March 20, 2020
In a special report collaborating with professional advisors, this article includes contribution from Ken M. Kramer, Q.C., on the importance of creating ‘Henson-type’ or discretionary trusts and consulting with experts when advising clients with disabled dependents.
July 15, 2019
Will or no Will?
A simple question that one may struggle to answer with confidence and certainty. If this question does not elicit thought in your mind, you must embrace uncertainty. Much like weather in Vancouver. Or the stock market. However, for those who are on the verge of major personal and financial life changes or those who have worked hard to build their personal legacy and want to preserve it, let’s start the conversation by saying, “I can make a Will.”
The basic requirements for me to make a Will are as follows: “I can or know someone who can write or type. I am at least 16 years old. I have two friends out of my many friends on Facebook or LinkedIn who are at least 19 years old that I can call upon to sign as witnesses in my presence. I have sound mental capacity such that I know a Will is a death document and I know what my assets are.”
So what is the big deal and why doesn’t everyone have one? To dig deeper into a recent poll conducted by the Angus Reid Institute, it was found that 51% of Canadians do not have a will. In other words, less than half of Canadians (49%) are leaving their families prepared when they pass away. I make no promises that further complex mathematical calculations will appear in this post.
That being said, you are not too early nor too late to get started. As a matter of fact, by spending time reading this post, you are already on the path to estate planning. By stumbling upon here, something in your consciousness is telling you, “You invest in your personal health and finances, why not invest in your legacy?”
What exactly is a Will? From a theoretical perspective, a Will is your vehicle and you are behind the steering wheel. You determine the location, you set the speed, and best of all, one fill at the pump or charge can last you many years.
But what if we don’t have a Will? Riding on my car analogy one last time, let’s put on a VR headset and visualize the scenario where you are sitting in the passenger seat of your cousin or friend’s car who drives like a maniac (everyone has one). You pray that you will survive the car ride and your mind naturally enters survival mode as you contemplate the likelihood of death and the consequences that will follow: “Who will get my house? Take care of my belongings? Pay off my debts? Get access to my personal bitcoin account? Who is going to tell my dog he’s a good boy?”
With no Will in place when we pass, we are back to mathematical calculations which we thought we left behind in high school. In other words, your estate is divided according to a fairly perplexing legislative formula as follows:
In a nutshell, your assets first goes to your spouse. If you have kids, part to your spouse, part to your kids. If no spouse, to your kids. If no kids, to your parents. If no parents, to your brothers and sisters. If no siblings, to your grandparents, etc.
I know what you are thinking. What is my ‘estate’? What compromises my ‘assets’? This is too much information, time to stop reading and grab a snack or go my phone.
I promise we are almost done.
On the other hand, having a Will in place gives you control over your legacy. At minimum, it permits you to:
Hence, I merely hope this sparks the conversation in your mind to engage with personal planning for your estate. As a word of caution, as simple as a Will sounds to make, it is best to be diligent and to obtain proper guidance and legal advice from a Wills practitioner before undertaking this task to avoid potential drafting problems and/or liability.
Should you want to take the next step to personal and financial security and begin your estate planning, please do not hesitate to reach out to our firm as we are more than happy to continue this dialogue and come on a ride with you.
As the saying goes, the only certainties in life are ‘death and taxes’. My advice is it is never too early to get ahead of these two certainties.
By Edward T. Ngo, Associate
July 8, 2019
Having a Will also enables you to make a contribution to a charity or non-profit organization that you or a family member may have a particularly strong association with.
The decision to plan a gift for tomorrow will also bring you benefits today. By creating your own legacy, you can take some control over the future and build a bridge to coming generations. The rewards go beyond the personal as you will better the lives of individuals and their families and inspire many people in our communities to work toward and invest in a brighter future for society. There are also fiscal advantages when contemplating a gift in your financial and estate plan.
Although many British Columbians continue to make donations to charitable organizations while they are alive, many of us are unaware of the various methods and available benefits associated with giving a charitable gift when we die. As governments continue to divest their social services responsibilities, the concept of community- building becomes vitally important to the survival of such organizations and their visions.
Many of us may query, “I really don’t have much to leave, so why bother!”. Giving a gift through your Will or a Trust does not have to be painful or costly. In fact, the Federal Government has recognized the importance of charitable giving by creating a more flexible environment for making a gift. Although receiving a tax benefit remains a strong incentive for many in making a charitable gift, the overriding rational for many continues to be the “social benefit” attached to making such a gift.
