When I Am Sixty Four – Part III: Wills & Ways


By John Nicola CLU, CHFC, CFP

IN THIS ISSUE: In the third part of our series, When I’m 64, John Nicola highlights the importance of proper Will and Estate Planning. Aging with wealth is a complicated proposition at the best of times, but it’s virtually undeniable that those who live with wealth are bound to leave an estate behind. This legacy is the testament to the life you’ve led and the family you’ve raised. Take the time to properly engage yourself in that process and ensure that your family and beloved charities benefit from your legacy in a well-structured and tax-efficient fashion.

If Ben is right and death and taxes are inevitable, then why do so many of us dread the idea of updating or even writing a Will? (I have met quite a few bright, articulate high income professionals and business owners who have “overlooked” the chore of writing a will). When it comes to keeping them current few of us are – pardon the pun – willing subjects. So why is this? Do we fear that thinking about our demise will hasten it? (It doesn’t, because I tried thinking about being thin and my weight didn’t change at all).

Perhaps we are of the school that doesn’t want to leave the “little beggars” anything. We are determined to have our last cheque coincide with our last breath. This theory is interesting enough to have spawned a best seller – Die Broke. The problem with this approach is that very few people I have met enjoy seeing their net worth shrink as they get older.

In fact, watching it rise seems to provide a modicum of comfort and achievement. Since predicting the exact date of one’s departure from earthly bounds is challenging, it follows that we are likely to die with an estate and assets.

So why is this? Do we fear that thinking about our demise will hasten it? (It doesn’t, because I tried thinking about being thin and my weight didn’t change at all). Perhaps we are of the school that doesn’t want to leave the “little beggars” anything. We are determined to have our last cheque coincide with our last breath.

This theory is interesting enough to have spawned a best seller – Die Broke. The problem with this approach is that very few people I have met enjoy seeing their net worth shrink as they get older. In fact, watching it rise seems to provide a modicum of comfort and achievement. Since predicting the exact date of one’s departure from earthly bounds is challenging, it follows that we are likely to die with an estate and assets.

It further follows that someone other than ourselves will inherit those assets. Our Wills are one (but certainly not the only) way to ensure that they go to those whom we wish to benefit. And just because this is a serious topic, it does not mean that you cannot bring a little levity to it. You could, for example, leave a legacy that is conditional as Edith S. of Walsall did when she instructed her children to not spend their inheritance on “…slow horses, fast women, and only a small amount on booze…”

In this newsletter, we’ll look at some models and questions that should make this process easier, more enjoyable, and less taxing than the status quo. It is important to note that at the technical level, Will and Estate Planning is a complex topic that requires some very good professional advice. However, our focus today is on the issues that you, as an individual or couple, must face to ensure you get the best value out of that professional, but often expensive, advice.

It might be best to start with some key questions:

  • What is your current net worth?
  • How much of your net worth (as your estate) will be lost to taxes, probate fees, and other costs? How much will that estate grow because of your life insurance? What then would the net value of your estate be if you died today?
  • Who are your beneficiaries if: You die first? Your spouse? Both of you?
  • Is one of your beneficiaries a charity(ies) or Family Foundation?
  • Do your beneficiaries get a simple percentage or dollar amount of your estate or is it to be held in trust?
  • How much of your net worth will, in fact, form your estate?

That last question may sound somewhat obtuse. After all, it may seem obvious that all of your net worth left after your death will effectively be your estate. However, as the following chart illustrates, this is not the case. For example, the following assets would bypass the estate and avoid probate and other costs:

  • RRSPs and IPPs with named beneficiaries
  • Shares of holding companies held by Family Trusts
  • Personal and other assets held in Alter Ego Trusts
  • Assets already transferred to Charitable Foundations or Donor Advised Accounts

I can hear some of you now: “John, this is getting complicated… I would need an army of lawyers to get all of these trusts in place.” (And, as Ben Franklin once opined, putting a client between two lawyers is the same as putting a fish between two cats.) Nonetheless, I can assure you that it need not be complicated. With good planning you can create the following benefits from an Estate Plan well-organized and a Will well-drafted.

  • Significant reduction in taxes and probate fees
  • Better control over assets to beneficiaries
  • Creditor and matrimonial protection for assets and income
  • Reduced income taxes now on your current income
  • The ability to endow charities that are important to you

So our first suggestion is to put together a will diagram such as the one below (we would be happy to put this together for you). In essence, it is a net worth statement with the following changes:

  • Values are reduced by the impact of taxes on the estate. For example, your registered assets will be taxed at your highest marginal rate in your estate unless they are transferred to a spouse, charity, or foundation (there are some additional tax relieving options for IPPs)
  • Values are increased by the injection of life insurance (both single life and joint last to die coverage).

 

The next step is to list your beneficiaries. In the example on the previous page, Chandra and Russ have divided their estate into 4 tranches. Two equal shares of 35% will go to their children, 15% will go to their grandchildren, and the remaining 15% will be added to their Foundation (or Donor Advised Account) to be managed by their children in supporting charitable organizations.

The last steps are where the planning is involved. So far we have defined what Chandra and Russ will have in their estate and to whom they wish to see it go. We have not said much about how. This is where planning can make all of the difference.

By way of example:

  • Chandra and Russ have a pre-tax estate of about $8M and tax liabilities (when they both die) of about $1M. This leaves a net estate of about $7M. They also have about $1.15M of registered assets. They want to leave 15% of their estate to their foundation or Donor Advised Account (today that would be 15% x $7M = $1.05M). If they made the beneficiary of their RRSPs and IPPs the Foundation, they would eliminate about $500,000 in taxes in their estate.
  • If they arrange for each child to receive their share of the estate by way of a Testamentary Trust (a trust created by a Will), then the children will save significant tax on the income earned by those trusts for the rest of their lives. They could also enjoy both creditor and matrimonial protection of assets depending on the wording and design of those trusts. This is where a good Estate Planning lawyer is invaluable (just don’t use two of them).

There are many other planning options to consider including transferring assets (or the future growth of assets) to a Family Trust or Alter Ego Trust to defer or avoid income taxes and to eliminate probate fees. Each of you has a unique situation and therefore your Will and Estate Plan should be a reflection of your changing needs and wants. Finally, there is no need to look at this exercise as a business document. You are not Michael Corleone (“Sonny it’s not personal; it’s an Estate Plan”).

Wills and Estate Plans are personal; so much of what you do is neither right nor wrong. You must decide what you want to do first, and once those decisions have been made, use the experts to show you the best way how.

Also, when you are finished, you might want to write a personal letter to your children or grandchildren that describes what your hopes for their futures are or what lessons you have learned during your life that you wish to make part of your legacy.

In the end, this might be the most valuable asset that you pass on.