From ‘Discovering She’ Magazine, August 2011

Talking with Women About Money – August

It’s a HOT summer and I hope you’re enjoying it at your favorite “home away from home,” your family cottage. For many of us, our cottage represents the second largest financial investment we will make. There is, however, an important difference between this property and your primary residence! On the last death of you and your spouse, there will likely be a significant tax liability. This is because a couple can designate only one property between them as a principal residence, which is sold with a capital gains exemption. All of this has the effect of forcing us to develop ways to pass the cottage on in a tax efficient manner.

Who should the family cottage go to?
While concern about the future tax liability associated with the disposition of the cottage is important and requires forethought, for others, who to leave the property to is paramount. The best solution may not be to leave it equally to all children. The children may not have the same interest in its future use and, a cash bequest, from other estate assets, may be more appropriate to those who don’t want the property.

I recommend having an open discussion with your children or grandchildren to determine who has an interest in using the property and who will pay the costs of future maintenance and taxes.

Ways to transfer ownership of the cottage
There are several ways of transferring ownership including the use of life insurance and trusts.

Life insurance can be a very cost-effective method of providing liquid cash to pay any capital gains. Insurance can be purchased on the single owner of the cottage or, as is most often the case, on the joint owners (mom and dad.) The policy would be a “joint last to die” and, because two people are insured, the cost will be less than either could buy individually. The proceeds of the insurance are tax free to the beneficiaries. In some cases, the beneficiaries of the cottage and of the insurance may be able to pay the premiums. The only potential downfall to this solution is that the owner(s) of the cottage must be in good enough health to qualify for the insurance. Because this may not be the case, let’s look at other solutions.

Consideration can be given to transferring a cottage to an ‘inter-vivos’ (living) trust if there is currently a small capital gain (the transfer of the cottage asset into the trust triggers capital gains). However, this would effectively transfer any future capital gains to the beneficiaries.

A “discretionary” trust can be useful because, as mentioned earlier, it may not be clear as to which of your children may even have an interest in the property. The transfer can take place into this trust and the owners will have unlimited use of the property as well as complete control. This would allow time to decide who the beneficiaries will be. At some later date, the property can be rolled out of the trust to the beneficiaries, at the value it was rolled into the trust originally. This will have the effect of deferring tax until the property is sold. If, as the owner, you are over 65, an ‘alter ego’ or ‘joint partner’ trust could be used. With these types of newer trusts there is no deemed disposition of property when the cottage is transferred into the trust.

A Word of Caution
There have been suggestions that the cottage can be transferred into joint names with the eventual beneficiaries. While this may have the effect of passing the property by “rights of survival” at death, it has major drawbacks. If this is done, there will be a capital gain at the time of transfer, the property would be in “joint control” with all owners, and it would be subject to claim if there were a marriage breakdown or by creditors of any of the owners. This is clearly not a good solution.

Hopefully your family cottage is a source of great enjoyment and many fond family memories. It’s important to plan for its’ appropriate transfer and to provide sufficient liquid cash to pay any taxes. A great deal of expense and frustration can be avoided in the future by taking a small amount of time today to plan for this event.

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries. ™ Trademarks of The Bank of Nova Scotia.

The current transfer of wealth from one generation to the next is unprecedented. Estate planning has become more urgent and complex and estate litigation is all too common. People are also living longer and elder care is now a pressing and inescapable issue for many individuals and families. While there is an abundance of information about estates, trusts and elder issues available on the internet and elsewhere, this information is often confusing, unreliable, or not applicable in Ontario.

All About Estates is a collaborative blog that brings together lawyers, accountants, trust officers, and social workers to provide you with current and accurate information about estates, trusts, tax, litigation, guardianship and elder care. Each weekday a different blogger from a different organization will write an entry. The content will be short, easy to read, and eclectic. The entries will not provide legal or other advice, but will raise issues that you can further explore on your own or in conjunction with the blogger. The hope and goal is to provide you with a smorgasbord of ideas, trends, comments, and tidbits on interesting and diverse topics that the busy professional or sophisticated client may find worthwhile and/or useful.