What are some of the charitable vehicles available for making a gift and which one(s) are most appropriate for me? A planned giving vehicle may be as simple as making cash bequest to a specified charitable organization in your Will. However, new approaches to planned giving may include life insurance policies, publicly traded securities or trusts. Each method will have its own associated benefits for the donor and the recipient. The following represent some of the more common planning vehicles worthy of consideration:
Making a gift through your Will is a meaningful way to make a lasting commitment. You can bequeath a sum of money, an item, or any portion of your estate. You can also arrange to donate proceeds from your registered retirement savings plan (RRSP) or registered retirement investment fund (RRIF). Charitable tax receipts issued to your estate can offset taxes on your income in the year of death and in the previous year.
Through relatively small life insurance premiums, you can provide a legacy of support. If you assign a new or an existing policy to a charitable organization, you will receive tax
receipts for the value of the policy and for subsequent premium payments. Insurance proceeds are contractual in nature and do not fall within your estate, thus, you can avoid probate fees and other taxes. Alternatively, you can designate a charitable organization as the beneficiary of the policy and a tax receipt will be issued to your estate.
You can buy an annuity and then use a portion of the annuity payments to pay premiums on a life insurance policy assigned to a charitable organization. You’ll receive charitable tax receipts for the premium payments. Remarkably, with this charitable insured annuity plan, your income may increase. It is even possible to structure the gift so that both the charitable organization and your heirs receive a return on the investment by using the increased income to fund the premiums on a life insurance policy naming your heirs or your estate as the beneficiary.
Another option is a gift plus annuity which combines a donation to support the charitable entity with an annuity which would be purchased by the charitable organization on your behalf through a licensed insurance company. Guaranteed annuity payments to you (and/or your spouse) will continue throughout your lifetime, unaffected by changes in the economy or interest rates. Depending on your age, you will receive all or a portion of the annuity payments tax-free and may receive a tax receipt.
You can make a gift today and benefit from the donated assets during your lifetime. You can accomplish this through a trust to which you transfer cash or assets. You or someone chosen by you will then receive either a fixed payment or interest income.
When you transfer property to a trust, you receive a charitable tax receipt for the present value of the charitable entity’s interest. Trust assets are placed outside your estate and the tax receipt may be used to reduce your taxes during your lifetime. When the trust terminates, the remaining assets will be used in the future to support the mission of the charitable organization of your choice.
There are ways you can make a gift of personal or real property to a charitable organization and retain a right to use the property during your lifetime. The transferred property may be art, your residence or commercial real estate. In each case you will receive a charitable tax receipt for the present value of the charitable entity’s interest which will offset taxes on your income. In addition, you may continue to use the property or receive income from it. At the end of your lifetime, the property may be sold and the proceeds will support programs and services of the intended charitable organization, as you have directed.
A gift of publicly-listed securities also provides significant tax advantages. Only 25 per cent of the capital gain (half the regular inclusion rate) will be included in your income. The charitable tax receipt will not only offset the tax payable, but other income as well – which could reduce the cost of the gift to 35 cents on the dollar. Similar advantages exist for gifts of stocks received through employee stock options.
If you make a gift today, you will receive a tax receipt. With the resulting tax savings, you could purchase a life insurance policy equal in value to the gift. The beneficiary of this policy could be your children or other heirs. In this way, the value of your lifetime gift would be replaced within your estate for your family’s benefit. This plan may provide additional advantages: if you retain the property and it appreciates, capital gains would be taxable and therefore would reduce the amount going to your heirs. Using life insurance in this way allows proceeds to be paid to your family, tax free and without probate fees.
Or, consider having your private company make a gift to a charitable entity. The company could then use the resulting tax savings to purchase a life insurance policy on your life. Proceeds from the policy go to the company and to your heirs, tax-free through a capital dividend account.
The answer to which planned giving vehicle is most appropriate for you must be assessed in light of your goals, your financial abilities and your creativity. Consultation with professional advisors (lawyer, accountant, financial planner) and the associated Planned Giving Manager of the intended charitable or non-profit organization will ensure that the right gift plan is chosen for you.
By: Ken M. Kramer, Q.C.
July 3, 2019
Recent changes to the Income Tax Act over the past year now permit individuals at least 65 years of age to develop Alter Ego Trusts and Joint Spousal Trusts. For some, this may be an attractive estate planning vehicle and can serve as an alternative to a Will.
