Article – Page 12 – Adviceon Library

Mortgage planning to fit your financial strategy

As part of your overall financial strategy, consider your mortgage strategies to access financing, reduce risk, and protect your real estate investments.

A good mortgage plan helps you keep moving forward regardless of market volatility and allows you to weigh capital gains versus losses in your favour. When dealing with your largest single asset class, you need to prepare for the worst possible situations, such as family illness, job loss, or increasing interest rates.

Look at probable contingencies and ask:

Can I pay for the mortgage if other unexpected expenses arise?
Could I end up needing to sell my residence or investment property or cottage?
Can I weather a real estate market downturn that could reduce the value of my property by 5 or 10%?

Other important considerations:

Run amortization schedules 1, 2, and 3% higher than the current market rate to see if you can pay for a higher escalating monthly mortgage payment just in case the economy shifts.
Consider not locking in a mortgage (keeping it open or only using a line of credit with the freedom to govern principal payments). If you determine that your plan must allow you to take advantage of selling, you may avoid future penalties.
Assess risks associated with a property such as an old condo with a special assessment (offloading the expense to all the owners collectively).
If you are nearing retirement, where do you want to live? Ask questions relative to your lifestyle preferences: “Is shopping, a park, a library, or city-life within walking distance?” or “Is there a major hospital nearby, and access to an airport or major roads such as the 401?”

The financial arrangements for your real estate can be affected by external influences, such as interest rate movements, and personal factors, such as your income and your ability to gain loan approval. The bottom line is that you must service any mortgage debt and pay down the mortgage.

Let us help you assess your situation as we help plan your best mortgage fit to suit your circumstances.

How do I make a claim as an heir to an estate?

If you intend to have control over the distribution of your estate it is important to have a testamentary trust (a will) drawn up by your lawyer.

If you die without a will, the Provincial Court will appoint the estate’s trustee referred to as the Public Guardian and Trustee. Any person claiming a share of your estate will then have to prove that they are entitled to and will have a right to inherit. Your estate will be distributed as follows:

• The largest share goes to the spouse (initial amount differs per province);
• Then the remaining estate value goes equally to the spouse and children, shared according to specific figures;
• If no spouse, to the children and descendants of the deceased, if any;
• To the parents of the deceased if no spouse or descendants;
• If no surviving parents, to brothers and sisters, and children of the deceased brothers and sisters;
• If no brothers and sisters, then to living nieces and nephews;
• When more remote relatives are involved, special instructions may apply.

NOTE: Half-blood relatives share equally with whole-blood relatives. Children include those born outside marriage and adopted ones.
The above is based on Ontario law. The law differs according to your province of residence and current law.

How do I prove that I am an heir of an estate?
You will need evidence to submit to the Public Guardian and Trustee assigned by the Provincial Court. You will need:

• Two sworn statements or affidavits. The first statement must be made by a person claiming a share of the estate (called the claimant). The second corroborates the first and is made by someone who has personal knowledge of the family history, but no monetary interest in the estate.

• A third sworn statement may also be needed from a resident who knew the deceased, stating his/her knowledge of the deceased’s reputation as to marital status and the existence of children born inside or outside marriage or adopted.

How does Disability Insurance protect a Buy-Sell Agreement?

Disability Buy-Sell Agreements

A detailed look at two ways to guard against potential liabilities when a significant shareholder becomes disabled.

Two strategies protect shareholders against the liabilities of another significant shareholder becoming disabled.

Criss-Cross Buy-Sell Agreement

The agreement provides for a mandatory sale and purchase of an interest in the corporation once a shareholder has been disabled for a specified period.
Shareholders own disability insurance on each other to fund the purchase.
The agreement guarantees to purchase the disabled partner’s business interest throughout the policy’s payout period.
Premiums are paid with after-tax income.
Policyowners receive tax-free disability benefits.
An allowable reserve can offset capital gains on the asset’s sale for a time if the entire proceeds are not collected upfront.
Personally owned income replacement insurance is generally purchased in addition to the above coverage to provide an income (in addition to the buy-out benefit) to the disabled shareholder.

