Inheritance enhances retirement and estate plan

Over the years we have helped new clients and existing clients deal with inheritances. In the majority of cases the inheritances are coming from parents. These can be done upon the parent’s passing away but are also done while they are alive in more and more cases. In other cases we have clients receiving inheritances from uncles/aunts, siblings, friends, and other individuals.

The greater the inheritance the more critical it is to get some professional advice. One positive part of receiving an inheritance in Canada is the money is not taxed. Following are some topics we would discuss when a client receives an inheritance.

Paying off debt

We like the idea of paying off debt, especially personal mortgages, credit cards, and lines of credit that are not tax deductible.

To begin with, we obtain a summary of all loans, current rates, and repayment penalties, if any.

If only some debt is repaid, then the highest non-deductible interest rate debt should be paid off first. If fees or penalties apply, it is important to obtain an understanding of these and your wealth adviser should be able to map out the best options.

If you still would like to invest some, or all, of your cash then you’re best to take a new loan out for the specific purpose of investing.

The interest expense incurred from the money borrowed is generally tax deductible if the purpose of the use of the borrowed funds is to earn income in non-registered accounts.

Increased income

One of the results of receiving an inheritance is that your annual taxable income is likely to increase. If you purchase GICs and bonds, you will have to factor in the interest income received. If you purchase equities, you will have tax efficient dividend income to report and some deferral options.

We provide an estimate of what the income will be once the investments are selected and calculate an estimated income tax liability if the funds are invested in a non-registered account.

Type of non-registered account

If you feel a non-registered account is your best option you should determine the type of account.

If you are single the choice is easy; an individual account. If you are married or in a common-law relationship, you may consider to open an individual account and keep the funds only in your name. Alternatively, you may open a joint-with-right-of-survivorship (JTWROS) account with your spouse or common-law partner.

The person who received the inheritance would be primary on the account. If a non-registered account is already opened then we have a discussion regarding the risk of commingling funds in the event of a marriage breakdown.

This discussion has many other components to talk about including tax, income splitting, and estate wishes. Consulting a family law attorney may be required in cases of marital breakdowns.

Topping up RRSPs

One way to defer some of the above income is to deposit funds into a tax sheltered Registered Retirement Savings Plan, if contribution room exists.

The greater your income, the better this option is. If your income is at or below the lowest tax bracket then there may be other options you would want to consider.

The determining factor is your future income expectations. As an example: John received $250,000 as an inheritance. He is using $150,000 to pay off all debt and would like to invest the remaining $100,000. John has accumulated a $140,000 RRSP deduction limit, as he has never contributed the maximum each year. John plans to work for the next five years and earns approximately $80,000 in T4 income.

One option we may suggest to John is to contribute the $100,000 into his RRSP and claim $20,000 a year as a deduction over the next five years assuming that there is no extra cash flow for additional contributions. One of the main benefits of putting funds in the RRSP (and not claiming the full deduction right away) is that all income is tax sheltered.

Tax Free Savings Account

Any income earned within the TFSA is tax free, if you have never set up a TFSA, the cumulated TFSA contribution limit for 2019 is $63,500. It may be worthwhile to understand the advantage of this type of account and top up to the maximum limit. Starting in 2019, the annual limit is $6,000, indexed to inflation thereafter.

If you have both non-registered account and TFSA, then we would recommend you to transfer your assets (up to the maximum limit) from the non-registered account into the TFSA, to take advantage of the tax-free feature.

Skipping a generation

Sometimes the people receiving the inheritance do not need the funds themselves. In these situations we often map out a strategy that will skip to the next generation. Sometimes this will help younger generations pay off mortgages, purchase a home, or build up retirement savings

Structure of accounts

Many Canadians only have RRSP or TFSA accounts. Often when significant funds are received (inheritance, sell of a business, life insurance proceeds), people open their first non-registered account.

One thing that we see is people buying GICs and bonds where the interest income is fully taxable in a non-registered account while leaving the equity investments which have tax-efficient dividend income within their RRSP. When this happens, the structure of investments is backwards.

There are many benefits of consolidating investments at one institution, including lower fees and more account options. It is beneficial to deposit the inheritance cash into a non-registered account at the same institution as the RRSP. If this is done then the structure can be corrected.