All About Estates

Living Benefits
Critical Illness Insurance
One of the great advantages of modern technology is that it’s allowing more people to survive once fatal medical conditions. However, the unfortunate reality is that many survivors must bear a heavy financial burden for things like medical treatment outside Canada, or ongoing care at home or in a facility. What can prevent depletion of your savings if you should fall ill? Critical Illness (CI) insurance can stop loss and protect your assets. Critical Illness Insurance (pdf)

Living Care
You work hard, save and invest to reach your financial goals. You want to retire without financial worries, control your own future and never burden your loved ones. Maybe take a dream trip. Spend more time with family and friends. A summer home. An inheritance for your loved ones … But life is unpredictable. Some of those dreams may have to change if you develop serious health concerns. Manulife’s LivingCare long term care insurance can help you prepare for the unexpected. LivingCare helps preserve your savings and investments and gives you choice about the type of care you receive. It lets you live all of your life your way. Living Care Guide (pdf)

Long-Term Care Insurance
The good news you ask? Positive lifestyle changes and medical advances over the last few decades have resulted in people living longer. The bad news? Living longer increases the chances of developing chronic medical conditions and the costs associated with caring for these conditions can be astronomical. Fortunately, an insurance product exists that can provide financial support required, should there be a need for long-term care in the future. Long-Term Care Insurance Overview (pdf)

Estate Planning
Estate Bond
Would you like to give more to your family and less to the government? If your answer is “yes,” you might want to consider an Estate Bond®.
Estate Bond (pdf)

The Estate Reallocation Strategy
The key to effective estate planning is to minimize estate tax and maximize the amount of wealth that is transferred to the next generation. But how? Life insurance offers a unique strategy. The Estate Reallocation Strategy (pdf)

This article appeared in the Fall 2009 Registered Nurses’ Foundation of Ontario Newsletter
Charitable giving is a growing priority for many Canadians. We see this in recent statistics showing a substantial increase in donations. This kind of support for charity is unprecedented in our history. While generosity and belief in community are primary motivators, the greatest enabler is a series of new tax incentives that began in 1996.

Introduction of Federal Tax Incentives
In introducing these charitable giving incentives, the Federal government has given taxpayers a choice. It’s a choice about how individuals wish to support society and the amount of tax they wish to pay. With these new tax incentives, it’s now possible to eliminate tax on 75% of income, except in the year of death and the year prior to death, when this figure jumps to 100%. Everyone must contribute to society via the tax system, but the decision about where the contribution goes can now be directed by the individual taxpayer.

What makes the tax incentives distinct is that they focus on gifts of assets (stocks, bonds, mutual funds, real estate, RRSPs/RRIFs) and business interests. These aren’t the gifts we typically make. Most are familiar with annual gifts by cheque to our favourite charities. The Federal tax incentives enable exceptional gifts that stand out for their size and level of commitment. These are gifts that are planned ahead of time and often realized through estate plans.

Meaningful Charitable Planning
A good financial and estate plan that includes charitable giving can be difficult to implement on its own and professional advice is recommended. Personal and family needs are at the centre of the planning process, and then charitable giving is considered. The goal is to integrate charitable giving into your financial and estate plan in a way that reflects both your values and your desire to minimize taxes.

At lower amounts, the individual’s will typically designates one or more charities to receive specific amounts or a percentage of the final estate value. At higher levels of gifting, an intermediary charitable entity – either a donor-advised fund, which is a charitable giving vehicle administered by a third party such as a mutual fund company and created to manage charitable donations on behalf of an organization, family, or individual, or a private family foundation – is set up to receive assets over a number of years. The intermediary “container” can be filled at your own pace, in increments or in one large instalment, often when a business is sold or at the time of death. This “container” represents a piece of your legacy, an ongoing entity in your family’s name.

Typically, these larger gifted assets are endowed, which means the capital is invested and only the income is gifted annually. Both advised funds and private foundations give ongoing control to the donors and their families to choose the charitable recipient annually. It’s a vehicle that allows donors and their families to be involved over time in enacting your legacy.