Corporate Share Redemption

The agreement provides for the mandatory redemption of the shares once a shareholder has been disabled for a specified period.
A taxable dividend, equivalent to the total amount of the purchase price, less the paid-up capital value of those shares, is deemed to have been received in the year in which the redemption of the shares takes place.
The dividend is subject to the Dividend Tax Credit and the Alternative Minimum Tax rules.
A lump-sum disability insurance contract owned by the corporation covers the funds required for the redemption.
The corporation could pay out an amount in addition to the redemption value to cover taxes payable by the disabled shareholder.
A promissory note can cover shortfalls in payment

Note: Life insurance taxation varies in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide significant business strategies relative to succession or an estate.

Why is an estate plan important for retiring business owners

When a business represents the major component of an estate, planning is vital. Entrepreneurs may think about retirement planning, yet not all business owners implement plans to allow them sufficient freedom to follow their leisure dreams. If you ask the owner of a successful small business if he or she plans to retire, you may hear, “I will never retire because I love what I do”, or “I will retire in 10 years or so.”

Why is this risky planning? Those who feel they never want to retire may not have developed retirement investment interests outside of the company aside from RRSPs. However, most believe their company will provide investment capital when sold, or, if passed on to the next generation, a salary or dividend payments.

Are all your eggs in one basket? Therefore, for some, their personal financial stability is riding on the future success of the company. When a business represents the major value of an estate, planning becomes necessary. Yet, many are not convinced that they need to plan their estate or the succession of their business.

Estate Planning is vital to Succession Planning. Despite the financial importance of their business, most business owners do not know what the tax liability would be if both spouses were to die. An estate plan can ensure that these taxes will be paid from one or a combination of the following sources:

Life insurance;
The business, from cash flow or liquid assets;
RRSPs (also taxed when both spouses die);
Non-registered investments.

Consider the following:

Take the time to do some basic estate planning to determine who will take over the company, and where your retirement income will come from. Revise or complete both your will and power of attorney. Review your personal and/or corporate-owned life insurance, disability coverage, critical illness insurance, long-term care insurance and key-person insurance.
Many business owners carry life insurance but miss a very important coverage related to health. Disability insurance and/or critical illness insurance can pay off a buy-sell agreement and provide income.
In some cases, the payment of relatively small life insurance premiums can entirely solve the estate’s future capital gains tax problems, or generate capital to replace the tax that will be payable on your RRSPs when both spouses die.
Life insurance can also eliminate company debt and help a succeeding son or daughter with new business capital. Finally, it can help fairly equalize the division of your estate among all of your heirs.

8 Amazing Advantages of Mutual Funds

Mutual funds offer investors a superior means of accumulating wealth through a broad range of investment solutions based on professional investment principles in a regulated environment.

There are eight benefits of Mutual Funds which the investor appreciates:

Professional portfolio management
Manage risk through diversification
Opportunities for foreign and domestic investment
Oversight by professional managers
Low entry investment amount
Solutions meet a wide range of needs
Easy to buy and sell
Convenient administration

The rapid growth in investor confidence in using mutual funds escalated to over half a trillion dollars. This indicates the validity of using mutual funds in an investment portfolio.

Source IFIC

What special powers do executors have?

Before naming or agreeing to act as an executor, be sure to consider what is involved. Naming co-executors, one of whom is a professional in the field, can be a wise decision.

• An executor carries out the instructions in your will. Co-executors can share the task.

• Provincial 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: funeral homes, beneficiaries, Canada Revenue Agency (CRA), insurance and investment companies, government and business pension departments, real estate agents, lawyers, accountants, appraisers, stock brokers, and business partners.

• They can 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 under the age of 18.

