Taking good care of the family’s future
CAREFUL CONSIDERATION IS CRITICAL TO ENSURING THE PROPER PLANNING FOR LEGACY TRANSFERS
Once a person has accumulated wealth, it’s not uncommon for them to start thinking about transferring portions of their legacies during their lifetime. The reasons for doing this are many, from helping out a family member to mitigating the impact of estate taxes.
But transferring a legacy can be challenging for those who don’t have their financial affairs in order. There are numerous issues to be addressed, including legal and tax considerations, not to mention the potential for strife within extended families.
Denis St-Pierre, tax partner with EPR Bathurst in New Brunswick, says when people start discussing transferring wealth during their lifetime, understanding the potential tax implications is especially important.
“When you pass on assets, everything becomes taxable at the time of transfer,” he says. Timing is critical in order to ensure the giver or the recipients aren’t facing burdensome capital gains or other tax liabilities.
He also advises people to consider the legal angles when transferring assets. “You can’t make presumptions about transfers. It’s all in how things are worded. Among other things, you have to understand which instruments supersede what in which province, because things such as common-law designations can vary from province to province. You should also carefully document your intentions to avoid potential challenges.”
When starting the wealth transfer process, there are four areas to consider, says Robin Goodman, vicepresident, insurance, trust and estate planning for RBC Wealth Management.
They are: timing of the gift, the amount of control you want before or after you make it, the tax implications and the number of generations you wish to plan for.
“As far as timing and taxes are concerned, most people want to do the transfer in a way that allows them to defer taxes for as long as possible,” she says. For someone wishing to retain financial control, some form of trust structure is one option.
Another effective vehicle that enables financial
YOU CAN’T MAKE PRESUMPTIONS ABOUT [WEALTH] TRANSFERS
control while minimizing taxes is life insurance, she explains. “Many people are unaware of the flexibility available through life insurance vehicles. They think it’s only used as a gift at death. The right type of policy will not only allow you to pass wealth on to the next generation in a taxefficient way, it can also be used to generate tax-sheltered growth [during your lifetime]. That mitigates two taxes you typically have to worry about.”
“You can even use insurance to transfer wealth through generations. I’ve seen some parents structure insurance to benefit up to three generations to come,” Goodman says.
There are two particular drivers that play a role in legacy transfer planning when it comes to insurance: protection and investment, says Joel Cuperfain, vice-president and estate planning specialist for RBC Wealth Management. “The choice depends on what you’re looking for and your stage in life.”
Younger people who have not had a chance to build significant wealth, for example, tend to focus on protection through estate creation, he says. “Insurance will create instant liquidity in the event of the passing of an individual. In that case, the policy provides a vehicle to give the beneficiary a tax-free benefit.”
As an investment vehicle, universal or whole life policies are an effective way to provide stable returns, Cuperfain says. “Universal life gives control over investments to the policy holder. Whole life investments are managed by the insurance companies. Both have proven to deliver very good returns for years. I would advise many clients to add this type of insurance product as a portion of their investment portfolio because it’s a tax-sheltered vehicle.”
Goodman also advises reviewing a will and estate plan every three to five years, or at times of significant change in financial circumstances, such as a death in the family or retirement. “All kinds of changes would require a review of your overall estate plan,” she says. “The general rule of thumb is to look at family through various life stages: early teens, late teens, university, mid-20s and when they’re buying a house. Those are points where you can make changes or do a legacy transfer that makes sense.”
Beneficiar y designations also demand careful consideration, especially in situations where assets could end up being transferred outside the family as a result of marriage breakdown. To that end, a person can sometimes use trusts in conjunction with beneficiar y designations for control, for instance to stipulate that assets can’t be transferred to a beneficiar y unless he or she has entered a prenuptial agreement.
“People are building in more and more provisos to ensure the gift doesn’t go somewhere else as a result of a divorce or other circumstance,” Goodman reports. “We’re seeing the same protection being built into all kinds of trust documents. It all boils down to your objectives. The better you structure your financial affairs, the closer you can get to creating a legacy that can’t be challenged.”