Consider what is involved before naming or agreeing to act as an executor.
• An executor carries out the instructions in your will. Co-executors can share the task.
• Jurisdictional laws define what the executor must do, whether they are a friend, relative, professional, or a trust company—however, the will can specify even more extensive powers.
• The executor may have to deal with some or all of the following at an emotional time: a funeral home, beneficiaries, past or ongoing taxes, insurance and investment companies, government and business pension departments, real estate agents, lawyers, accountants, appraisers, stock brokers, and business partners.
• They may also be empowered to convert the estate to cash or divide assets equally among beneficiaries. They can also make payments to the parent/guardian of a beneficiary in most cases.
• The executor (especially if inexperienced in legal or financial matters) should know how complex the estate is before agreeing to the task. If necessary, appoint a co-executor who is a legal and accounting professional.
• Have a clear and objective idea of what will be involved before asking someone to be your executor and agreeing to act as one.
Discuss the parameters of an executor with your lawyer, before enabling one, or taking on the responsibility if given or offered to you.
Segregated fund policies are unique insurance-related products with some guaranteed investment features that can benefit both your capital and income for years.
· Premiums are paid to the insurer for an insurance policy. These monies are allocated to segregated fund investment options.
· An investment manager then invests these premiums in the segregated fund. He invests in stocks, bonds or other assets, according to the fund’s stated investment objectives.
· Through the insurance policy, you can take advantage of unique benefits that can bring more certainty and flexibility to your financial strategies.
· Where a segregated fund invests in aggressive growth equities, there are some unique provisions that risk-averse investors may prefer. Often a portion of the capital invested may carry an agreement to be returned after the timing of maturity. Check the contract provisions which often include reinvesting options at certain junctures of time which also should be understood.
Guaranteed retirement capital and income
· Lifetime guarantee on your income Some policies offer some control over your retirement income by providing you an income for life. With a lifetime income benefit option, your income may not decrease regardless of how the segregated fund performs unless excess withdrawals are taken. This may give some protection against the risk of outliving your money, market volatility and inflation.
· Maturity guarantee on your capital Segregated fund policies provide some certainties to return a percentage of the premiums paid into the segregated fund (less a proportional amount of redemptions), depending on the product selected.
Make sure that you pay careful attention to the contract terms and time periods relating to any mention of a certainty regarding the return of a percentage of premiums paid. Go over this carefully with your advisor.
Too much debt can threaten your future and destroy your peace of mind. Here are five warning signs to watch for:
You are spending more than 20% of your after-tax earnings on debt. Total up all you owe, excluding your mortgage, e.g. student loans, car payments, and credit card bills. Now total up how much of your after-tax income is dedicated to servicing this debt.
You are paying for daily essentials with credit instead of cash. Consequently, you are close to the credit limits on your cards. Credit cards charge notoriously high interest rates, which is exasperated by compounding when credit cards are not paid off monthly. This can also increase your actual gross cost of goods purchased.
You are deferring important expenditures. You may need maintenance work (on your car, your home, and your teeth) as you struggle to get by.
You seem to spend your paycheque the day you get it. This may be a sign that you’re also over spending, an activity that leads to debt.
You are not differentiating between ‘good’ versus ‘bad’ debt. Good debt is money borrowed for productive purposes to help generate wealth over time (such as an education, build a small business, or purchase real estate). Fancy cars, expensive vacations, restaurant meals, and over-indulgent gift giving may indicate a lifestyle that for many do not justify the average household’s paycheque.
If you are in serious debt, consult a debt counselor who will arrange a repayment schedule with your creditors.
Consumers are shifting unsecured high-interest credit card balances and debts such as car loan balances to a low-interest Home Equity Line of Credit (HELOC). This transference happens on a larger scale when people consolidate their debts while backing them with their home value. Once your home secures this debt, it is no longer unsecured debt in your portfolio.1
You may indeed be able to save a sizeable chunk of interest by transferring debt from a high-interest credit card to a low-interest HELOC. For many, this works well insofar as they have an intelligent debt repayment plan in place.
When developing a financial strategy, assess all of your credit cards and other loans, including a Home Equity Line of Credit (HELOC). Total your combined debt while you weigh this against all of your retirement and your non-retirement assets.
A safety precaution always estimates your decisions about how they will impact your net worth statement when subtracting liabilities from assets. Adding in your HELOC debt with your portfolio of obligations gives you proportional insight into your actual net worth. Add your HELOC level of debt alongside your unsecured credit cards. Compare interest rates, fees, and other features and the time it will take to pay these loans all off (some calculators do a great job comparing this).