Where there is life insurance with beneficiaries assigned, monies must be directed as defined in the life insurance contract.

•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 professional in this field.

• Have a clear, objective idea of what will be involved before asking someone to be your executor and before agreeing to act as one.

What are the key reasons to review your Will?

Keeping your Will up-to-date is just as important as having a Will. Consider updating your Will for the following reasons.

• Marriage. You recently married, or a marriage ended since you made out a reciprocal (joint) Will. Your Will may be revoked upon marriage, unless it specifically states it was created in contemplation of marriage.

• A change of executor, lawyer, accountant, or guardian. If one of these key players die, or becomes incapacitated, or is replaced regarding your estate plan.

• You want to establish planned giving. You desire to leave monies, for example, to a charity, an art gallery, a religious organization, or a school.

• Birth of children and grandchildren. You want to ensure that they are provided for, perhaps through life insurance.

• Divorce. If your Will has previously named a ex-spouse as executor, this appointment is nullified upon divorce.

• Separation. If you die before a divorce becomes final, your spouse may retain access to your estate assets.

• Change in wealth. If you inherit money, or inherit life insurance proceeds, or your assets decline, consider altering your bequests.

• Special care is needed. A spouse, parent, or child has become disabled and needs future care.

• Change in health. If you anticipate requiring costly long-term health care, you may want to alter the specific bequests in your Will to reflect this new reality.

• Death of executor or beneficiary. Appoint a new executor or revoke a previous beneficiary directive or review your beneficiary designations.

• Sale of business. If your assets become more liquid upon the sale of a business, you may want to pass that benefit along to beneficiaries or charities. If a partner has bought or is buying your business previously bequeathed in your Will you may need to adjust your estate planning.

• When you want to change your trustee, or trust institution. You want to assign others to be in charge of investments within a testamentary trust directive.

• Legislation changes. Federal or provincial budgets have changed legislation affecting your estate planning. The validity of your Will may be affected by changes to laws.

• Taxation of the capital gains on a major asset. When you own an asset that has appreciated in value, such as a cottage or business, make sure the tax payable, will not decimate the estate. Life insurance solutions to pay off your estate liabilities after death, may be a more affordable option.

How can Life Insurance insure Estate Planning tactics?

A testamentary trust is established in a will. It directs a named trustee to manage and distribute assets and income to named beneficiaries of the trust.

You can designate the number of years it will survive, within permissible, legal limits. The trust becomes effective at the time the will is probated. The assets undergo the probate process and are therefore, exposed to creditors’ claims. If your intent is to avoid probate, a living trust would be a more suitable alternative.

Individuals commonly choose between two types of trusts: family and spousal. Family trusts are established to:

Protect the interests of underage children and any family member with special needs.
Safeguard adult children’s assets from creditors or divorce settlements.
Manage funds for spendthrift adult children.
Minimize disclosure of small business assets that could be susceptible to lawsuits or creditors

Spousal trusts are established to provide your spouse with funds. These trusts also:

Protect your children’s assets should your spouse remarry.
Assure the inheritance of children from a previous marriage.
Reduce income tax through income splitting.

Funding trusts
If an estate will have significant capital gains tax due and/or debts, consider using life insurance to cover all liabilities. You can also increase the death benefit to pay off business agreement liabilities (if any) and provide specific trusts with the necessary cash.

What is the mind-set of financial independence?

Establishing the right mindset towards money will eventually show up in your investment portfolio as wealth that can provide a lifetime of income and the eventual achieving of financial independence. This may be impossible, without understanding how attitude affects one’s financial destiny. First, let’s examine a few of the correct attitudes versus erroneous thinking that could block our way.

Agree about money Most people need to consider the input of another person regarding how money is spent, invested, and managed. The problem is, many people never agree to a strategy of investing and stick with it – they’re still broke while arguing or doubting how to invest at age 55. Find a compromise, and stick to an agreed-on plan to invest.

