Inheritance

Si, si, si – Translating YES into your financial planning

For many people – especially young adults breaking into their careers – financial planning may feel like learning another language. There are new concepts, words and phrases, and time required to master how and when to apply them.

Now I’m not suggesting that Spanish is required, but you probably know that “si” means yes. By repeating that three times, si-si-si, you have a simple acronym that takes you through common stages in your actual life as a way to look at decisions in your financial life:

S chooling
I ncome
S aving
I nvesting
S pending
I nheritance.

Elements of all of these are at work at any time, so these titles are really meant to highlight the principal focus at a particular stage. As well, the time spent at any one stage will vary from person to person, sometimes with significant overlap and blurring of lines between them. In fact, you may go back through repeated cycles over your life, so think of this as isolating key issues to help you identify, build and apply your financial planning skills.

Schooling that fits your outlook

Education is the foundation for your life ahead. Choices you make at this stage can both open up and close off where you may be going, whether that’s formal schooling, hands-on experience or a blend of the two. Whatever path you take, this is when you are almost always spending more than you are earning, but it is truly an investment in yourself.

Income that supports the lifestyle you are living

As an income earner, you will be able to pay off education debt and move into positive cash flow for your current purposes. Managing this flow can be tricky, so be aware how much of your spending is going to needs and how much is consumed by wants. Those wants are what makes life more livable, but if they push beyond your current financial means, it’s time to either scale back or look for ways to improve your earning capacity.

Saving towards your future self

You have a past, you are in the present, and you will have a future. With a good handle on your present finances, you can devote a manageable amount of excess income to feed your future. With increasing clarity of that future vision as savings grow, you won’t experience saving as a pain of loss, but rather as a gain of future comfort and flexibility.

Investing your savings

Investing is not saving. It is what you do with savings. To this point the emphasis has been on building your skills and behaviours, in order to create savings distinct from your own earning power in the labour market. Investing layers on top of that, providing the opportunity and necessity of putting your money to work in the capital market, delivering the growth, protection and accessibility to meet your later life requirements.

Spending later rests on the decisions you make much earlier in life

Obviously you spend throughout your life, but in retirement it is the dominant feature of your finances. You may continue some work as a way to ease into it, but eventually your only income will be from your invested savings, with assistance from government sources. While retirement coincides with advancing years, a comfortable retirement is not simply based on reaching a particular age, but rather relies on having accumulated sufficient financial resources to sustain you in what will be your non-earning years.

Just as we are tied by love and emotion to the family and friends around us, we often have intertwined and interdependent financial lives. Providing an inheritance to others is a combination of moral force, financial need and legal obligation. Be conscious how this affects your planning, so that that you have a high degree of certainty that you will meet your needs and expectations through your life and beyond.

Estate and capacity planning for vacation properties across borders

When I was a boy, we had a modest cottage a couple of hours out of the city. Just getting there was an adventure, as my parents piled six kids and a dog into a Datsun 510 — with no air conditioning.

These days, it is not uncommon to have a vacation property in another province or outside the country altogether. Whether that’s a family getaway, a snowbird retreat, or a new Canadian continuing to hold property ‘back home’, our society lives across borders like never before.

With this modern mode of living comes complexity, particularly when it comes to estate and capacity planning.

Wills and estate transfers

Generally a Canadian Will is effective to deal with a person’s real property (real estate) in the home province, and personal property wherever it may be. In order to deal with real estate elsewhere, the Will would have be proven to the satisfaction of the courts/law in that other jurisdiction. While this is not an impossible task, it presents some additional cost, time and potential uncertainty.

With that in mind, it may be desirable to plan ahead by executing a second Will in that other jurisdiction. In so doing, it is crucial that the second Will doesn’t inadvertently revoke the person’s main Will, or otherwise alter distribution. Accordingly, there must be an open dialogue between the lawyers in the two jurisdictions.

Discussions with the foreign lawyer should include gaining an understanding of tax obligations (currently and for the estate), and legal responsibilities of the executor. This may necessitate adjustments in the home Will, or at least some informal guidance. Alternatively, it could lead to naming a distinct second executor, with appropriate allocation of powers and constraints between the two. This knowledge may even affect the owner’s longer term intentions for the property.

Incapacity while owning or being abroad

Arguably, the estate transfer is the easy situation as compared to having to respond to a crisis while an owner is living. While an estate transfer is a property matter, there are both property and personal issues that can come up while a person is living, with attendant greater urgency.

Powers of attorney (POAs) and powers of attorney for personal care (PAPCs) have been a recommended part of the estate planning process for decades now. And while it is usually intended that the power may be exercised wherever the grantor or property may be, challenges can crop up when foreign jurisdictions are involved.

Some jurisdictions require these documents to be executed in a prescribed form, include specific language or otherwise be constrained in some manner that may be at odds with the home jurisdiction’s rules. Even if there are no such formal impediments, there can be delays (and associated costs) as individuals, health care workers and businesses assure themselves of their obligations — perhaps even requiring them to seek their own legal advice before being able to take instructions.