That said, be cautious using HELOC debt as quick loans for vacations, 2nd residences, extensive renovations versus selling and repurchasing a new home, vehicles, businesses, or investments. HELOC credit cards offered with most lines of credit will also reduce your home equity value.2
This growing shift of unsecured credit card debt to HELOC debt enticed by lower interest rates (related to your mortgage) helps the lenders’ balance sheets because this debt, once transferred, becomes secured collateral against real estate assets then owned at a higher proportion by the bank. Taken to the limit, if the real estate market prices drop, your debt may surpass your home value — this happened in the 2007-8 mortgage debt crisis. Think seriously about reducing your debt portfolio, especially if you hold a lot of HELOC debt.
Many people are inadvertently reducing their home equity in the process of securing previously unsecured credit card debt while hinging it to and reducing their home value. When people sell their homes, they are often surprised that their home equity is considerably reduced after paying their mortgage. Why is this? You must pay all associated HELOC debt during the sale.
Source: Bank of Canada
1 Most credit cards are unsecured by any asset that you own. However, if you accept a credit card linked to your home which offers low interest, this may be secured against your home value. Many consumers are unaware of how this works.
2 If bankruptcy occurs, your home equity generally is safe unless it is secured against HELOC debt. Unsecured credit cards are often simply not necessary to repay should one seek bankruptcy protection. Always read your small print in all contracts. Don’t rely on sales discussions over the phone or in-person until you read the small print. It is only beneficial to a bank or financial institution to shift your debt from unsecured credit card debt to secured debt if bankruptcy ever does occur.
More than three million Canadian couples will pass on an average of one-quarter million dollars to the next generation over the next 30 years. Consider that 50 percent of all personal assets are owned by people of age 50 or more. A question they will ask themselves is how to transfer this wealth to their families?
Transferring property to your children. Your children will be faced with a host of new responsibilities when they inherit your wealth. They will have to ask themselves: should we sell the house; what assets should we keep or place in storage; which assets should we share and which should we sell? Canadians who own a cottage or second residence used for vacations may require special tax planning because a cottage or vacation condo is considered to be a secondary residence for tax purposes. There may be family quarrels over who will pay for a cottage’s or vacation property’s upkeep and use, once you die. Consider your estate-planning directives before you pass on. This preparation will help to prevent confusion and potential family conflicts.
Utilize legal and/or accounting help. If your estate requires special consideration, discussing estate issues with professionals will provide options and guidance for simple-to-complex estates. If you have a cottage or another secondary residence, be sure to include this in your discussions.
Consider these alternatives:
• Plan to have the cottage/second residence held in a testamentary trust after you die. A trust is a legal document that allows you to determine what property will be provided for specific beneficiaries upon your passing. You may also set certain conditions to the use of the assets by the beneficiaries.
• Maintain control. Set up a living trust, so that the property won’t form part of your estate at death. A living trust is created while you are alive, and your beneficiaries can benefit from your wishes during your lifetime.
• Or, if the children want the cottage/second residence, give or sell the real estate to them while you are alive.
Understand the result – deemed disposition. When the ownership of a cottage/second residence goes directly to beneficiaries or into a trust, a deemed disposition takes place. This means that if the value of the cottage has increased, capital gains tax may have to be paid.
Consult an accountant to help you determine what tax will have to be paid upon the disposition of the cottage. Typically, the fair market value of the property, less its total costs, will result in a capital gain (only half of the gain becomes taxable). However, this gain may result in substantial costs because you could be faced with a higher marginal tax bracket. Tax planning with your accountant is essential.
Advanced estate planning can cover your second residence’s estate tax liability.
So you may ask, how can you pass on the cottage/second residence to your children without a large tax liability? Personal life insurance, purchased with your after-tax dollars, can provide a non-taxable death benefit to pay this tax. For a minimal monthly premium payment, your potential capital gains tax liability on a family cottage/second residence can immediately be covered.
In addition, your life insurance can also pay off any unpaid portion of the mortgage. This can help equalize the estate with other siblings. The person holding the mortgage would be the beneficiary for tax reasons. A joint last-to-die life insurance policy may be the least costly method to resolve the estate inequity. Note: A capital gain is only triggered upon the death of the last spouse, or upon the disposition of the property.
Estate equalization maneuver. In some families, not all children may wish to share in the family cottage/second residence. Where there is one child, who – to the exclusion of others – will receive your cottage/second residence, an inequity may occur. Your estate will pay the applicable capital gains tax on your cottage/second residence, thus lowering the remaining assets in your estate for equal distribution among the other children. Therefore, you may want to plan for estate equalization to the other heirs using an increased amount of life insurance proceeds.
Note: Prior to February 28, 2000, the inclusion rate for tax on capital gains was 75 per cent. From February 28, 2000, to October 17, 2000, the inclusion rate was 66 2/3 per cent. Currently, and as of October 18, 2000, the inclusion rate was further reduced to 50 per cent. You may need to treat your capital gains or losses separately, on the basis of these periods and inclusion rates, relative to the time that you realized your capital gains or losses. Consider consulting an accountant when evaluating your final estate tax liability.
