If you’re over 65, a GIC alternative

Individual investors who have money invested in term deposits or Guaranteed Investment Certificates through a bank or credit union should also explore insurance contracts often referred to as Guaranteed Interest Annuities, or GIAs.

First off, answer the following questions:

  • What are the fees to sell my investments if I were to pass away before they mature?
  • Are my investments subject to probate fees?
  • If I were to pass away, how quickly could my beneficiaries receive these funds?  4)  What is the best way to structure my affairs to reduce estate costs?
  • Does the interest income I earn qualify for the pension income amount?
  • Am I able to split the interest income with my spouse?
  • Am I able to name a beneficiary for my non-registered term deposit or GICs?

By answering the above questions you will better understand why we feel there is a good alternative for some investors aged 65 and older.  Insurance products have benefits, especially when it comes to estate planning.  Insurance is useful to provide risk management, tax benefits, creditor protection, and the ability to name specific beneficiaries (even for non-registered accounts).  Probate fees may be avoided by naming beneficiaries as opposed to your estate.

Insurance companies offer very similar products to Guaranteed Investments Certificate; but come with some added benefits.  Collectively these products are often referred in the industry as Guaranteed Interest Annuity but each insurance company has a specific name for their products – Manulife’s are Guaranteed Interest Contract; Standard Life calls them Term Funds; and Canada Life has Guaranteed Interest Terms.

GIAs have benefits that term deposits and GICs do not offer and we will illustrate this comparison using Helen Stevenson, a woman who has been widowed.

Helen has a net worth of approximately $1 million split between her personal residence ($600,000) and non-registered bank GIC monthly pay portfolio ($400,000).   Helen is in her mid eighties and came to see us to prepare an estate plan.  She is in the process of selling her home and moving into an assisted living home.   In our estate plan for Helen she was surprised to learn that if she were to pass away today that her entire estate would be subject to probate fees.  We estimate probate fees alone to be approximately $14,000 as all investments, including personal residence, are currently flowing into her estate and subject to a fee of 1.4 per cent.     

Cost Savings:  GIAs are able to bypass the estate.  This will be a considerable cost savings for Helen through reduced fees for executor, probate, legal, and accounting, as well as other costs associated with a typical estate.  By converting her GICs to GIAs she would save $5,600 in probate alone; this does not include other possible savings.

Naming a Beneficiary:  The ability to designate a beneficiary allows you to control who receives the proceeds of your investments.  There is no fee to change beneficiaries, and this process is much easier than changing your Will.  This is especially important for investors who own term deposits and GICs in an individual non-registered account. Helen established four different GIA contracts with different insurance companies, each for $100,000.  The first contract has her four children named as beneficiary, the second contract names her eight grandchildren, the third contract names four friends, and the final contract names four charities.  Helen will live off of the monthly income during her lifetime.  When she passes away, the proceeds from the contract are paid directly to each named beneficiary.  Helen can easily update the beneficiary selection to the contracts with no cost.

Redemption:  There is no cash surrender charges at death for GIA contracts.  Your named beneficiary will receive the original deposited amount plus any accumulated interest.  Proceeds are paid out directly to the beneficiary with minimal delay.

Privacy:  Proceeds distributed from insurance products to named beneficiaries not only bypass probate but also avoid public record.  Every family situation is unique.  Often at times a solution to a complex situation is an insurance product that bypasses the estate and public record.  This is particularly important these days with complicated extended or blended family situations.  Creditor protection is also a benefit of insurance contracts available in most provinces across Canada.

Converting Interest Income to Pension Income:  Interest income earned from GICs is reported as interest income in Box 13 of a T5 slip.  Income reported in this box is not a qualifying source for the pension credit or pension splitting.  GIAs are subject to special rules under the Canadian Income Tax Act (accrued income–annuities reported in box 19 of a T5 slip).  Income reported in box 19 may provide benefits if you are 65 or older, especially if you are married or do not earn other qualifying pension income.  The amounts reported in box 19 qualify as pension income for investors who are 65 or older.  This is important as it enables individuals to claim the pension income amount (if not already claimed).  The pension income amount effectively allows investors to exempt up to $2,000 of eligible income each year.  Note that couples can each take advantage of this.

Pension Splitting:  An additional benefit of GIAs is the ability for couples eligible for the pension income amount to also split the income with their spouse.  This can be done without the concern of the Canada Revenue Agency applying the attribution rules of one spouse in the household earned the base capital earning the income).   The attribution rules are complex but effectively prevent inappropriate income splitting.

Flexibility and Protection:  You may choose between different payment options such as monthly, quarterly, semi-annually, or annually.  You may also choose from different issuers and maturity dates with a wide selection of terms that fit you.  GIAs can typically be purchased to a maximum age of 100.  GICs have CDIC coverage for up to five years.  GIA contracts do not have a time limitation for coverage through Assuris (see www.assuris.com for further details).