We are able to do a series of trades that will correct the overall structure will ensure that interest income on fixed income is tax sheltered within the RRSP. By holding Canadian equities in the non-registered account, you will receive the benefit of the dividend tax credit, and taxation of capital gains and losses.

Updated documents

Obtain the appropriate forms to update your investment accounts, Powers of Attorney, beneficiaries and ownership. We always encourage people to update their Will and other legal documents (if necessary).

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.

 

Act today to minimize a massive final tax bill

Taxpayers, naturally, are fixated on trying to minimize tax in the current year. This is a classic scenario of someone not being able to see the forest for the trees. The forest is your ultimate final tax liability. The trees are the current year taxes. The final tax bill in Canada consists of any income up to the time of death, accrued gains are deemed to be realized at the same time and estate administration tax (probate fees).

Annually, in early June we will look at our client’s tax returns and see the level of taxable income and tax payable they incurred in the current year. When the current tax payable is too low we may schedule an estate planning meeting.

The estate planning meeting typically starts off by a rough tax calculation of what your final tax liability would be today, based on your current assets, if you were to pass away. If you have not gone through this exercise, then it is worth doing. In some cases, the government stands to inherit a significant portion of your net worth if not structured appropriately. The conversation is setting the framework for a more detailed analysis done as part of the financial planning process.

Throughout our working lives we commonly reduce our annual tax bill by making Registered Retirement Savings Plan (RRSP) contributions. An important item for people to understand is the tax consequences when withdrawals are made and also the tax consequences upon death.

Withdrawals from registered accounts are generally considered taxable income in the year the payments are made. Over time your RRSP account may have generated different types of income including dividend income, interest income and capital gains. All of this income would have been deferred. All RRSP and Registered Retirement Income Fund (RRIF) withdrawals are considered ordinary income taxed at your full marginal tax rate regardless of the original type of income.

When a registered account owner dies, the total value of their registered account is included in the owner’s final tax return. The final tax return is often referred to as a terminal tax return. The proceeds will be taxed at the owner’s marginal tax rate. The highest marginal tax rate (British Columbia and federal) is currently 49.8 per cent. An individual that has $800,000 in an RRSP/RRIF account may have to pay $398,400 of that amount to Canada Revenue Agency in income taxes. If the RRSP names the estate as beneficiary, then an estate administration tax or probate fee of approximately $11,200 would apply. Accounting, legal, and executor costs can result in less than half being directed to your beneficiaries and more than half going to taxes and other fees.

These taxes must be paid out of the estate. CRA considers you to have cashed in all of your registered accounts in the year of death. Paying over 50 per cent of your retirement savings to CRA is not something investors strive for. There are a few situations where this tax liability can be deferred or possibly reduced.

Spouse

Registered assets can be transferred from the deceased to their spouse or common law spouse on a tax-free rollover basis provided they are named as beneficiary. The rollover would be transferred into the spouse’s registered account provided they have one. If the spouse does not have a registered account, they are able to establish one. The registered assets are brought into income on the spouse’s return and offset by a tax receipt for the same amount. This rollover allows the funds to continue growing on a tax-deferred basis. The rollover does not affect the spouse’s RRSP contribution room.

If your spouse is specifically named the beneficiary of your RRIF account, then you should consider designating your spouse as a “successor annuitant.” As a successor annuitant, the surviving spouse will receive the remaining RRIF payment(s) if applicable and obtain immediate ownership of the registered account on death. These assets will bypass the deceased’s estate and reduce probate fees. You should discuss all estate settlement issues with your Wealth Advisor and financial institution to obtain a complete understanding.

Minor child or grandchild

Registered assets may be passed onto a financially dependent child or grandchild provided you have named them the beneficiary of your registered account. In order to be financially dependent, the child or grandchild’s income must not exceed the basic personal exemption amount. A child that is under 18 must ensure that the full amount is paid out by the time that child turns 18.

Financially dependent child

A child of any age that is financially dependent on you can receive the proceeds of your registered account as a refund of premiums. This essentially means that the tax will be paid at the child’s marginal tax rate, likely to be considerably lower than your marginal tax rate on the terminal tax return.