Example 1
Mary, a 70 year old retired nurse, is an example of someone who wants to donate to the RNFOO. She arranges to contribute $50,000 over five years to a donor-advised fund available from a mutual fund company. Working with her advisor, she invests the money conservatively to ensure that the principal remains intact and the annual income of about 3% to 5% is donated to the RNFOO each year into perpetuity.

Example 2
In another example, Joanna, a Registered Nurse, and her spouse John want to make significant contributions to several charities. On their passing, their son will inherit sufficient assets to enable his career and lifestyle while simultaneously keeping him motivated to continue working. Joanna and John want to impart their charitable values to their son, his children and grandchildren. To do so, they set up a private family foundation with an initial investment of $250,000. On their passing, they have designated their private foundation as the beneficiary of a $500,000 joint, last-to-die life insurance policy. With the investment strategy designed to preserve the capital, the annual income can be distributed to their charities of choice.

The approach to planning described above separates the process of planning the gift from the support of individual charities. You can plan to give a large amount to charity over a number of years as part of an integrated plan. The contributions happen on your timetable and not when fundraisers come calling. Gifts to individual charities occur as part of a controlled, thoughtful process that preserves maximum flexibility and allows ones’ philanthropic values to be implemented over time. If you would like to learn more about this planning opportunity, please contact the RNFOO office.

Bev is a Senior Investment Executive and Financial Planner with ScotiaMcLeod and highly respected in her industry. She is a Certified Investment Management Analyst and a Fellow of the Canadian Securities Institute. Bev has served as Gala Fundraising Chair, and from October 1998 to October 2004 she served on the Executive Team of RNFOO. At the Gala in May 2006, Beverley Moir was presented with an Honourary Life Membership in recognition of her leadership and commitment to the Registered Nurses Foundation of Ontario.

® Registered trademark used under authorization and control of The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF. This article is for information purposes only. All performance data represents past performance and is not indicative of future performance. It is recommended that individuals consult with their Wealth Advisor before acting on any information contained in this article. ScotiaMcLeod does not offer tax advice, but working with our team of experts we are able to provide a suite of financial services for clients. The opinions stated are not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF. All insurance products are sold through ScotiaMcLeod Financial Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Underwriters (Financial Security Advisors in Quebec) representing ScotiaMcLeod Financial Services Inc.

Q. I own my own, very successful, company and although it is large and I have a very capable senior management team, I am very involved in the day-to-day management. I am older and will have to retire in a few years, at least partially. My children work in the business but have no interest in running it. Having been too busy building the company, I have never put together a succession plan. Now I worry that when I pass, my company may suffer. I haven’t ruled out selling, at least part of my company, to one of my employees. Do you have some advice on what my options might be? – Jensen P.

A. Business succession planning is critical for the self-employed and business owners. Leaving it to chance could allow someone else to decide what will happen to your business. There is the potential for significant loss if your business can’t function because you are not there or if there are other business interruptions such as creditors demanding payment or employees seeking more stable employment elsewhere. This uncertainty could lead to a forced sale or business liquidation at a substantially reduced value.

If your business is the primary asset and main source of income for your family, you need to plan for your family’s personal needs first. There needs to be sufficient life and disability insurance to make sure that you and your family can sustain your current lifestyle in the event of illness or death. With your personal affairs in order, it’s time to look at the needs of your business. As a business owner, you need insurance to protect your business property and for that you need a business succession plan. You should ask yourself how the business will continue to function if you lose a key person or some other unexpected business interruption. Insurance to cover the lives of key persons is used to cover this scenario.

You should communicate with your family members to assess their interest and preparedness to take over the business. Ownership and management are two different things. Selling the business to a key employee may be an alternative and may help to avoid family disputes. Have a buy-sell agreement and corporate insurance in place that allows surviving partners or stakeholders to buy your share of the ownership and maintain control of the company.

Bev Moir is a Senior Investment Executive and financial planner with The Moir Team at ScotiaMcLeod,Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member Canadian Investor Protection Fund (CIPF).