Insurance companies have features relating to their GIA product that may be different from the general information above.  Not all investment advisors have the required license to sell GIAs.  When we are selling life insurance products we are acting as Life Underwriters.

Prior to acting on information in our columns we recommend you obtain professional advice to determine if GIAs may be suitable in your estate plan.

 

Are you prepared to be an executor?

If you are asked to be an executor for a friend or family member you should gain an complete understanding of your fiduciary duties.    Being an executor has a broad range of responsibilities, including funeral arrangements, financial decisions, income tax returns, and satisfying creditors.

In this column we will focus on investments.

Let’s use as an example, the widowed Mary Wilson, who named her eldest son, John, as her executor.  Mary has four children and her last will states that her estate is to be divided equally amongst her children.

We receive a phone call from John notifying us that his mother has passed away.  We immediately create a new account and transfer all the investments “in-kind” to the Estate of Mary Wilson.

John comes in for a meeting and he asks us our opinion regarding the investments in the estate.  Some of the investments are considered medium and high risk.  John feels that the market will be positive over the next several months.  But his siblings are already disagreeing with how the money should be invested.

Here are some key points to consider regarding the investments of an estate:

  • It is crucial that you review the terms of Mary’s will carefully to determine the executor’s investment powers, and what specific powers you have as executor to retain assets and reinvest.
  • Obtain a list of all investments and which financial institutions they are held at, including type of account.  Make a note of all contact names, such as investment advisors and associates usually listed on investment statements.
  • Notify all financial institutions as soon as possible after the date of death.  At the same time, you should consider making instructions that no further trades are to be done if the accounts are discretionary.  Request a schedule of all investment maturity dates of fixed income and obtain an understanding of the associated costs if you were to sell any investments.
  • Make a note of all investments that are not held at an investment firm directly, including physical share certificates.   Anyone who has had to change the name on a share certificate will know the work involved and the associated costs.  Clearly make a note of all old defunct security statements.  If in doubt you may bring the certificates into your investment advisor to do a search.  We encourage everyone holding physical share certificates to deposit them into a financial institution to reduce costs to your estate and avoid passing on unnecessary work to your executor.
  • An executor has the responsibility, not only for making investment decisions relating to all accounts, timing of distributions, and even the financial institution where the investments are held at, but also for insuring and safeguarding other assets, such as real estate, vehicles, personal effects and caring for animals owned by the deceased.   All creditors, including Canada Revenue Agency, must be considered.  We recommend an executor consolidate multiple investments accounts, if not done so already, for simplicity and to be able to work with one advisor.   It will also be easier to perform distribution calculations.
  • One of the toughest decisions you will have to make is whether to hold, sell, or buy specific investments, especially if some of those are medium or high risk equities.  If the executor is a beneficiary, along with others, it is important to avoid conflicts as well as act as a fiduciary.  It is possible that some of the beneficiaries would rather have the investments in cash equivalents or short term fixed income, rather than in equity.  In many cases it makes sense to liquidate the equity investments and move the proceeds into cash equivalents.  This may be especially important if one of the beneficiaries objects to taking on risk.
  • Create a consolidated list of all assets at the time of death, with market values as of the market close the day before death.  This information, along with the adjusted cost base, will be used to calculate realized gains (loss) on the deceased’s final tax returns.
  • Obtain a list of accrued interest and dividends declared but not paid as of the date of death.  Depending on the amount, it may make sense to file a rights and things tax return to take advantage of another set of basic exemptions.
  • Depending on how many financial institutions you need to contact it may be best to request several notarized copies of the death certificate and will.  Depending on the size of the account and how the account was set up, you may require letters probate.  As well, obtain an understanding of what documents are required by each financial institution
  • Some investments may be designated to pass to beneficiaries outside of the estate.  This is common for insurance products, registered accounts, and joint with right of survivorship accounts.  These investments essentially bypass the estate.  Hopefully the deceased’s will is consistent with this.
  • If an executor is negligent in discharging his or her duties, s/he can be held liable.  It is completely allowable, and indeed advisable, for an executor to seek professional help.

You always have the right to decline being an Executor.  If you do not want to accept this responsibility, you should renounce as Executor immediately.  You may seek the advice of a corporate executor and/or trustee at any time.

Do you need a Representation Agreement?

Many seniors have financial and medical concerns relating to their care as they become older.  Being capable of rational conduct and managing your own affairs is the cornerstone of estate planning and why we encourage people to plan early.  If someone becomes incapacitated, they lack the ability to sign legal documents.  This leads us to compare two documents, a living will and representation agreement.

