It's Your Money  

A money plan for your kids

Many of today’s retirees have built up significant wealth over their lifetimes and will not spend it all before they pass on.

The bulk of this money will be passed down to their children. But are their kids ready and responsible enough to put these gifts to good use?

In last week’s column, I discussed GICs that can bypass the estate and go directly to your chosen beneficiaries. As a follow up, I wanted to explain a unique way to pass on GIC or other investment accounts in the manner that you would prefer.

I’ve heard from many retirees who want to pass their money on to their children but fear that they don’t have the restraint to use it wisely.

These parents have worked hard for their whole lives to build up their assets and they hate the idea of passing it on only to be “burnt through” in a couple of years on new cars and vacations.

But what is the alternative?

You could set up a costly family trust but a good chunk of your estate will be eroded by legal and accounting fees. Recently, a much simpler solution has emerged.

Many investment accounts that are held in “segregated funds” or “GIFs” (Guaranteed Income Funds similar to GICs) have the ability to create a graduated inheritance program.

Instead of simply naming your children as the beneficiaries, you can elect to spell out your future wishes in detail and have the payouts administered at no cost to you or your heirs.

So how does this work? Here are a few examples:

  • You have two adult children, one of which is very responsible with their money and the other is not. You could elect to give the responsible child their 50 per cent of your portfolio right away while the other child receives their portion annually (with interest) over a 10- or 20-year period.
  • Your adult child requires a lifetime of financial support but is not capable of handling money on their own. You elect to have the value of your funds purchase a life annuity for your child that will provide a fixed or indexed monthly payment amount for as long as they live.
  • If you have a 10-year-old child and your will states that they would live with your sibling if you pass, you could elect to leave 1/3 of your portfolio to them upon your death (held in trust and accessible as needed to help raise them). The remaining 2/3 could be passed on to them over a 10-year period starting at age 20 – so if there’s $500K left, they would receive $50k per year (or $4,167 per month) plus interest.
  • You have a 40-year-old son who earns a decent income but spends everything he makes and is saving nothing for retirement. Your investments could be passed on in a way that they don’t get access to any of the money right away, but a life annuity starts paying them a fixed retirement income stream at age 60 or 65. If they aren’t responsible enough to prepare for their retirement, you can fill that gap.   â€‹

The above are only a few examples and there are many other options to consider. A graduated inheritance strategy can be setup on your investment accounts (including GICs) or your life insurance policy.

Equally important, the strategy you design is not “locked in” once you commit to it and can instead be adjusted or changed at any time. All these options are done with no additional costs or fees; you simply fill out an addendum for your policy or account beneficiary designations.

For those of you with insurance or investment assets to pass on down the road, consider a graduated inheritance strategy to help ensure that your money provides the maximum impact for your loved ones.          


GICs a good deal

There is over $555 billion in GIC assets held here in Canada, an amount that is steadily growing.

Guaranteed Interest Certificates (GICs) have their downfalls. With today’s low interest rates, your buying power after interest goes down once you take inflation and taxes into account.

Yet, their security is still appealing to many retirees who aren’t worried about making money but instead want only to be sure that they won’t lose what they’ve built up.

The majority of these GIC assets are held by those already retired and due to the previous generation’s different views on debt and savings (plus the pensions that don’t exist anymore), many of these retirees will end up passing this money on to their kids and grandkids.  

But what happens to this enormous amount of wealth once all of this GIC money is passed on?

You guessed it, the tax man will stick his nose in for a piece of the action.

And on top of probate taxes, there are numerous other estate related costs including legal, trustee and accounting fees that are often also charged on a percentage of the estate’s worth. 

There is a good solution out there though – GIC investments that bypass the estate and go directly to your chosen beneficiaries.

Often referred to as GIFs (Guaranteed Income Funds) instead of GICs, these estate efficient investments are sold by insurance companies and they allow one or more beneficiaries to be named to their accounts. 

They have some additional benefits too including potential protection from creditors, privacy (estate filings are public information in B.C.), and the money is paid quickly to the beneficiaries instead of being locked up for up to a year (or longer) in probate. 

But in the end, the No. 1 criterion for evaluating GIC/GIF offerings is still what rate they pay. Banks typically have the lowest rates; a quick scan today showed a three-year GIC pays roughly 1.5 per cent per year from any of the big banks.

Credit Unions typically have better GIC rates and the best I saw among the provincial credit unions was 2.6 per cent for a three-year term.

I then checked some GIF rates from common insurance providers and saw their three-year rate currently at 2.6 per cent as well, which makes them very competitive to the best rates. So, you can get all the added benefits of an estate bypassing, creditor proof GIC for the same top rates.

But that’s not all; there is one more big benefit of GIFs from certain insurance companies.