Know the state of your finances Many never reconcile their bank account or organize their financial receipts or statements. They continue to make purchases, but never really know if they can afford them. Financial independence depends on financial management – you will need to establish orderly control. Purchase a filing cabinet, trays for receipts, files for all categories of purchases – a place for everything. Consider using computer software such as Quicken, posting your income and expenses weekly. Reconcile bank accounts and know your balances on a weekly basis, and your financial position, on a quarterly basis.

Buy only essentials on sale Sale signs are everywhere – the consumer can get up to 70% off in some cases. Those who sell goods know that sale signs encourage people to buy. Consumers legitimize the purchase in their minds, on the basis of saving a few dollars on an item. The problem is that over time one may buy many items on sale, despite the fact that he or she is spending above the household’s discretionary income, and may max the credit cards. While overspending this way, unmanageable debt is created. Instead of using discretionary income to invest; it all goes to paying down escalating credit card bills and high interest. In order to break free of this habit, save money first, and buy based on true needs. Stay clear of malls until the habit is broken. Be careful not to go to the other extreme and become a scrooge, ruining life’s enjoyment for others. Save money first, and buy based on true needs.

Limit need-for-prestige spending Many people buy more expensive computers, stereos, cars and gadgetry in order to impress the neighbours – yet these items depreciate in value over time. Add to that, countless upgrades when we become discontented, comparing new arrivals on the market. Such buying behaviour may create a false sense of prestige, negating one’s future retirement security. Income may drop or disappear all too soon, leaving many unpaid liabilities. Invest in assets that appreciate in value, such as a home, equity investment funds, or segregated funds, while not spending more in relation to increased income.

Eliminate procrastination based on fear What occurs in the U.S. or the Euro zone affects us all collectively, only insofar as how the markets that you invest in respond. Over 50 years, we find that the U.S. markets initially declined in a crisis, yet each recovered in a remarkably short period of one week. After the Suez Canal crisis: markets down 1.5%, gained 4%. The arms blockage in Cuba: down 2%, climbing back 4%. President Kennedy’s assassination: a decline of 3%, rising again within one week, 6%. The financial crisis of 2008 ruined many people’s investment retirement portfolio if they sold their funds or stocks. Those who were patient saw most of their funds and stocks climb to much higher values than before the crisis began.

How do individuals or families accumulate wealth?

They save by moving money received as income into a separate account before they spend it. It doesn’t matter if you have received an inheritance or won a lottery – the rule is the same. Save, and then invest before you spend.

Here are some excellent reasons for investing.

It gives us a sense of financial security, earned by continued discipline and adherence to the principle of saving, which adds to our sense of personal dignity.
We are eventually rewarded by seeing money make more as it works for us, gaining and compounding.
Saving paves the way for the actualisation of our goals and objectives in life, such as acquiring a home, making significant purchases, travelling, putting children through college or university, or going back to school ourselves.
Accumulated assets will increase our net worth and bring us financial independence. Such control and flexibility are within our reach if we start now.

Stumbling blocks to saving. Don’t defer to only saving what’s left at the end of the month or waiting until “things get better”. Usually, nothing is left at the end of the month, and things rarely improve because the philosophy has stayed the same – spending above income continues, and debts increase. Except for a home mortgage or loans for motor vehicle transportation, and in some cases for investing, debt is a deterrent to financial independence. Commit to a strategy to pay down all household debt and save at least 10-20% of your monthly income.

Inflation is a constant battle. Over the years, inflation has reduced our buying power. When increasing to reduce inflation, interest rates also increase our debt repayment load as a percentage of income.

Planning for your dependants. Ensure you have sufficient life insurance to pay off your debts, such as credit card balances, car loans, IOUs, and any business-related debt. Incorporate this with enough coverage to provide future income for your dependents. This is especially necessary if your debt exceeds your annual income, as it does for the average household where debt runs at 150% or more of income.