Living Will

Many people still have a document often referred to as a living will, which is not legally enforceable in British Columbia.  This document is an expression of wishes concerning your medical care.  In the absence of no other planning documents, it may assist family and medical professionals in making decisions at a hospital.  A living will is usually limited to end of life scenarios, such as whether or not you would like to be put on life support to extend your life.

Although a living Will is not legally enforceable it still had some distinct advantages-  mainly that it expresses your wishes.  If this document was provided to a spouse or children then your intentions would be more clear.  In many cases children have to make decisions with respect to their parents’ medical care.  The living will – typically only one page and relatively simple to understand and inexpensive to prepare – should have reduced the disagreements that families may have encountered with respect to medical care.  But a living will does not name a specific person to make medical decisions on your behalf.

You may recall the American woman named Terri Schiavo who suffered brain damage in 1990 when she was only 26 years old and became dependant on a feeding tube.  Her husband wished to remove her feeding tube; her parents opposed this.  This dispute was highly publicized involving four years of family conflict in the courts.  Even the U.S. president became involved.

Representation Agreement

In British Columbia, a legal document that covers incapacitation is a representation agreement, and is quite different from a living will.  First of all it is used to appoint another person to act on your behalf concerning health care matters.  If you do not have a representation agreement, then provincial legislation provides a prioritized list of who may act as your substitute decision maker – most commonly, a spouse or children.  If you want to be specific about whom you are appointing and what your wishes are, consider a representation agreement.  This is especially important if you would like a person making these decisions who is not on the prioritized list.  Others may feel that having a representation agreement could eliminate the need for loved ones to make difficult decisions.  This document may also be effective for planning if you feel there could be some family conflict as to your health care.  Most importantly, this document can clearly state your desires with respect to your health care and end of life wishes.

We encourage people to understand what a representation agreement is and how it can be used for estate planning.  A representation agreement is a fairly lengthy document that deals with more than just whether you would like to extend life using life support.

The next time you are updating your will or power of attorney we encourage you to bring the topic up with the professionals you work with.  Obtain information regarding the underlying costs and discuss who would be suitable to make health care decisions on your behalf.  The person you appoint may or may not be the same person as your power of attorney.  Remember that it is wise to appoint an alternate healthcare representative in the event your first representative is unable to act.

A comprehensive estate plan has at least three legal documents:  will, power of attorney, and representation agreement.  The representation agreement may reduce family conflict, especially in cases such as Terri Schiavo.  This case also highlights that life events may impact both younger and older people.  We encourage you to seek legal advice prior to acting on any information within our column.

The top 10 mistakes made with RRSPs

A Registered Retirement Savings Plan is not for everyone, but for those who are considering RRSPs or have them, it pays to head off some of the most  common mistakes.

Prior to setting up an RRSP, determine whether you are likely to make one of the following 10 common mistakes:

1.  Often people rush to make a last-minute RRSP contribution and give little thought to the underlying investment.  Spend a few minutes to remember how long it took you to earn that money and slow the selection process down.  Solution:  If you are in a rush we recommend that you consider making contributions to your RRSP in cash and look at all your available investment options prior to making an investment decision.

2.  Over contributing to your RRSP may result in T1-OVP penalties and interest.  This past year we noted a campaign by Canada Revenue Agency that resulted in several letters being sent to individuals who have made over-contributions.  Solution:  Before you contribute to your RRSP, be certain of your limit.

3.  Making contributions to an RRSP and pulling the money out before retirement.  Often this results in more tax being paid than what you initially saved as a deduction.  The shorter the time period between the contribution and withdrawal, the less likely you are to have received tax deferment of income.  Contributing funds and withdrawing the funds uses up your contribution room, which is a big negative.  Solution:   Avoid contributing to an RRSP unless you can commit the funds until retirement.

4.  People who have an RRSP account should understand that all income generated in the account is tax deferred.  This is by far the biggest advantage of an RRSP.  Over time, this should save you much more in taxes than the initial deduction for the contribution.  People who have non-registered investments understand that income generated in these accounts is taxable.  Pulling funds out of an RRSP prior to age 72 is generally the wrong decision when non-registered funds are available.  There are some exceptions, such as shortened life expectancy.  Solution:  Using the capital within your non-registered investments first will reduce your current annual income and defer taxes further.

5.  Some people have multiple RRSP accounts held at different financial institutions.  They may have $10,000 at institution A from a 2004 RRSP contribution, $6,000 at RRSP institution B from a 2005 RRSP contribution, and $8,000 at institution C from a 2006 RRSP contribution.  This may result in additional RRSP fees being charged to you and result in you paying more fees than you need to pay.  More importantly, your investments become more difficult to manage.  Solution:  Consolidate your RRSP accounts at one institution for better management, to reduce fees, and to open up more investment options.