Rollover to Registered Disability Savings Plan

In 2010, positive changes occurred to help parents and grandparents who have a financially dependent disabled child or grandchild. Essentially this enables the RRSP accounts of parents and grandparents (referred to as the annuitant) to be rolled over to the RDSP beneficiary. The estate benefit is that up to $200,000 of the annuitant’s RRSP can be transferred to the beneficiary’s RDSP. Care should be taken to make sure the transfer qualifies under current tax rules and thresholds. The end goal is to minimize tax and hopefully your beneficiaries receive a larger inheritance. We recommend you speak with a Wealth Advisor if you are considering naming a disabled child or grandchild the beneficiary of your registered account.

Rollover to Registered Retirement Savings Plan

The RDSP is my favourite option for rollover, but what happens if the RRSP/RRIF is greater than $200,000 (the maximum rollover for the RDSP)? Another good option to explore if the child is dependent on you by reason of physical or mental infirmity is the tax free rollover of the registered account (i.e. RRIF) into the disabled child’s own registered account (i.e. RRSP). With disabled children there are no immediate tax consequences and there is no requirement to purchase an annuity. You may want to discuss the practical issues relating to having your registered account rolled into registered account in the name of a disabled child.

Other planning options for children with disabilities

A combination of the RDSP and RRSP rollover is normally sufficient if the annuitant has a small to medium sized RRSP/RRIF account. Other planning options are available if you have a sizable RRSP and are worried about disabilities payments from the government.

Beneficiaries

Care should be taken when you select the beneficiary or beneficiaries of your registered accounts. If you name a beneficiary that does not qualify for one of the preferential tax treatments listed above, then it could cause some problems for the other beneficiaries of your estate. An example may be naming your brother as the beneficiary of your RRSP and your children as beneficiaries of the balance of your estate. In this example, the brother would receive the full RRSP assets and the tax bill would have to be paid by the estate, reducing the amount your children would receive.

Important points

Every individual situation is different and we encourage individuals to obtain professional advice. Below we have listed a few general ideas and techniques that you may want to consider in your attempt to reduce a large tax bill:

  • Pension credit — you should determine if you are able to utilize the pension tax credit of $2,000. If you are 65 or older, then certain withdrawals from registered accounts may qualify for this credit. Rolling a portion of your RRSP into RRIF would allow you to create qualifying income. For couples this credit may be claimed twice – effectively allowing some couples to withdraw up to $4,000 per year from their RRIF account(s) tax-free (provided they do not have other qualifying pension income).
  • Single or widowed — single and widowed individuals will incur more risk with respect to the likelihood of paying a large tax bill. Single and widowed individuals should understand the tax consequences of them dying as no tax deferrals are available.
  • Charitable giving — one of the most effective ways to reduce taxes in your year of death is through charitable giving. Those with charitable intentions should meet with their professional advisors to assess the overall tax bill after planned charitable donations are taken into account.
  • Life insurance — one commonly used strategy is for individuals to purchase life insurance to cover this future tax liability. The tax liability created upon death coincides conveniently with the life insurance proceeds. This would enable individuals to name specific beneficiaries on their registered account without the other beneficiaries of the estate having to cover the tax liability.
  • Estate as beneficiary — if you name your estate the beneficiary of your registered account then probate fees will apply. An up-to-date will provides guidance on the distribution of your estate.
  • Life expectancy — Individuals who live a long healthy life will likely be able to diminish their registered accounts over time as planned. Ensuring your lifestyle is suitable to a longer life expectancy is the easiest way to defer and minimize tax.

A wealth adviser should be able to generate a financial plan to review with you and your accountant. The financial plan should outline the tax your estate would have to pay if you were to die today. This will begin a conversation that may allow you to create a strategy that reduces the impact of final taxes on your estate and throughout your lifetime.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.

 

Online access and paperless options becoming more mainstream

Computers, phones and tablets have all become mainstream in today’s modern households. The thirst for current knowledge in a busy mobile world has never been greater. More than ten years ago, businesses began introducing new online options for clients to get financial information. Although some were slow to adopt this technology change, most clients today desire to have online access to both their bank and investment accounts.

