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 Timeless Financial Tip #10: Making Legacy Planning more Meaningful

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By Steve Lowrie, CFA

Special to Financial Independence Hub

Let’s face it: When families list their favorite financial planning projects, legacy planning rarely makes the cut. It may feel as if you’re putting the emphasis exclusively on death and taxes, rather than your lifetime pursuits such as building a career, pursuing your personal interests, stewarding your kids into adulthood, and retiring in style.

Then again, I believe the term “legacy planning” is misleading to begin with. It sounds so dry and formal — as if it’s only for uber-rich, multigenerational dynasties, or the tail end of your lifespan.

No wonder most people put off planning for it.

In reality, legacy planning can be worthwhile for almost anyone. And it’s not just for later in life; key aspects of it can help you enjoy a more enriched life today. In today’s Timeless Tip, we’ll cover the possibilities.

What is Legacy Planning?

Instead of treating legacy planning as a tedious, end-of-life chore, I like to think of it as being more like a bonus round of lifestyle planning across four core quests:

  1. Family Ties: Legacy planning helps you keep more of your wealth in the family. Importantly, it lets you define who your family is, in a world where multiple marriages and blended families may more often be the norm than an exception to the rule.
  2. You or your Heirs: Legacy planning can also be defined by what it is not. If your top priority is having enough to enjoy your retirement in style, your legacy planning will differ from someone who dreams of leaving the largest possible inheritance to their heirs.
  3. Charitable Giving: Legacy planning also helps you chart out how and when you’d like to support your causes and charities of interest. Hint: You don’t have to wait until you’re gone to leave a legacy.
  4. Tax Reduction: Even if you’re fine with letting inheritance laws guide how your estate will be distributed, most of us would prefer a tax-efficient transfer. Legacy planning strategies abound here.

How do you define “Family”?

First, let’s address the piece most of us associate with legacy planning: Who gets what stuff after you’re gone? If your estate seems perfectly straightforward, you may be tempted to just let your heirs sort it out. Unfortunately, this can leave you and your loved ones uneasy — not just moving forward, but right now.

Unintended Consequences: Check your provincial inheritance laws, and you may be surprised by what will happen to your assets if you die intestate (without a will). Your preferences may differ dramatically from the government’s.

Unresolved Heirlooms: Resolving which loved ones are to receive which treasured heirlooms and other portions of your wealth, can bring you and your family more peace — today, and moving forward.

The Angst of Uncertainty: Most of us also feel better knowing we’ve done what we can to spare our heirs the pain of having to untangle an unplanned estate at the same time they are grieving a profound loss.

The logistics of estate planning need not be extensive. They can range from essential to more advanced:

Wills: A basic will might suffice if you simply want to ensure particular people directly inherit particular pieces or portions of your estate, as permitted by law — especially when your preferences differ from provincial law.

Trusts and Foundations: You may want to up the ante with targeted trusts to cover additional nuances in your life. For example, trusts can provide for underage heirs, an heir with special needs, or other complexities, such as if your family owns a business in which some, but not all family members are involved. Private foundations come into play if you are interested in increasing the scope of your multigenerational charitable giving.

Insurance: Life insurance is also an often-overlooked tool for providing gap funding to cover taxable wealth transfers, especially when family businesses are involved.

Bottom line, making plans today for your wealth transfer to happen with minimal muss, fuss, costs, and complications can free you to better enjoy your assets throughout your life.

Spending or Preserving?

As we covered in “Retiring Reliably, Leaving a Legacy or Balancing Both?, ” another key question is: Do you want to earmark excess wealth for your optimal retirement, an optimal legacy, or a balance of both? Different lifestyles call for different legacy plans.

You may not think of investment management as part of traditional legacy planning. But you’ll be better at both if you combine forces. For example, if you want to emphasize leaving a legacy, your investment portfolio’s average expected return should exceed your withdrawal rate, so inflation doesn’t eat away at the balance. This usually means keeping more of your investments working in the markets, while also arranging for a way to take out cash on a regular, tax-efficient basis. Continue Reading…

Accelerating your Legacy Planning by Gifting In Advance

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LowrieFinancial.com

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Most posts about legacy, wills, and estate planning focus on how to settle your estate after you pass: ensuring your intentions are met, your family is cared for, charitable gifts are fulfilled, taxes are minimized, and so on.