6.  Underestimating life expectancy is also a common mistake.  All too often people in their 60’s begin pulling money out of their RRSP solely to avoid paying a large tax bill if they were to pass away.  We encourage people to plan for the most likely outcome rather than the worst-case scenario.  Solution:  Avoid early withdrawals and ensure that you take full advantage of the deferral benefits of your RRSP.

7.  When you open an RRSP account you must make a beneficiary selection.  If you are married or living common law then the natural choice is your spouse for the tax-free rollover provisions on the first passing.  Often widows will still have their deceased spouses named as beneficiary.  We have seen cases where people have remarried and have their ex-spouse still listed as a beneficiary.  In some cases naming your estate may be the best option.  Solution:  Speak with your advisor and ensure you have the correct beneficiary on your RRSP account.

8.  We encourage people to give careful thought to the type of investments they hold within their RRSP and outside of their RRSP.  Good structure decisions are important and are easier when all of your investments are at one institution.  To illustrate this we will use an individual that has equity investments within their RRSP that may generate dividend income and future capital gains (all income within an RRSP is treated as regular income for withdrawals).  Let’s also assume that this same individual has GICs and term deposits at the bank that are not within their RRSP.  Although this individual does not require income, he is being taxed every year on the income.  Solution:  Have interest generating investments within your RRSP along with equities that you may trade from time to time.  Outside your RRSP consider investments that are long term holds that generate primarily capital gains.  For non-registered accounts, Canadians are not taxed on unrealized gains until the investment is sold.  If you purchased a basket of blue chip equities outside of your RRSP and held them for 20 years you would not be taxed on the gain until the investment is sold.  In effect you have created two types of tax deferred plans.

9.  People who do not have pension income (not including CPP and OAS) should ensure that they are taking all planning components into consideration before requesting early RRSP withdrawals.  Withdrawals from an RRSP are not eligible for the pension income amount and they are not eligible for income splitting.  Solution:  If you require funds then we encourage you to wait until at least age 65 and then convert funds to a RRIF before withdrawal.  RRIF income received at age 65 or older may be eligible to be split and qualify for the pension income tax credit ($2,000 each per year).

10.  One of the biggest mistakes we see is failure to make an RRSP contribution.  Individuals who are making large salaries without a pension need to take advantage of their RRSP contribution room.  Not having the discipline to set aside funds for retirement will result in making sacrifices at retirement.  Solution:  Consider making an RRSP contribution.

Make your funeral plans now

It’s going to save you and your loved ones time and money in the long run

Planning your own funeral service may not be on your to-do list.  But it should be a chief component to your comprehensive estate plan.

Little planning is usually done – leaving family and loved ones scrambling to arrange a funeral service at a difficult time.  Spending a little time now to plan may make decisions easier for your family during a stressful time and ensure your wishes are respected.

Some people have wills that may provide direction with respect to funeral arrangements, but many wills provide no direction.  Regardless of whether arrangements are documented in your will, we recommend that instructions regarding funeral arrangements be left with your executor.

Keeping your funeral arrangements within your will, secured in a safety deposit box, may seem like a good idea.  What happens if a death occurs over a long weekend or during the holiday season when banks, trust companies and law firms are generally closed?  It may be difficult in some situations for your executor to obtain a copy of the will prior to making decisions with respect to your funeral.  For those people who have put funeral instructions in their will, you should ensure that your executor has a copy of your funeral plans in order to expedite your wishes.

 

Prearranging your funeral service means that you have made arrangements for your own funeral ahead of time.  This does not necessarily mean that the services have been paid in advance.   For $20 you can become a member of the Memorial Society of BC and register your funeral arrangements.  For further details on this non-profit society you can view their website (www.memorialsocietybc.org).  The society provides a number of services that are focused on planning.   Once you are a member, there is no cost to make changes to your plan. At time of death, a $35 administration fee is collected by the funeral provider on behalf of the society.  If you have registered with the society, we encourage you to give a copy of the “arrangement form” to your executor.

Planning your funeral will ensure that your wishes are respected.  Family members will not have to make difficult decisions that may cause disputes.  Planning may assist you and your family in keeping the costs reasonable.

It is important to differentiate between prearranging and prepaying funeral services.  Prepaid funeral services means the services are paid in advance either with a funeral home or an insurance company to provide funeral services at the time of death.

First, make a few phone calls.  Two good resources that are available are the Business Practices and Consumer Protection Authority and Funeral Service Association of British Columbia.

You can determine whether a funeral home is licensed and in good standing with the Business Practices and Consumer Protection Authority (BPCPA).  A listing of all funeral providers, cemeteries and crematoriums can be found at www.bpcpa.ca.  The BPCPA can be contacted directly to ensure there are no licensing suspensions or outstanding complaints at 1-888-564-9963

Planning allows you an opportunity to see if the funeral home is a member in good standing with the Funeral Service Association of British Columbia (FSABC).  A listing of members in good standing can be found at www.bcfunerals.com or by contacting FSABC directly at 1-800-665-3899.  Not all funeral home are members of FSABC.