The term online access has caused some confusion, especially when financial firms have both online access through a website (the web) and login access through an application (the app) for a tablet and smart phone. What you can access and do on both of these online platforms are different. We recommend that clients create an account and get comfortable with both to obtain all available information on their accounts. I think the hesitation early on was due to peoples’ comfort level in regard to technology and security issues.

There are many benefits to setting up online access. One of the main reasons people like online access is the ability to set up “paperless” options. With most financial firms, this is done through the website version. Going paperless is an optional choice, or an added benefit, that clients have once they have online access on the web. Let us look at some of the benefits of online access and paperless delivery.

Security

I mentioned that some people may be hesitant to go online for security reasons. Financial firms have spent enormous capital to ensure appropriate security is available for their clients. Some people could easily argue that with mail delivery being a manual process that the arrival of your mail at your home is not 100 per cent guaranteed. When you receive other people’s mail you may wonder if anyone has received yours. Many people feel that it is more secure to go paperless and not have your financial information sent by regular mail.

Customization

Clients have the ability to select and customize what documents they wish to receive by paper delivery or by paperless delivery. The three broad categories are statements (monthly statements), confirmation slips (sent after each trade) and tax documents. Clients must elect paperless or paper delivery on each account. For example, a client could elect paperless delivery on the TFSA and RRSP account but wish to have paper delivery on the taxable or cash account. It is normally less confusing for clients if they either go all paperless delivery or all paper delivery.

Timeliness

Another benefit of online access and paperless delivery is that you would be able to access your statements sooner. With paperless delivery you would receive a notification by email that your financial information is available online and you could immediately log in and view this information. With paper delivery, the statements would have to be printed by your financial firm and mailed to you. When Canada Post was going on strike, many clients converted to paperless documents to ensure they continued to get their financial information in a timely manner.

Tax documents

Many clients today like the idea of logging onto a secure website and printing off their tax documents. We also recommend that clients create “My Account” with CRA and print the slips automatically sent to them as a completeness check. Once you have set-up “My Account” with the CRA you can take advantage of their sign-in partner service. This allows you to sign into “My Account” with the CRA using the same sign-in information you use for your online access at your financial institution. This is one less password you will have to remember. If you have online access, you would be able to compile all tax slips provided you have paperless delivery and online accounts set up by March 31. If you have paperless tax documents, the latest your accountant should receive your tax documents is April 1st every year. Even if you are travelling you can access your documents and send these through to your accountant — remember to use secure email.

Environment

Paperless documents also has the added benefit of being good for the environment. Financial firms reduce printing costs, mailing/delivery costs and do their part for the environment by reducing the amount of paper they use. Clients viewing the information online can do so in a secure manner. They do not have to print the statements and worry about storing the financial information securely or shredding old documents. When clients select paperless delivery, they can go online and go back several years to look up financial information whenever they need to. It is easy to find and stays secure in the meantime.

Power of Attorney (POA) — monitor parents

In many situations, we are dealing with two or more generations in a family. When our clients are aging, we will typically have a discussion with them about steps they can do today in the event they become unable to make financial decisions. If they have reliable and responsible children, we will often suggest a family meeting where one of their adult children is introduced to us. We have a discussion about financial information for aging clients or clients suffering from dementia or Alzheimer’s disease. We like to have this conversation while our aging clients still have capacity and the ability to set up a financial power of attorney. Financial information can be confusing and create anxiety in some cases. Establishing a power of attorney, to monitor your situation can reduce this significantly. What works really well is to set up the account delivery as paperless and provide full online access to the power of attorney.

Power of Attorney (POA) — monitor children

We are often asked if we will help our clients children get started on the right path with investing. When the accounts are set up we can easily add the parent on as a power of attorney. A parent may want to gift money to their children and the POA on the account enables them to keep an eye on the child’s financial progress. Guiding your children on how to deal with money can be as important as guiding them toward a good education and profession. Children naturally do not know the different ways to invest or the different types of investment accounts.

Transfers between accounts

If you have online access set up with your bank and financial firm, it creates an added benefit of viewing both. Online access enables you to transfer funds from a bank account into your investment account. This can be done quickly and efficiently, without the need of writing physical cheques.

