltered accumulation – No further contributions – Mandatory withdrawals
Advantages – Ongoing investment control – Can respond to changing needs by adjusting amount and timing of income – Lump sum withdrawals
Drawbacks – Capital may diminish – Client may outlive the RRIF income – Requires ongoing investment decisions
Annuity
Basics – In essence, it works like the reverse of a mortgage – Lump sum paid to institution – Annual/monthly payments
Advantages – Cannot outlive “life” annuity – In certain market conditions, income can exceed RRIFs – No investment decisions – Income is guaranteed
Drawbacks – Capital is fully committed – Most annuities cannot be cashed or altered – Payments cannot be adjusted to reflect changing needs