Some also have a “graduated inheritance” beneficiary option that you can affix to your GIC account to pass on your money over time in the manner that you chose, without all of the time and money required to setup a complex trust.  S

tay tuned next week for more information on that unique option.

While not the right choice for all retirement plans, GICs still remain a big part of Canadian’s retirement savings.

If you hold or are considering purchasing GICs, be sure to take a look at those issued by insurance companies for all of the added benefits they provide, as long as their rates are good too!

Business insurance helpful

Nobody likes to talk about life insurance. Between the high costs, having to think about death and the pushy salespeople that are all too common, it’s easy to see why. 

Small business owners seem to be even less apt to have a discussion about life insurance. They often focus all their time and money back into their business and don’t stop to consider their business’ financial needs.

But there are three common situations in which life insurance can provide the needed protection to solve big problems that many of these business owners face.

Equalizing Your Estate

A common occurrence is a business owner with two or more children where some but not all of their kids are involved with the business.

If the owner passes away and leaves the business shares equally divided between their children, those involved with the company now have to contend with a partner/sibling who may be more inclined to want to sell the business off or be paid out for their half right away. 

Assuming there are two children and that one is involved and the other is not, an insurance policy can be setup for the fair market value of the business and you can name the un-involved child as the beneficiary and leave 100% of the business to the other child who works in it.

This provides both children with an equal inheritance and keeps everyone happy. 

Death of a Key Employee

Many smaller companies rely very heavily on the contributions of one or two critical people who could be an owner or a key employee. What would happen to the business if that key person was to pass away suddenly?

Having life insurance on key people will provide cash flow to the business to make up for lost revenue and the money can be used to find or train an appropriate successor. Many business loans will require a “key person” insurance policy and if that is a condition of your loan, you can usually deduct some or all of the insurance premiums.      

Funding a Buy/Sell Agreement

In the case of multiple business owners or partners, a buy/sell agreement should always be in place to clearly spell out what happens if one of those partners passes away. A life insurance policy should be setup to fund the buy/sell agreement. 

In most cases, the agreement will lay out a very tax efficient plan for the company to purchase the deceased’s shares from his widow or estate and these heirs receive the money that the insurance policy provides, often largely tax-free using the Capital Dividend Account. 

In many cases, these insurance policies can be purchased inside your corporation, using more tax efficient corporate money. It is critically important that you understand all the tax implications and setup these policies properly. 

You’ve put thousands of hours and likely many sleepless nights into growing your business into the success that it is. Take a few minutes to ensure that you’ve got the proper protection in place to keep it that way.


Home-buying pitfalls

Buying your first home can be exciting, exhausting and a little bit scary.

Your want a house you love and can afford, but many people make mistakes that can have long-term consequences.

As we sit here in the early stages of a real estate market correction, making financial mistakes while purchasing your first home can be even more damaging than usual to your financial future.

I wanted to share a few financial tips for anyone making the plunge into home ownership:

How much can you really afford?

There are often three different answers to this question.

  • there is the amount you think you can afford
  • the amount the mortgage lender (bank) thinks you can afford
  • the amount that you can actually afford.

Sometimes a lender will approve you for a higher amount than you should be spending and sometimes you might think you can handle x amount per month of mortgage payments, but you should really sit down with an unbiased professional financial planner to find out how much you should really consider spending.

A realtor or mortgage broker may offer this type of advice, but the conflicts of interest that exist with their ability to offer you unbiased advice need to be understood – it’s much better to get unbiased advice from a financial professional. 

Don’t forget to consider additional expenses.

Many prospective buyers only look at the monthly mortgage payment and forget about other costs such as:

  • property taxes
  • insurance
  • strata fees repairs
  • the various utility bills.

What happens to your budget if a major repair bill comes along such as a new furnace or roof?  You need to be able to deal with these unforeseen financial shockers comfortably as well.

Many home buyers are still looking at variable interest rate mortgages as well which can be scary in a rising interest rate environment. If you’re using this type of mortgage, you need to be sure that your budget can absorb at least 100 basis points worth of increases – 150 points would be better. 

Keep your emotions in check.

Many buyers, both first time and seasoned homeowners, have made poor financial decisions after falling in love with a property outside their price range. It’s imperative that you treat a home purchase as a business transaction and not purely an emotional one.

Another pitfall is accepting a deal that isn’t very good after being pressured into buying something that you don’t feel totally comfortable with. Some sellers and realtors will use high demand (whether it’s real or not) to push someone into acting too quickly. Never be afraid of walking away if you’re not entirely committed.

Buying your first home can be stressful and overwhelming, but if you’re aware of the main financial mistakes that others have made ahead of time, you can protect yourself and shop with confidence.

A home will likely be the largest purchase you ever make so take the time to get it right. 

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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