Estate planning is important; we help clients with it all the time. But today, I’d like to offer a valuable twist on the theme of estate, life, and legacy planning:

Instead of your excess wealth being distributed after you die, you may find even greater value in giving some of it away while you’re still around.

Properly managed, making gifts and charitable donations while you’re alive can offer solid tax-saving benefits to you and your estate financial planning. In particular, targeted charitable giving can be a powerful tool for business owners and similar professionals who are approaching retirement and facing high-tax events, such as selling their business, or exercising highly appreciated stock options.

As importantly, it can be incredibly rewarding to witness the results of your generosity. Don’t underestimate the value this intangible benefit can add to your life and legacy planning.

Legacy Planning for Quality Living

First, what is “excess wealth?” Is there such a thing as too much money??? Not really.

This is where legacy planning is essential. If you’re thinking about spending, gifting, or donating significant wealth, don’t just guess at the dollar amounts. Instead, you and your financial advisor should periodically crunch the numbers to determine how much you and your loved ones conservatively need to remain well-positioned, even under worst-case scenarios (such as, say, a global pandemic).

After that — if you and your loved ones are indeed set for life — any extra resources become the financial equivalent of gravy on your entrée. How will you use your excess wealth to add flavour to your life and to the lives of others so that you are leaving a legacy you can be proud of?

An anecdote about Lifetime Charitable Giving

To envision what it would be like to make one or more significant charitable donations during your lifetime, consider the story of “John and Jane,” an earnest couple in their 60s who came to me for advice a few years ago. John came from meager roots, but he was determined to make his own way. With a boost from some financial aid, he put himself through college, where he met Jane. Together, they worked hard, scrimped and saved, and raised two kids. Along the way, John started his own business, which prospered.

Fast forward to 2020, when John was able to sell his business for a substantial sum of money. After we ran all the numbers, it was clear he, Jane, and even their kids would be able to live comfortably for their remaining days. Both personally and in a holding company, the couple also owned some taxable investments that had appreciated nicely.

So far, so good. However, there was one challenge (even if it was a nice “problem” to have): even with extensive planning in the anticipation of an eventual sale (purified operating company, multiplying the lifetime capital gain exemption, etc.), the business buy-out would generate hundreds of thousands of dollars in taxes in the year of the sale. As the saying goes, when you’ve incurred taxable gains, you can choose who’s going to benefit the most from the taxable portion: the government, or your favorite charities. I suggested to John and Jane, they could reduce their taxes owed in the year of the sale by instead fulfilling some of their existing charitable intents that same year.

To manage the significant donation they had in mind, we established a Donor-Advised Fund (DAF) in their name. They then donated into their DAF an equal amount to the taxes incurred from the sale of John’s business. This helped them accomplish several goals:

  1. They were able to fully offset the taxable buy-out gains with their charitable contribution.
  2. John was able to fulfill a lifelong dream by using some of the DAF assets to establish a scholarship at his alma mater. By doing so during his lifetime, he has been able to see others benefiting from a solid education, just as he had when he was young. On a personal level, he and Jane have found the experience highly rewarding.
  3. Moving forward, they can donate highly appreciated assets to their DAF to wash away those gains as well.

A DAF offers a few other benefits as well. For example, you can direct how to invest undistributed DAF dollars in the market, potentially increasing your giving power over time. You can also keep your charitable giving anonymous if you’re so inclined. Continue Reading…

Death and Taxes, Cross-border Style

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Dollar Printing: Global Macro Shifts; Franklin Templeton Investments Licensed from Gettyimages

By David Cieslowski, CPA, CA, CFP, CIMA

(Sponsor Content)

As Benjamin Franklin famously wrote, “… in this world, nothing is certain except death and taxes.”  For US citizens, as well as some Canadians who own US assets, the first may be swiftly followed by the second.