Similar to an Alter Ego or Joint Spousal Trust, an Inter Vivos Trust, or living trust, has always been available to Canadians, however, its use as an alternative to a Will, (similar to a revocable Living Will in the US), was always unattractive in Canada because of the tax consequences involved in their use. The concern being that if you transfer to a trust an asset that has increased in value, this is a disposition and triggers immediate capital gains tax.
Under the Alter Ego or Joint Spousal Trust amendments, anyone over 65 can now transfer assets to this particular type of trust on a tax-deferred basis. In other words, the trust takes over the asset at its cost; the tax on the gain is deferred until the disposition of the asset by the trust, or until the trust is terminated and the asset distributed to the beneficiaries. In short, the transfer is tax neutral. There are no income tax advantages, nor any disadvantages.
For the tax rules to apply, the income and capital must be solely for the benefit of the settlor or his/her spouse (that is, the original owner of the assets) during his or her lifetime. The settlor is also the trustee, so retains complete control over the assets until his or her death. He or she can name as beneficiaries of the trust on death whomever would have been beneficiaries under his or her Will, including charities. The trust can hold all or only some portions of the client’s estate.
If the trust holds everything, it replaces a Will, but with this important difference: as long as a testator has capacity, he or she can change a Will at any time, right up to the time of death; with a trust, it is not so easy to change. This can be a good thing (it avoids the risk of undue influence) and a not such a good thing (if urgent changes in beneficiary are legitimately desired).
There are two essential benefits of an Alter Ego or Joint Spousal Trust. Initially, everything transferred to the trust during one’s life is not in the estate on death, and is therefore free of probate fees and the costs of probate. Secondly, since the trust already owns the transferred assets at the time of death, they are not part of the estate so the Wills Variation Act does not come in to play. This advantage is of particular importance with second marriages, where the potential frequently exists for a conflict between the testator’s children and the surviving second spouse. Once everything is in the trust, with both the wife and the children as beneficiaries in proportions the settlor has decided upon, then not only will fights after death be avoided, but the settlor can make clear to all parties during his or her remaining years that all is settled, fair and final.
The special tax treatment afforded to the Alter Ego Trust is available also to the Joint Spousal Trust, where distribution occurs only on the death of the surviving spouse. One or both can contribute to the trust (if the contributor is 65), and the income can only be used for the benefit of the settlor and the spouse during their joint lifetimes.
In appropriate circumstances, the Joint Spousal Trust could replace the very common Wills where each leaves everything to the other spouse, and on the survivor’s death, the remainder goes to the children or grandchildren. But often in these cases, the spouse who believes he or she will die first worries that the surviving spouse will remarry some gold-digger who will take everything from the kids! The Joint Spousal Trust would help this situation.
Despite the obvious advantages of these trusts–the saving of probate fees, the minimization of Wills Variation Act problems, and the protection against gold-diggers–one must be careful to remember the limitations to their use. Some examples: in the case of real estate, the transfer to the trust may trigger Property Purchaser Tax, which would counteract any savings in probate fees for properties over $300,000 in value. However, it should be noted that a Principle Residence along with its associated Principle Residence exemption is transferable to the Alter Ego Trust.
RRSPs and RRIFs cannot be transferred to the trust at this time. As well, where the estate consists of appreciating assets, it is important to check with an accountant to see if the savings on probate fees would be offset by the need to pay greater capital gains tax on death, for the reason that a trust, unlike an individual, does not have personal exemptions available to claim in the year of death.
But subject to these limitations, I believe there are many situations where an Alter Ego Trust or a Joint Spousal Trust could be of great advantage in an estate plan, whether used as a replacement to Wills or used alongside the Wills for particular assets only. As always, your particular situation should be assessed by an experienced professional before determining whether this vehicle will work for you.
By: Ken M. Kramer, Q.C.
June 28, 2019
I’d like to discuss the interrelationship between the estate planning tool of a “trust” and the Disability Benefits Program Act (“DBA”).
For those disabled individuals having an entitlement to such benefits under the DBA, a trust may be the most effective legal tool available to enable such individuals’ to continue receiving such benefits in circumstances where they may be about to receive a large financial gift, an inheritance or an accident settlement. Given that our provincial DBA program is income and asset tested, how you deal with such money and other assets may affect your ability to receive benefits under the DBA.
Initially, what is a trust? A trust is a legal relationship where someone (the “Trustee”) holds money or other assets for someone else (the “Beneficiary”). A trust may be created in a will, when someone dies (“a testamentary trust”), or it may be created during someone’s lifetime (“an inter vivos trust”). A trust created while someone is alive may be created by a disabled individual for his or her own benefit or it may be created by someone else.
