Ways to benefit heirs, not the taxman
These six wealth strategies can help maximize an inheritance, but most well-to-do Canadians first need to start planning
It is often assumed that wealthy Canadians have it all figured out when it comes to passing money from one generation to the next. After all, bank towers are filled with specialists who do nothing but figure out the best way to maximize the amount and keep it out of government hands.
A recent survey from RBC Wealth Management, however, found that most high-net-worth Canadians are “woefully unprepared” to transfer their inheritance, with fewer than one in four having an advanced plan in place.
“Far too many Canadians don’t take the time to actually put together that wealth transition plan from one generation to the next,” says Tony Maiorino, head of RBC Wealth Management Services in Toronto.
More than half of high-networth families intend to pass on all their wealth to their heirs, but they “are not doing a lot of preplanning,” he says.
Here are a few financial strategies that well-to-do Canadians should consider adopting.
Trusts are a key pillar of many estate plans. They allow the older generation to dictate how the money is passed on, to whom and when.
“A lot of people are setting up trusts for the purpose of postponing when the heirs are receiving money and graduating the release of money,” says Susan Latremoille, director of wealth management with the Latremoille Group at Richardson GMP in Toronto.
Trusts also avoid probate taxes, and, unlike a will, which becomes a public document upon death, they allow a family’s wealth to remain secret. They also help families prevent legal battles between heirs.
Even the most well-designed estate plan will likely result in taxes that can reduce the value of the estate upon death.
Covering large capital gains on the sale of investments or real estate can be done by taking out insurance policies, which then provide a sizable payout upon the death of the insured individual. Most importantly, the payout is tax-free to the beneficiaries.
“That is one thing that government hasn’t messed with: The proceeds of a life insurance policy are tax free and the buildup within a life insurance policy is tax sheltered,” explains Ms. Latremoille.
The government allows a onetime capital-gains exemption of a little more than $800,000 for small business owners when a business is sold.
But more substantial family businesses will likely face a sizable capital gains obligation upon the death of the owner and his or her spouse.
One way to minimize that future tax hit is to institute an estate freeze, “to basically freeze the business owner’s value in the business by restructuring the share ownership so that the future growth starts to accrue to the benefit of their children,” says John Budd, co-author of The Canadian Guide to Will and Estate Planning and a portfolio manager with Cumberland Private Wealth Management in Toronto.
Individual pension plan
Another potential benefit for incorporated business owners is the ability to create an individual pension plan. Not only does an IPP act as a “super RRSP,” providing a defined-benefit-type pension payout, the funds can be shared by other family members in the business.
The IPP “allows for the creation of a pool of assets that can be used by different generations where you can have a surplus in that pool be transitioned to another annuitant in that plan,” says Mr. Maiorino.
Joint ownership of assets
This strategy makes sense at first blush but may carry some longterm negatives depending on family dynamics, warns Ms. Latremoille.
Selling part of an asset, such as a family cottage, to a family member may still result in capital gains down the road and, more importantly, could result in family strife.
For example, say parents make the partial sale of a cherished family asset to one daughter. “By law, that daughter becomes the owner, and if she doesn’t like her siblings or feels greedy, she can say, ‘Tough luck, Mom left this to me through this joint ownership.’” .
Start with a will
Perhaps this should be at the start of any to-do list for wealthy Canadians, or even those with more modest means, but “you would be amazed at the number of people in Canada who do not have a will,” says Mr. Budd.
“Look at Prince, a multimillionaire who died without a will.
There is going to be a similar situation to Elvis Presley and other artists, where there is more money generated through royalties after they died than when they were living.”
Edited on 23 March 2017