Kevin Greenard CPA CA FMA CFP CIM is a portfolio manager and director of wealth management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the Times Colonist. Call 250-389-2138.

Part VI – Real Estate: Skipping to Other Generations When Planning Your Estate

With the value in real estate and other holdings, many Canadians have accumulated a significant estate that involves planning.  Talking about estate planning need not be uncomfortable.  For many, this naturally leads to who you would like to receive your estate – either family, friends, and/or charitable groups.  The process involves mapping out a plan that minimizes tax, while at the same time ensuring your distribution goals are met.

The second stage of the estate-planning process is when we ask for clients to bring a copy of the documents they currently have in place. We also obtain a copy of their family tree and information about current executor(s), representative, or other individuals currently named in the will.

To illustrate the process, we will use a typical couple, Mr. and Mrs. Gray, both aged 73. They last updated their wills 24 years ago.  They have what is commonly referred to as “mirror wills” where each leave their estate to their spouse in a similar fashion.  The will also has a common disaster clause that if they were to both pass away within 30 days that the estate would be divided equally amongst their three children.  We will refer this to as the “traditional method”.

Since they last updated their Will, all three of their children (currently aged 56, 54, and 52) have started families of their own. In fact, the Gray’s now have seven grandchildren between the ages of 11 and 32, and two great grandchildren (aged seven and three).  None of which were born when they last updated their Will.

In reviewing their will, we noted that this traditional method of estate distribution left everything to their now financially well-off adult children, to the exclusion of their grandchildren. We highlighted that the current will does not mention the grandchildren or great grandchildren. In exploring this outcome, they expressed they wanted to map out an estate plan that also assisted those that needed help the most.

The last time the Gray’s updated their will they had a relatively modest net worth, but in the last 24 years they were able to accumulate a significant net worth. We had a discussion with Mr. and Mrs. Gray that focused around the timing of distributing their estate.

The traditional method effectively distributed nothing today and everything after both of them passed away.

We discussed the pros and cons of distributing funds early. During our discussion, the plan that was created was combination of components, parts involved a distribution to the grandchildren based on certain milestones.  They also wanted to make sure their grandchildren obtained a good education.  The estate plan details that we outlined in the short term were relatively easy to put in place and were as follows:

  1. For the youngest members of the family they wanted to set up and fund Registered Education Savings Plans (RESP) for all eligible grandchildren and great grandchildren. The RESP contribution shifted capital from a taxable account to a tax deferred structure. This effectively results in income splitting for the extended family. Another added benefit is that RESP accounts would receive the 20 per cent Canada Education Savings Grant based on the amounts contributed.
  2. For the family members already in university, the plan was to assist with the cost of tuition and other university costs up to $10,000 per year per grandchild.
  3. For the grandchildren who were at the stage of wanting to purchase a principal residence, they wanted to set aside a one-time lump sum payment of $50,000 specifically to assist each grandchild with the down payment on a home.

One of the more challenging areas of the Gray’s estate plan dealt with their real estate. In addition to their principal residence, they also owned a recreational property in the Gulf Islands. The recreational property had some significant unrealized capital gains. It was important for the Gray’s to ensure both properties were kept within the family, if possible. We called a family meeting together where we outlined different options to achieve this goal. The key with this part of the estate plan was communication with Mr. and Mrs. Gray and their three children. We were able to obtain a clear plan that was satisfactory to all family members.

The finishing touch to a well-executed estate plan is ensuring the details are clearly documented in an up-to-date will.

 

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138. greenardgroup.com

This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in  this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a 
division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

Ten Tips on Working With A Portfolio Manager

HEALTHY LIVING MAGAZINE

Over the years, I have had many discussions with people about what is important to them.  Health is nearly always at the top of the list.  Connected to this is having time to enjoy an active and social lifestyle.

Life has become busy, and it is tough to squeeze in everything that you have to do, let alone have time left over for all the things you want to do. Sometimes it is simply a matter of making a choice. One of my favourite concepts I learned years ago in economics is ‘opportunity cost’. It can relate to time, money or experiences. We can’t get it back, borrow or save it. Time is sacred – especially family time and doing your own investing can take time and attention away from your family. So ask yourself – is doing your own investing worth the time you are spending on it?