One of the first steps may be to obtain a list of services. All funeral providers, cemeteries, and crematoriums are required by law to provide an itemized price list.  By paying today you can control and calculate costs.  Prepayments may be done through a trust fund or funeral insurance certificate.

We recently asked FSABC what happens if a person prepays funeral costs for a funeral home, but moves to another city?  Generally, pre-arranged funerals are transferable.  But depending on the payment – either a trust fund for funeral insurance certificate, as well as the policies of the individual funeral home – there could be some limitations.

BPCPA regulations indicate that trust accounts that are transferred between funeral homes may keep up to 20 per cent of the trust account for selling and administrative costs.   Some funeral homes keep the full 20 per cent while others choose to release all of the funds.  Regarding insurance funded funeral plans, usually all of the funds together with any interest are transferred to the new funeral home by changing the beneficiary of the certificate.  If an insurance funded funeral plan is cancelled then cash surrender values would apply.

People in their late 60s or 70s may prepay funeral costs through either a trust fund or funeral insurance certificate.   People in their 80s and 90s typically prepay though a trust agreement.  Trust agreements are also the likely option for people with terminal illnesses that are uninsurable.

A Pollara Report in 2004 highlighted that approximately 70 per cent of Canadians surveyed think that pre-planning is a good idea, although only about 20 per cent of the population have actually made some advance funeral arrangements.

If you were to die today

The government stands to inherit nearly half of your investments, so deferring tax liability is essential. 

Throughout our working lives we have reduced our annual tax bill by making 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 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 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 43.7 per cent.  An individual that has a $500,000 registered account may have to pay $218,500 of that amount to Canada Revenue Agency in taxes.  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 nearly 44 per cent of your retirement savings to CRA is something investors should strive to avoid.  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 designate 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 estate and reduce probate costs.  You should discuss all estate settlement issues with your legal advisors and financial institution to obtain a complete understanding.

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 is able to receive an income-producing annuity that pays the full amount until the child is 18.  A child of any age that is financially dependent on you is able to 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.  If the child is dependent on you by reason of physical or mental infirmity then the registered account may be rolled over tax-free into the disabled child’s own registered account.  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 transferred to a disabled child.

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 enhanced pension tax credit increased from $1,000 to $2,000 in the last federal budget.  If you are 65 or older, then certain withdrawals from registered accounts may qualify for this credit.  For couples this credit may be claimed twice – effectively allowing some couples to withdraw up to $4,000 per year from their registered accounts tax-free.
  • 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 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.

Individuals should ask their professional advisor to estimate 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.

 

Picking power of attorney key to financial peace of mind

About a year ago we wrote about the importance of maintaining an up-to-date will.  Just as important as a will for many people is establishing the appropriate power of attorney document.  Establishing these two important facets in your life ensure your estate goals are accomplished.

A power of attorney provides a person (referred to as an “attorney”) the power to make decisions on your behalf while you are alive.  Power of attorney documents range from those that provide limited or specific powers to those with a more liberal range of powers.  Obtaining an understanding of the different types of power of attorney documents is the first step.  We recommend that people speak with their lawyer regarding a legal power of attorney when they are updating their will, if not sooner.  The remainder of this column deals specifically with power of attorney options at a financial institution as opposed to a legal power of attorney document that a lawyer would draw up.

Why a power of attorney?

Accidents may occur unexpectedly.  Those fortunate enough to avoid health problems at a younger age may become mentally and/or physically incapacitated later in life.  Do you know what would happen to you and your family if you became incapacitated?  Would you prefer the Public Trustee manage your affairs or a pre-determined individual you select?  Planning ahead and selecting a power of attorney will ensure important decisions will continue to be made without unnecessary disruption.

Financial institutions

Many financial institutions provide individuals the ability to designate a power of attorney on their account.  This specific type of power of attorney would not cover other financial affairs of the individual and should not be confused with a legal power of attorney.   When establishing this type of power of attorney document at financial institutions people still need to make the decision between “limited” or “full.”  A limited power of attorney provides the attorney the right to make buy and sell decisions but not the right to withdraw funds from the investment accounts.  A full power of attorney provides the ability to make all types of decisions, including withdrawal of funds.

Don’t wait

Provided people know someone that they are comfortable naming as their attorney, we recommend establishing either limited or full power of attorney at the time the investment account is set up.  This is often the easiest time for you to set up the attorney and there is no doubt as to your wishes.  If you have an investment account and an attorney is not currently named then it is possible to add one or more attorneys.  When you add the attorney at the account opening stage or later the financial institution requires forms to be signed and witnessed.  Along with these forms, most financial institutions now require additional information about your attorney.  The good news is that this is free to set up.  A word of caution for those individuals who choose to wait – it is too late after an owner becomes incapacitated and may or may not be possible if the owner’s mental abilities are questioned.   It is also important to highlight that an individual may cancel a power of attorney at any time provided clear written instructions are provided.