Determining, how much life insurance is necessary for your family’s financial security will require an objective viewpoint as you assess the following:
Evaluate the death benefit that you need.
Your advisor can assess the death benefit you need, by using a mathematical calculation that is referred to as a “capital needs analysis”. You may want to have enough capital to pay for your funeral, final taxes in your estate, outstanding loans or a remaining mortgage, and/or your credit card debt.
If you earn an income and support dependents, you may need to provide a significant amount of money to invest, from which your family can earn an investment income to provide a quality lifestyle. Life insurance can also provide enough money to cover a child’s education or top up the potential retirement income needs of a spouse if a breadwinner dies.
Where there are two spouses providing an income for the family, many couples purchase enough life insurance to reciprocally protect the potential income loss of one or both income sources, by covering both spouses appropriately.
Business Owners have special insurance needs
In many families, one spouse is employed, and another is self-employed. If one spouse owns a sole proprietorship business, he or she may need to consider income replacement insurance which can create a replacement paycheck in case you become disabled. There may be business-related debts and expenses, which if not paid, can create liabilities for the family.
If you are in a business partnership, you may want to look at establishing a buy-sell agreement, and/or succession planning facilitated by life insurance capital if you or a partner die; or income replacement insurance if you or a partner are disabled and can no longer work at your business.
Critical Illness Insurance
Many are also using Critical Illness insurance for personal or business planning, which can offer capital solutions if one becomes critically disabled. Once you are certain how much you need, your advisor can offer quotes and several plans most suited to your circumstance.
Succession planning allows you to transfer your wealth creating potential.
Many who own family businesses, will move into retirement over the next two decades. A delicate process referred to as “succession” or “business continuity” planning can lead to relinquishing leadership roles while transferring their businesses to the next generation.
By developing a succession strategy you can fairly distribute business assets; transfer the power and authority associated with leadership from the senior to next generation; and cultivate family harmony. The successor then becomes the new steward of the family legacy.
An excellent plan will establish the best possible tax planning to limit liabilities that can occur.
Segregated funds from insurers offer you an insurance policy contract.
The value of your interest in a seg fund is equal to your share of the securities owned by the seg fund. This is credited in terms of the number of units an investor owns of a seg fund. With seg fund policies, you own an interest in an investment portfolio as stated in an insurance policy contract.
You pay premiums that “deposit” money into a seg fund policy that further invests in the seg fund.
Look through a wider lens to see life insurance at work. Life insurance protects you against income loss and the adverse effect that less income can have on your family if one were to die or have a disability.
As you build on that foundation by creating your assets and net worth, you may need to reassess your level of coverage. Caring for others is at the root of life insurance planning.
You have family responsibilities. Adequate coverage allows a surviving spouse and surviving family to maintain their current lifestyle.
You can support a stay-at-home parent caring for your children. If one parent’s income is currently relied on to provide all living expenses, the death of that individual may cause financial insecurity for all family members, particularly when there will be a stay-at-home parent caring for the children.
Life insurance protects children. The coverage needed will be affected by:
the number of children and their ages
educational expenses of the children
the current value of your assets
your current income
debt accumulation
your future employment goals versus stay-at-home parenting
your overall financial goals
You can place young children as secondary or contingent beneficiaries; thus allowing them to receive the death benefit if your spouse if the primary beneficiary predeceases them. A trust can manage funds on behalf of the children. It can direct investing the proceeds of the death benefit to create guardian income for loved ones.
Continue coverage throughout college or university. When children go to college, many of us tap into our savings to help meet their tuition and housing expenses. We may purchase a child’s first car, or pay him/her income for one or more years. If you die without providing continuing support, your young adult child may need to quit seeking a higher education due to a shortage of funds.
Protect your income in case of a disability. Have you thought about how becoming ill or injured could affect your children’s financial security? Would your income be reduced, placing them under duress? Disability insurance is designed to replace approximately 70% of your pre-disability income and is especially necessary for the self-employed.
Reserves must be kept to protect your guaranteed capital.
A life insurance company holds a reserve in relation to the capital guarantee provided in the policy contract. Because of the need to assess and insure the capital guarantee, the involvement of life insurance is required.
The insurer is required by law to maintain adequate reserves of capital that may be needed to pay any future liability due to a capital loss. Companies now offering seg fund investments also work in conjunction with a life insurance company to facilitate this reserve and insures the capital guarantee. The management fee charged to the segregated fund includes the cost of that insurance.
Too much debt can threaten your future and destroy your peace of mind. Here are five warning signs to watch for:
Many who own family businesses, will move into retirement over the next two decades. A delicate process referred to as “succession” or “business continuity” planning can lead to relinquishing leadership roles while transferring their businesses to the next generation.