One way to focus on the things you want to do is to delegate the day-to-day management of your finances to a portfolio manager who can help you manage your investments by creating what is called a ‘managed’ or ‘discretionary’ account. They are able to execute trades on your behalf without obtaining verbal permission, so when the market changes, they are able to act quickly and prudently.

Here are some tips for working with portfolio manager to improve your financial health:

Have a Plan

You are more likely to achieve the things you want if you set goals to paper. With fitness goals it would be things like running your first 10k race or lowering your blood pressure. Financial plans are the same – sit down with your portfolio manager and outline what you want to achieve with your estate, your investments and your retirement. Once a plan is in place, a periodic check-up takes a fraction of the time to ensure everything is on track.

Stay in Control

If you are worried about being out of touch with your investments, there are measures in place to keep you in the driver’s seat. One of the required documents for managed accounts is an Investment Policy Statement (IPS). This sets the parameters with your portfolio manager and provides some constraints/limits around their discretion. For example, you could outline in the IPS that you wish to always maintain a minimum of 40 per cent in fixed income. This lets you delegate on your terms, and ensures a disciplined approach to managing your portfolio. Technology has made it easier and faster for you and your portfolio manager to track your progress, review changes or update the program. Developing a written agenda that gets shared in advance of a meeting, whether in person or virtual, can create efficiencies and ensures nothing is missed. Whether it is email, Skype, or even text messaging – there are many ways for you to stay connected to your finances.

Think About Taxes and Legal Issues

Your finances often involve other professionals such as lawyers or accountants, so it is beneficial to get everyone connected early on. Work with your portfolio manager to complete a professional checklist that includes important names and a list of key documents. If your team can communicate directly with one another, it’s easier to map out planning recommendations and tax-efficient investment strategies. Your portfolio manager can also act as your authorized representative with the Canada Revenue Agency and can even make CRA installment payments on your behalf. Every summer, I am reviewing assessment notices, carry-forwards, contribution limits (i.e. TFSA and RRSP) and income levels to allow my clients to enjoy the outdoors and improve their quality of life

Put Family First

Having a complete picture helps a portfolio manager map out strategies to preserve your capital and to protect your family. If a life event occurs or your circumstances change – from new babies, to inheritances, to critical illness –  your portfolio manager can provide options and solutions. When the family member who manages the finances passes away suddenly, it can be very stressful for the surviving spouse or children during a time that is already emotionally draining. To help in this situation, many families create well thought-out plans that can involve working with their portfolio manager to make discretionary financial decisions in a time of transition. A Portfolio Manager can take care of your finances regardless of the curves that life throws them.

As a portfolio manager, I feel it is critical to be accessible and to keep clients well-informed with effective communication. What I am finding is that conversations are shifting to areas outside of investments, including the financial implications of health issues and changes within the family.

If you are looking for a way to simplify, reduce stress in your life, and proactively manage your finances, a portfolio manager might be a good way to improve your financial health.

 

Financial tips for blended families

Opening the communication channels is key when helping couples in blended family situations.   This communication should absolutely start on Day 1 for blended families, and should be part of the account opening process. A good advisor will ask probing questions beyond the checklist of mandatory questions to first open an account.  

With new blended families, it is not always easy to have open communication with both parties. Often, they have different advisors and different financial institutions.   If this is the case, then it is common for the couple to maintain the status quo with their separate finances.   I always encourage couples in blended families to come in together, even when they are maintaining separate finances. Once this happens, and once there is open discussion and communication, then progress can be made on a variety of financial decisions.

Often there is a disparity between the value of assets, or net worth, of each party. Rarely are the assets equal. One party may have more equity in real estate, while the other has more stock and bond investments.  

Making objective financial decisions can be challenged by the simple notion that “blood is thicker than water.”   For example, many parents want to provide for their children from a previous marriage. However, this can conflict with the many tax benefits provided for married or common-law relationships. This conflict is especially challenging when it comes to estate planning. Below I have listed a few common assets and basic challenges couples in blended families may face.