Other benefits

Most of us may feel that the likelihood of becoming incapacitated in the near future is remote.  However, many people draw up a financial power of attorney document for several reasons, including:

  • People who travel or work in areas where communication is an issue.
  • Individuals whose lifestyle is not conducive to timely contact.
  • Assigning an individual who is more familiar with financial matters.

If an account owner would like us to speak with their spouse or another individual regarding their investment accounts then they must have the appropriate power of attorney documentation completed.

Who to name?

It is important to remember that, although the individual is referred to as an “attorney,” it is not necessary that the individual be a lawyer.  Common choices amongst individuals with children are to name a spouse or an adult child.  For single or widowed individuals naming an individual you fully trust is a logical first choice.  It is important the individual named understands their powers and are able and willing to make appropriate decisions regarding the accounts if and when required.

Seeking legal advice

Although it is relatively easy to establish a power of attorney at a financial institution and the cost is usually free, we encourage individuals to carefully consider their choice of attorney.  We also feel these types of decisions are best made in conjunction with discussions with your professional advisors.  Your lawyer will be able to provide you a complete understanding of the limitations of a financial power of attorney and the benefits of drawing up a legal power of attorney.  In many situations the power of attorney document is as important as a will.

It is important to note that power of attorney documents cease at death at which point your will takes over.  To ensure your estate goals are met it is important to ensure that you have two properly executed legal documents – a will and power of attorney.

Gifting assets early sensible for some

When it comes to estate planning every individual is different.  Younger people tend to dedicate little or no time to estate planning, yet as individuals age, they typically give this area of their finances more thought.  Estate plans may differ considerably.  Some plans focus on maximizing an estate, while others plan to leave little to none to beneficiaries.

Recently we have seen generous charitable donations from Bill Gates and Warren Buffet.  A significant amount of their assets were donated while they are alive.  To them it made sense to gift a portion of their assets now.  They will be able to provide more guidance in controlling how the foundation puts the gifted assets to use.

Does it make sense for us non-billionaires to gift assets early?  It may make sense for certain individuals to consider gifting assets prior to their death.  The following are ten items to discuss with your advisor prior to gifting assets:

1.  Satisfaction:  Similar to Bill and Warren, you will be able to see how your hard work and wealth will benefit others.  What could also happen though is the recipient of the gift may be non-appreciative and careless.  If this is a possible or likely outcome we recommend spending time educating the beneficiary prior to them receiving the gift.  Another option may be to gift a smaller amount now while you are alive and monitoring how the beneficiaries are able to handle the gift.

2.  Privacy:  Not all gifts are as public as those recently in the newspaper.  When gifts are made to certain family and/or friends and not others it is easy to see how jealously could erupt.  Making an anonymous gift is easier while alive.  Many individuals may be surprised to know that if their will is probated then it is open to the public under Supreme Court Rule 64.  Individuals may, on payment of the proper fees to the registry, be able to view a copy of your probate file.  Beneficiaries, executors, and family members are able to view your probated file at no cost.  Those individuals that are not a party to the will may view the probated file for a charge, currently $8.00 and make copies of the documents for a charge, currently $1.00 per page.

3. Contest:  Assets that are distributed through your estate in accordance with your will may be contested.  Do you feel that the beneficiaries may contest your will or how you have chosen to distribute your assets?  If the answer is yes, then the simplest solution to avoid that outcome is to gift assets now.  If you no longer own the asset in dispute, then there is nothing to contest.

4. Probate fees: Probate fees may be reduced considerably by gifting assets prior to your death.  Last week we mentioned the pros and cons to establishing joint bank and investment accounts with other individuals.  We reviewed the associated risks and the estate planning benefits (reduction in probate and other administration fees).   The same essentially applies to amounts which are gifted; however, a gift is permanent and control is lost.

5. Administration Fees:  Too much emphasis is often placed on reducing probate fees.  The fee is not so onerous that one would prematurely gift assets just to avoid paying what is generally less than 1.4 per cent of the assets being probated.  Individuals should factor in other savings such as accounting, legal, and other fees.  The more complex your estate, the more fees that will generally apply.  In British Columbia, executors are also entitled to a fee within certain limits.

6. Simplicity:  Once we had a co-worker who mentioned that she never left home without cleaning her house.  She wanted her place neat and tidy in the event that somebody ever needed to enter the house without her (in the event of an emergency or death).  Having your affairs in order can provide you peace of mind.