As with Wills, it may be desirable to have parallel documents drawn up in the foreign jurisdiction in order to expedite action at critical times. In addition to the provisos about guarding against revocation and having open communications, some further questions should be canvassed:

Can the same person be named in both jurisdictions? Are there practical/logistical/linguistic concerns that may lean toward naming a different person in the foreign jurisdiction?
What events may cause an appointment to be revoked (eg., marriage, separation, bankruptcy)? If such rules differ between the jurisdictions, how will that be reconciled?
What is the scope of the attorney’s activity for each of the jurisdictions? Where there is a gap, how will this be handled?
If it is intended that the home jurisdiction attorney have ‘final say’, is this possible under the foreign jurisdiction’s rules? How can an attorney be removed?
Is compensation allowed/required/prohibited, and do the planning documents together guard against double compensation?
What checks are there to assure appropriate accounting and accountability for each attorney’s actions?

Cross-border developments

These concerns have been attracting greater interest in recent years, with two major developments worth noting.

In the summer of 2015, the Uniform Law Conference of Canada tentatively approved a uniform law on cross-border recognition of powers of attorney for both property and health care, health care instructions and similar documents. The Uniform Law Commission in the United States approved its draft in 2014. Provinces and states that incorporate the recommendations into their domestic law will enable their residents’ documents to be effective in all reciprocating jurisdictions.

In the area of estates, as of August 17, 2015, a new cross-border succession regulation is in force in the European Union (except Denmark, the U.K. and Ireland). It affects European citizens and residents, and European property held by non-residents. Canadians should consult with their lawyer whether any action is required on their part.

Whether a gift to an executor is taxable compensation

At issue

Compensation received by an executor is income from an office, and thereby taxable.

Where an individual is both named as executor and provided a legacy or bequest in the Will, there is a presumption that that gift is in lieu of compensation. For distinction, a legacy is a dollar amount, whereas a bequest is an item of property. Either way, the amount of compensation would be the fair market value of the gift. Ironically in the case of a large single property bequest, an executor who lacks cash liquidity may have to dispose of the item in order to pay the corresponding tax bill.

The executor may rebut the presumption that a gift is compensation by offering evidence of the testator’s contrary intention, either through the Will or by surrounding circumstances.

Boisvert v. The Queen, 2011 TCC 290

Guy Boisvert and a notary were named as liquidators (the proper term for executor in Quebec) of the estate of Marcel Sauvé. The Will provided that as a “token of gratitude” for the services as liquidator, Mr. Boisvert would be bequeathed the deceased’s residence and contents. In time, Mr. Boisvert was assessed for income from an office in the amount of $68,080, as quoted in the estate’s declaration of transmission.

On appeal, Mr.Boisvert testified that, despite the words in the Will, he had a very small role in the estate administration, deferring much to the notary. In turn, the value of the property should be seen as disproportionately large to be characterized as remuneration.

The court held that even if he played a small role, he “had accepted the office and the responsibilities that came with it” and therefore the presumption of compensation was not rebutted, and the tax assessment was upheld.

Re Hayes (Estate of), 2006 ABQB 427

This matter came before the court as a contested passing of accounts, opposed in part by the Public Trustee on behalf of minor beneficiaries who were grandchildren of the deceased. Among the arguments offered, it was asserted that the gift of a residence to one of the executors constituted compensation, and therefore there should be no further claim for personal expenses of the executors.

After summarizing the arguments, the judge simply stated the view that “the gift to Delwin Hayes as Bert’s son was personal and therefore the presumption has been rebutted.” Though this was not a tax case, the opposite finding would certainly not have been helpful to Mr. Hayes in dealing with his subsequent tax return.

Capital Trust Corpn. Ltd. v. The Minister of National Revenue, [1937] S.C.R. 192

Joseph Mackenzie was one of a number of executors of the estate of his father, who died in 1923. A Codicil to the Will provided that Mr. Mackenzie should be paid $500 monthly, which was to be in addition to any entitlement that “courts or other authorities may allow him in common with the other executors.”

For reasons unexplained, the monthly amount was not paid until a catch-up payment of $19,500 was made in 1927.

Mr. Mackenzie’s argument that this constituted a gift was not successful as he would not have been entitled to it had he not accepted the appointment. Furthermore, he was taxed on the full amount as received in 1927, and specifically was not allowed to allocate the amounts proportionately across the intervening years.

Practice points

A testator should understand that where a gift is closely tied to an absence of compensation, it is likely that the executor will be taxed on that amount. Bear in mind as well that it is often the case, especially with small and quickly administered estates, that there is little or no corresponding tax deduction to the estate, effectively resulting in a gratuitous windfall to the government.
An executor who is a beneficiary of a bequest or legacy may wish to review the Will before accepting the appointment. Depending on phrasing, this could bring a gift under tax scrutiny that might not have occurred had the individual been strictly a beneficiary. On the other hand, if there is a direct connection between accepting executorship and the gift, a taxable gift is likely better than nothing at all.

S chooling I ncome S aving I nvesting S pending I nheritance.