Non-Registered Account:  The term taxable account or non-registered can be used inter-changeably. Often young people do not have non-registered accounts as they are busy paying off mortgages and/or contributing to their registered accounts, such as RRSPs.   Older couples with adult children are more likely to have taxable accounts when they enter a blended family.   When a person has non-registered investments just in their name, this is called an Individual Account.   The monthly statements and confirmation slips have just the one person’s name on it, and the year-end tax slips (i.e. T5 and T3 slips) are in same one individual’s name.  

Couples in a first marriage, and who have built up equity together, will open up a taxable account called Joint With Right of Survivorship (JTWROS). This type of account has many benefits for couples, including income-splitting. The primary benefits of these joint accounts are probate is avoided, income tax continues to be deferred, such as for unrealized capital gains, and simplicity of paperwork after the first spouse passes away.  

Some couples have two JTRWOS with each person being primary on their own respective account. By primary I mean their name is first on the account and their social insurance number is on all tax slips. This enables couples to still keep funds separate, but it will still provide the same above benefits.

Tenants in Common:  Another option for taxable accounts is Tenants In Common. With Tenants in Common a taxable account is set up with two or more owners, where the ownership percentages do not have to be equal. Upon the passing of any owner, their portion represents part of their estate, and the other owners do not have the right of survivorship.   Many of the benefits of JTWROS are lost with Tenants In Common, but for some couples this may be the right decision. A couple that would like to combine their assets to pay household bills, could simply allocate the ownership based on the amount originally contributed. If Spouse ”A” puts in $300,000, and Spouse “B” puts in $700,000 then the allocation for ownership could be 30 per cent for Spouse A and 70 per cent for Spouse B.   If either spouse passes away, their Will would dictate how their proportionate share is divided.  

Registered Accounts:  The two most common types of registered accounts are Registered Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA). RRSP and TFSA accounts can only be in one person’s name.  

However, with both of these types of accounts you are able to name a beneficiary. With couples in a first marriage and building equity together, your spouse is likely always named the beneficiary on registered accounts.   At the time of death, Canada Revenue Agency allows the owner of an RRSP (called an annuitant) to transfer their RRSP to their surviving spouse or common-law partner, on a tax-deferred basis. If there are financially dependent children because of physical or mental impairments, then it also may be possible to transfer the annuitant’s RRSP on a tax-deferred basis. Outside of these two situations, the annuitant’s RRSP is fully taxable in the year of death.

A person who has a spouse, and chooses to name an adult child the beneficiary should understand the tax consequences. If you name your spouse the beneficiary, your spouse receives 100 per cent of the value until the funds are pulled out gradually (taxed when taken out). If you name someone other than a spouse, the funds are deemed taxable in one large lump sum, so the marginal tax bracket of 45.8 per cent could easily be reached. Many people would cringe if they could see the amount of tax paid to CRA from RRSP accounts resulting from a lack of planning.  

Although the TFSA has no immediate tax issues on death, there are still some benefits to naming your spouse or common-law partner the beneficiary.   As an example, let’s look at a blended family with Spouses C and D. Spouse C has $48,000 in a TFSA and Spouse D Has $52,000.

Spouse C has the option of naming the Estate the beneficiary, naming Spouse D the beneficiary, or naming another individual such as a child or children from a previous marriage. If Spouse C names the Estate the beneficiary, then the account would likely have to be probated to validate the Will. The Will would provide us direction as to who the beneficiary of the TFSA will be. If Spouse C named Spouse D the beneficiary, then we can roll over the entire $48,000 into Spouse D’s TFSA account (without using contribution room). After the roll over, Spouse D would have a TFSA valued at $100,000 – all of which is fully tax sheltered. The roll over can be done once we receive a copy of the death certificate – and no probate is required for the transfer of assets. The only time individuals are permitted to put more into their TFSA accounts, other than their standard annual limits and replenishing amounts withdrawn in an earlier year, is when their spouse or common–law partner passes away and they are named the beneficiary.

If Spouse C named the children from the first marriage the beneficiary, then Spouse D does not get the additional room and the children could receive the funds but would not be able to roll this amount into their own respective TFSA accounts without using their available room.  