7. Taxes:  Prior to gifting assets it is important to understand the tax consequence, if any.  Understanding the attribution rules and when they apply is important.  Gifts to charities are often enhanced with a little planning.  Significant gifts prior to your death will allow more flexibility to take advantage of tax credits.  Gifting assets now may assist in reducing your future income taxes.

8. Income Splitting:  Gifting assets is one method of income splitting worth noting for families.   Understanding the attribution rules is important.   The attribution rules generally apply when gifting to immediate family members.  Understanding these rules and the different types of income are important especially as they relate to minor and adult children.

9. Avoid confusion:  When it comes to non-financial personal possessions it makes sense to consider how those items will be distributed.  Many individuals include an itemized list that is attached to their will.  Gifting these assets while you are alive is one way to ensure they find their new home.  We have all heard stories of families who fought over every single asset, regardless of its size or value.

10. Losing Control:  After assets have been gifted, control has been lost.  For some this may be a good thing as it will allow them to concentrate on more immediate concerns and may generate greater peace of mind.  Another possible benefit of gifting assets may include an individual receiving more social benefits because of their reduced income.  Gifting assets for some may result in becoming financially dependent on others, such as your family or social assistance.  It can be a strange dilemma when looking at certain government benefits – often it pays to be poor.

We recommend that those individuals that are considering gifting some of their assets first meet with their professional advisor to understand the advantages and disadvantages.

Joint accounts help bypass probate fees

Investment and bank accounts owned by more than one person are often referred to as “joint accounts.”  They allow two or more people to have authority over the transactions and management of a single account including withdrawals.

Individuals considering transferring assets into joint names should first obtain professional advice.  There are some potential benefits for transferring accounts into joint ownership in certain situations.  One potential benefit is the ability to bypass probate fees.

What is Probate?

Probate is an administrative procedure which involves the court validating a deceased’s will and confirming the appointment of an executor.   It is important to note that only those assets that are distributed through the will are subject to probate.  Joint accounts generally bypass the will as the ownership of the account transfers to the surviving joint individual(s).

Probate Fees

Every province has a different fee schedule relating to probate.  In British Columbia, the fee schedule is as follows:

  • $0 for estates under $10,000
  • $208 for estates between $10,001 and $25,000
  • $6 for every $1,000 or part thereof for which the estate value exceeds $25,000 but is not more than $50,000
  • $14 for every $1,000 or part thereof in excess of $50,000

The fee is essentially $358 for a $50,000 estate and greater amounts are charged 1.4 per cent.   If the gross value of an estate is $200,000 then the probate fees would be calculated as follows:

First $50,000                       $     358
$150,000 x 1.4 per cent =   2,100
 Total                                        $  2,458

The following highlights two scenarios where a joint account may be considered.  These illustrations do not discuss the potential tax consequences.

Joint With Spouse

Mr. and Mrs. Wilson have been married for 28 years and each have non-registered investment accounts that are solely in their own names.  Neither of them had been married before or had any children.  Their respective wills name each other the beneficiary of their assets.  During the estate planning process and review of their wills we explained to them that if either of them were to pass away that the non-registered account of the deceased may be subject to probate fees.

We then explained a type of account referred to as “Joint with Right of Survivorship” often abbreviated on investment statements as JTWRS.   Both Mr. and Mrs. Wilson could establish JTWRS accounts while maintaining beneficial ownership of their investments for income tax reporting purposes.   One benefit for establishing JTWRS accounts for the Wilson family is that upon either of their deaths the surviving spouse will be the sole owner of the investment account.  As the account is already in the surviving spouse’s name it avoids probate.  Mr. and Mrs. Wilson also wanted each other to have trading authority on their respective accounts for convenience or in the event of their incapacitation.  The JTWRS would enable them to conduct investment transactions on either of their accounts as required.  In our opinion it is beneficial for both Mr. and Mrs. Wilson to establish JTWRS accounts.

Joint With Adult Child

Mr. Sharp has an investment account which is currently in his name.  He feels that he can reduce probate and administration fees by adding his only adult son as joint owner on his investment account.

Extra care should be taken before establishing a joint account with an adult child.  Prior to establishing a joint account it is important to gather information about Mr. Sharp and his son.  Mr. Sharp should consider both the potential advantages and disadvantages.  The following are some typical risks associated with joint investment accounts:

  • Relinquishing some control as the joint owner now has signing authority on the account and could abuse their authority
  • Exposure to lawsuits or creditor claims
  • Subject to division of matrimonial property

Employed in a risky profession Mr. Sharp’s son was also experiencing marital difficulties.  After careful consideration we concluded that the potential benefits did not outweigh the risks.  We also recommended that while not appropriate at the time it may make sense in the future or if circumstances change.

The above are two common scenarios highlighting joint accounts.  Individuals with more than one adult child should certainly seek professional advice before establishing joint accounts.  Listing all adult children joint on a bank or investment account opens the account to the associated risks noted above.  If you have more than one child and list only one of them jointly on an investment/bank account then this could lead to additional problems.