In the United States, an estate tax is applied to the transfer of the taxable estate of every deceased  American citizen, resident or non-resident, including green card holders or others with dual US-Canadian citizenship. Even Canadian citizens who have never stepped foot in the United States, but hold US securities or other US assets, could find their estates subject to a tax on situs assets, which are defined as assets with a tangible or intangible direct US connection or location.

The low-down on US estate tax

Estate tax falls into the category of transfer taxes, as opposed to income tax. It can be substantial; those in the top marginal tax bracket may pay up to 40% on estates with assets of more than US$1 million. Moreover, for US citizens and residents this tax applies to assets held worldwide. Real estate ownership alone can easily exceed those limits.

Fortunately, the reality is somewhat more encouraging. Only around 2% of the US population actually pays estate tax, largely because of exclusions that effectively spare all but the largest estates.

The two most common exclusions are:

  • Annual exclusion of US$15,000 per person
  • Lifetime credit of US$11.7 million for 2021 and indexed annually. Something of a political football, this credit can rise or fall along with changes in government[1]. The current credit limit is set to expire at the end of January, 2025.

These annual exclusions are portable, meaning they can be used by any descendant of the deceased.

The gift that keeps on giving: to the IRS

In the battle of wills between those determined to transfer all of their wealth to succeeding generations and those determined to “tax to the max,” many strategies have been tried and failed. Gifting assets to relatives while the owner is still alive has been one of the more popular tactics. Not surprisingly, the IRS employs two additional taxes to thwart such attempts at tax-free wealth transfer.

The first is a garden-variety gift tax. For non-spouses, annual exclusions are the same as for estate taxes. For spouses they are more generous: unlimited for spouses who are US citizens and $159,000 for 2021 (indexed annually) for spouses who are not. Continue Reading…

How to handle windfalls, inheritances, gifts, estate freezes

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“We should all be concerned about the future because we will have to spend the rest of our lives there.” — Charles F. Kettering (1876–1958), American inventor

Will a lifetime of work help the next generation’s financial security? Let’s imagine.

Boomers and younger generations often receive cash and other financial assets from several sources. Three popular ones come to mind, such as inheritances, gifts and estate freezes. Let’s call them wealth transfers or windfalls. Some are modest while others are substantial. All ought to be much appreciated.

In Canada, the value of transfers is estimated to exceed $1 trillion. Similarly, the US ballpark is likely higher than $10 trillion. These windfalls serve as a welcome boost for ageing boomers. Especially where the nest egg is in need of a little help.

Inheritances consist mostly of family homes, cottages, land, income properties, stocks, bonds, mutual funds, family businesses, cash and term deposits. Gifts typically include cash and equivalents, savings and a variety of deposits. An estate freeze often involves private companies, family businesses, farms, income real estate and family trusts.

Don’t make any snap decisions that cannot be reversed. Don’t sell things you now own or buy anything new, like stocks or real estate.

Receiving a wealth transfer is like winning the lottery. We are human and can fall prey to emotional, spur of the moment decisions. Avoiding the pitfalls of dealing with our exuberant feelings of sudden wealth is not always easy.

No need to rush

Continue Reading…

Leave an inheritance of cottage relaxation, not taxation

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Cottage On The Carpenter Lake, CanadaBy Tarsem Basraon, TD Wealth 

Special to the Financial Independence Hub

The summer is quickly approaching and for many Canadians that means one thing: cottage season.

While many parents envision leaving the family cottage as part of their inheritance one day, with the value of cottages often appreciating since purchase, there’s also the risk of bestowing the legacy of a large tax bill.

To help make sure you’re leaving an inheritance of cottage relaxation and not taxation, here are three strategies you can discuss with your financial advisor when planning your cottage legacy. These strategies are available to you while you are alive, and there are various other strategies that can be implemented on your death in your will.

• Co-own with your Kids

Adding your children to the deed and making them co-owners of your cottage could help defer capital gains tax and save money. For example, if your cottage value has increased over time, it would trigger a capital gain on the portion of the cottage that your children now own and you would pay the tax on that now. Down the road, your kids would only pay tax on the capital gains owing on the remaining portion of the cottage you own when you die. There is,  however, a risk with this approach. Continue Reading…