While there are many solutions available for blended families, it is important to talk about these options and then document the plan.   Gathering all the information and creating a plan that both parties are content with can take some time. A plan should include all standard types of assets such as personal residence and vehicles, as well as liabilities. One of my most rewarding moments as a Portfolio Manager is assisting my clients with their plan. A plan ultimately provides peace of mind for clients in what is often viewed as a complex situation that was either too sensitive to talk about or simply not addressed.

Portfolio manager can act for clients more quickly than traditional adviser

Over the years, I have had great discussions with people about financial decision-making. It is tough for most people to make decisions on something they don’t feel informed about. 

Even when you are informed, investment decisions can be challenging.

When you work with a financial advisor, you have another person to discuss your options with. In the traditional approach, an advisor will present you with some investment recommendations or options.  You still have to make a decision with respect to either confirming the recommendation and saying “yes” or “no,” or choosing among the options presented. As an example, an advisor may give you low-, medium-, and high-risk options for new purchases. An advisor should provide recommendations that are suitable to your investment objectives and risk tolerance.

Another option for clients have is to have a managed account, sometimes referred to as a discretionary account.  With this type of account, clients do not have to make decisions. The challenge is that very few financial advisors have the appropriate licence to even offer this option.   To offer it, advisors need to have have either the Associate Portfolio Manager or Portfolio Manager title.

When setting up the managed accounts, one of the required documents is an Investment Policy Statement (IPS). The IPS outlines the parameters in which the Portfolio Manager can use his or her discretion. As an example, you could have in the IPS that you wish to have a minimum of 40 per cent in fixed income, such as bonds and GICs.

Portfolio Managers are held to a higher duty of care, often referred to as a fiduciary responsibility. Portfolio Managers have to spend a significant time to obtain an understanding of your specific needs and risk tolerance. These discussions should be consistent with how the IPS is set up. Any time you have a material change in your circumstances then the IPS should be updated. At least every two years, if not more frequently, the IPS should be reviewed.

The nice part of having a managed account with an up to date IPS is that your advisor is able to make the decisions on your behalf. You can be free to work hard and earn income without having to commit time to researching investments. You can spend time travelling and doing the activities you enjoy. Many of my clients are intelligent people who are fully capable of doing the investments themselves but see the value in paying a small fee. The fee is tax deductible for non-registered accounts and all administrative matters for taxation, etc. are taken care of. A good advisor adds significantly more value than the fees they charge. This is especially true if you value your time.

Many aging couples have one additional factor to consider. In many cases one person has made all the financial decisions for the household. If that person passes away first, it is often a very stressful burden that you are passing onto the surviving spouse. I’ve had couples come in to meet me primarily as a contingency plan. The one spouse that is independently handling the finances should provide the surviving spouse some direction of who to go see in the event of incapacity or death. In my opinion, the contingency plan should involve a portfolio manager that can use his or her discretion to make financial decisions.

In years past it was easier to deal with aging clients. Clients could simply put funds entirely in bonds and GICs and obtain a sufficient income flow. With near historic low interest rates, this income flow has largely dried up for seniors. When investors talk about income today, higher income options exist with many blue chip equities. Of course, dividend income is more tax efficient than interest income as well. A portfolio manager can add significant value for clients that are aging and require investments outside of GICs.

Try picturing a traditional financial advisor with a few hundred clients. A traditional financial advisor has to phone and verbally confirm each trade before it can be entered. The markets in British Columbia open at 6:30 AM and close at 1:00 PM. An advisor books meetings with clients often weeks in advance. On Tuesday morning an advisor wakes up and some bad news comes out about a stock that all your clients own. That same advisor has 5 meetings in the morning and has only a few small openings to make calls that day. It can take days for an advisor to phone all clients assuming they are all home and answer the phone and have time to talk.

A Portfolio Manager who can use his or her discretion can make one block trade (the sum of all of his clients’ shares in a company) and exit the position in seconds.

Sometimes making quick decisions in the financial markets to take advantage of opportunities is necessary. Hands down, a Portfolio Manager can react quicker than a traditional advisor who has to confirm each trade verbally with each client.