Recent court cases have dealt with these issues and should be considered essential reading for anyone considering a joint account.  These cases highlight the importance of documenting your intentions with respect to joint assets and the remainder of one’s estate.  We recommend that individuals meet with their professional advisors to understand the potential tax consequences and risks of putting assets in joint names.

Options to consider about securities certificates

Registering your investments

Investments and shares generally need to be registered in either the name of their beneficial owner or registered under the name of a nominee.  Most new investment accounts that are being opened today have the individual securities being registered in nominee name.

Registered In Client Name

More common in the past, investors had investments registered in their own name. Many investors today still have share certificates in their name either from recent transactions or holding certificates they acquired in the past.  Client requests to receive the physical share certificate are becoming less common.  Such requests generally result in an administration charge of approximately $35 per share certificate.  Holders of share certificates not only have to monitor the quality of their investments but now have the added responsibility of securing their investments as well.

Some investors may feel that holding the share certificate is more tangible.  Share certificates are generally decorated with intricate artwork which is why collectors of defunct stock certificates tend to hang on to them.  When investments are registered in client name the dividend and interest cheques are mailed directly to the registered owner. As an investor registering in client name, you have more to deal with in regards to the administration of holding, buying and selling the shares.

What has changed?

Life has become more complicated.  Capital markets have expanded.  Fortunately, computers have made the tasks of shareholder registry and transfers more efficient.  In addition, financial institutions provide a nominee service that also assists in expediting transactions.

Registered In Nominee Name

The majority of investors today are registering their securities in nominee name.  This essentially means that the securities in your investment account are not registered in your name but in the firm’s name or the name of another person or company holding the securities on your behalf.  The issuers of the securities may not know your identity (beneficial owner) as your account is in nominee name.  You may choose whether you object to or would rather not disclose your personal information as beneficial owner to the issuers of the securities.   In addition, securities law permits you to decide if you would like to receive security holder material such as annual reports and financial statements.  If you object to the disclosure of your personal information and still wish to receive security holder material there may be costs associated for the financial institution to send you this information.

Nominee accounts take the majority of the administration out of your hands.  Although your securities may be registered in the financial institution’s name as nominee, you maintain beneficial ownership.  The nominee generally may not act unless instructed by you.

The following are some of the benefits of registering your securities in nominee name:

  • Interest and dividends on your securities are paid into your investment account versus having cheques mailed to you for each security you own
  • Online access listing your investments
  • Monthly transaction histories and statements enable you to keep track of your investment and better monitor their value
  • Flexibility to sell a partial position or to transfer a security in-kind within investment accounts
  • You will receive consolidated tax slips for each non-registered investment account each year
  • Efficient management of cash flow with all incoming income deposited into your account; the ability to customize outgoing payments, most of which may be automated
  • Flexibility with respect to adding savings into the investment account
  • Efficient settlement occurring normally within three days if held in nominee name with minimal paperwork
  • Timely notification and advice with corporate actions and reorganizations such as rights issues, takeover offers, conversions of subscription rights, etc.
  • Positions held in nominee name through a financial institution help to create a more organized estate

10 Questions to Consider

Individuals with physical stock certificates should consider the following:

  1. What are the benefits for holding your individual share certificates in your name versus nominee name?
  2. What happens if your share certificates are lost or stolen?
  3. Do you know how to transfer your share certificates to another individual?
  4. Do you feel the executor of your estate will be able to find all of your share certificates?
  5. Do you have old share certificates that are defunct that you are still holding onto?
  6. Do you have share certificates that you are unsure of their value?
  7. Are you aware of the added administrative burden your executor may encounter by having share certificates registered in your name?
  8. Are you aware that transfer agents may charge fees to your estate even when proper documentation is provided?
  9. When do you plan to dispose of your shares?
  10. How did you plan to dispose of your shares?

The answers to the above questions may show investors that there are few reasons to hold investments in their own name.  You will find that the costs to your estate may be significant.  If the costs are not a concern then consider the longer delays and greater paperwork that you are essentially asking your executor to do for you.  Registering your investments in nominee name ensures completeness, ease of administration and less overall risk of something being overlooked.

Estate Planning Tip

A basic estate planning measure that we recommend for individuals with share certificates is to open an investment account and have them registered in nominee name.  This will ensure that your investments are fully accounted for and safeguarded.  At the same time you are reducing estate costs and saving the executor you have appointed a lot of paperwork.

The benefits of holding investments in nominee name are many, especially when it comes to estate planning.  For some, it may be more important to consider the consequences of not registering your securities in nominee name.  We recommend that if you have share certificates registered in your name that you meet with a financial advisor to determine if the certificates have value and if you should consider registering the securities in nominee name.