This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. When discussing Life Insurance Products, ScotiaMcLeod Investment Executives are acting as Life Underwriters representing ScotiaMcLeod Financial Services (Ontario) Inc. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia

Q. My husband and I are retired, owning both a home in the city and a cottage up north. We are updating our will and want to leave our children the cottage when we pass away, but we don’t want to burden them with having to pay a large amount of taxes on the property. How can we leave the family cottage for the next generation in a tax efficient manner and ensure it remains in the family for future generations to enjoy? – Janelle P.

A. It is no longer possible for you and your husband to designate one property each as your principal residence. You can sell or transfer ownership of your principal residence to your children and designate the cottage as your principal residence, and enjoy the capital gains tax savings on both properties.

Life insurance is a cost effective way to provide liquid cash to pay capital gains taxes your beneficiaries may incur. Life insurance is purchased on the life of the owner or on joint owners of a cottage on a “joint-last-to-die” basis. Insurance proceeds are tax free to the beneficiary and avoid probate. This will provide immediate cash to pay taxes. In some cases, the intended beneficiaries of a family cottage may pay the insurance premiums. A potential downfall of this solution is that you and your husband must be in good enough health to qualify for insurance.

Another solution is to transfer the cottage into an “inter-vivos” (living) trust, especially if there is a small capital gain liability. The transfer of the cottage asset into a trust triggers capital gains. With this approach, ownership of the cottage is now in the trust and your family retains unlimited use of the property. If you and your husband are over 65 years old, an “alter-ego” or “joint-partner” trust can be used. There is no deemed disposition of the cottage when it is transferred into this newer type of trust.

Bev Moir is a Senior Investment Executive and financial planner with The Moir Team at ScotiaMcLeod, Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member Canadian Investor Protection Fund (CIPF).

This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. When discussing life insurance products, ScotiaMcLeod Investment Executives are acting as life underwriters representing ScotiaMcLeod Financial Services (Ontario) Inc. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia

Sara and John S., both 65 years old, met with me recently to discuss how to transfer ownership of the family cottage to their three children. They have two concerns: The value of the cottage has appreciated considerably since they bought it 15 years ago and approximately 50% of the increased value will be subject to capital gains tax. Second, their children are married with young children and big mortgages, and thus may not have extra cash to pay the potential taxes owing at the time of their passing.

A. Sara and John aren’t sure where the cash will come from to pay the tax liability. They will not have other estate assets that can be liquidated and they are fearful that the tax liability, plus probate and transfer fees may necessitate the sale of the cottage.

One approach is for Sara and John to retire to the cottage and, following the sale of their city home, use the cottage as their principal residence. In this way, they can take advantage of the capital gains exemption on principal residences. This may not be practical due to health and family considerations in their later years.

Another option is to estimate the taxes owing at death and to save the money. A more tax effective strategy is to purchase life insurance to cover the estimated tax liability. For example, Sara and John would pay less than $1,500 a year to buy $100,000 of life insurance. If they were to save the equivalent amount over the next 20 years in a taxable account, they would need to earn 10% a year on that investment in order to save the $100,000.

Alternatively, they could sell or gift the cottage to their children and cap their tax liability now. Future growth in the cottage’s value is now taxable in the hands of their children when they either dispose of it or transfer ownership to their children. This strategy avoids probate as the transfer happens now, outside of Sara and John’s estate. However, it will trigger an immediate taxable capital gain in the current year and control of the cottage is now relinquished to the new owners, their three children. The Canada Revenue Agency (CRA) will calculate the capital gain based on the cottage’s current market value, regardless if the cottage has been gifted or sold at nominal value. Furthermore, when the children pass on the cottage to the next generation, CRA will calculate their capital gain based on the nominal price paid.

The Result:

It’s important to seek professional advice because there is no ‘one-size-fits-all’ answer. In Sara and John’s case, maintaining ownership of the cottage was important to them. As they are in good health, they chose to purchase life insurance to provide the liquidity to ensure that sufficient funds would be available to their children when needed.

Bev Moir is a financial planner with The Moir Team at ScotiaMcLeod in Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member CIPF.

This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.