For those individuals receiving Level 2 disability benefits, you may be familiar with the regulations of the DBA (the “Regulations”) as it relates to income and assets entitlements. The Regulations preclude an individual without dependents from receiving disability benefits where that individual has assets totaling more than $3,000 unless such assets are exempt assets. Exempt assets include such items as your clothing, automobile and home. A trust that either you or someone else sets up for your benefit may also qualify as an exempt asset. The lifetime total for these and some other kinds of trusts totals $100,000 unless you can convince the Minister that your “disability costs” will be higher.
The Regulations also deal with income. Most money received by an individual receiving disability benefits will be deducted dollar for dollar from that individual’s disability benefits cheque. Such income is called “unearned income”. However, certain income is considered exempt, which will permit an individual to keep such income without losing their disability benefits. For example, the Ministry currently permits an individual without dependents to keep $200 per month earned as wages (“earned income”). Income from investments or trusts is always “unearned income” unless such money is paid from a trust and is used for “disability-related costs”.
To be considered “exempt”, it is vital that any payments for such “disability-related costs” be made directly from the trust and fall into one of the following six categories:
There is no set limit on what you can spend from the trust on the first five categories (items a to e). For the last category (item f), payments must not exceed $5,484 a year to remain exempt. Examples of item “f” may include memberships in sports or social clubs. Clearly, from a planning perspective, this category offers an individual with a disability the most flexibility in utilizing such trust funds.
Before deciding to set up a trust to protect your money (and your disability benefits), there are many important decisions you will have to make. For example, what type of assets are you going to put into the trust? Who is going to be the Trustee of the trust and who is going to get what is left in your trust after you die? Questions may also arise over the tax ramifications of setting up your trust? Finally, if you are receiving home support services, what effect, if any, will a trust have on your entitlement to such services?
These and other questions will need to be canvassed between you and your lawyer prior to setting up your trust. Setting up a trust is a highly technical process requiring expertise in estate planning and taxation. Thus, please ensure that you retain the necessary legal and tax advice prior to setting up your trust.
By: Ken M. Kramer, Q.C.
With another year having just past, it is a time for many, to reflect on our past year’s achievements and happy memories, for others, and you know who you are, the new year represents an opportunity to set new goals, and dare I say, embark on the dreaded New Years Resolution!
Losing that extra 10lbs, cleaning out that garage, running three times a week, renovating that basement suite are all noble goals that never seem to gain any momentum past the month of February. However, a New Years resolution that we should all pay particular attention to is the simple task of developing or revisiting our estate plan’s.
It may not sound like the most exciting and challenging of goals which one can set for the new year, however, developing an effective estate plan may be the most rewarding and financially sound, not to mention, ACHEIVABLE resolution you will ever encounter.
How then does one start the process? This of course is the million dollar question. For many of us, the thought of planning for our death is anything but attractive . For many, taking out the garbage or visiting the dentist for a root canal may seem more pleasant.
Therefore, initially, we must visualize the development of an estate plan as more than simply, “Who gets What When I die”, or, as I like to refer to it, as the “Three W’s Syndrome ”. An estate plan is much broader in scope and reflects on various legal and economic disciplines such as family, tax, and estate laws. A well thought out estate plan will not only benefit you when your no longer with us, but also while you accumulate and grow your wealth.
My first piece of advice to all my clients is, “DO YOUR HOMEWORK!” Educate yourself as to what an effective estate plan means to you. Ask questions, read articles and attend seminars to assist you in generating a level of knowledge that will make you comfortable in developing and refining your estate plan. Know what your limits are and don’t be afraid to ask for help. Estate Plans much like individuals are unique. No one plan will necessarily fit all. Prepare to differentiate yourself from that of your brother, neighbor or co-worker.
Although there are no legal requirement to seek professional advice when developing an estate plan, the option should be seriously considered so as to avoid future disappointment and unnecessary expense. The costs of seeking proper professional advice at the outset of developing an estate plan pales in comparison to the thousands of dollars which may be expended where no professional advice is sought.
Finally, and most importantly, make the development or revision of your estate plan a priority for the new year. The cost of a few hours of your time may result in thousands of dollars in savings to your estate and ultimately, your family.
By: Ken M. Kramer, Q.C.
I caution my readers that the information expressed in this article should in no way be construed as legal advice. If you would like further information on this or other topics please contact me at the address below.
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