My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, July 18, 2016

The Best of The Blunt Bean Counter- Inheriting Money - Are you a Loving Child, a Waiter or a Hoverer

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a June, 2014 blog post on how people act when they become aware they will inherit money from their parents or grandparents.

This topic is a bit controversial and the post became the basis for an article by Adam Mayers of the Toronto Star on inheritances, titled Inheritances are about love, money and greed.

Inheriting Money - Are you a Loving Child, a Waiter or a Hoverer


In February 2012, I wrote a blog post titled “Is it Morbid or Realistic to Plan for an Inheritance?”. I knew this was a touchy subject and would elicit various reactions from my readers. In the post, I stated that to “ignore the existence of a significant future inheritance that would impact your personal financial situation may be nonsensical” from a financial and retirement planning perspective.

Whether you believe you should plan for an inheritance or not, is your own personal decision. Today I want to deal with the behaviors and actions of those who stand to inherit money from their parents. Over the last 25 years, I have dealt with the tax, financial and psychological issues surrounding numerous client estates. I have observed the actions of those who will be the recipients of an inheritance and have found their behavior anywhere from fascinating to sickening.

I have found people who will inherit money fall into 4 groups:

1. The Loving Child

2. The Pragmatic Loving Child

3. The Waiters

4. The Hoverers

The Loving Child


For this group, their parents come first and money is secondary. Typically, these children are very close to their parents throughout their life and call and see them on a consistent basis, often weekly, or even daily. They have always helped their parents with their medical needs or in some cases with their financial needs, without giving it a second thought; because, their parents are well, their parents. This group would tell you they would give back any inheritance, if it allowed them another day to be with their parents and would consider it blasphemy to plan for an inheritance.

The Pragmatic Loving Child


This group is a subset of #1. These children love their parents and just want their parents to enjoy their lives, even if it means that they spend the children's inheritance. Children in this group may consider the reality that they will likely receive an inheritance. Even so, they do not want to take it into account in their planning and it is only at the insistence of an accountant or financial planner that they would even consider such.

The Waiters


I am not sure who coined this term, but I have seen it used many times. Waiters are described as children waiting for their parents to die, so that they can benefit from their parents assets. Waiters are considered to have a warped sense of entitlement to their parent’s money. I have observed several waiters over the years, some who went into debt to live a lifestyle based on an assumed inheritance. In my limited sample size, the children have always received their inheritance. However, one day I would love to see the face of a waiter when a lawyer informs them their parent decided to leave everything to charity instead of them.

The Hoverers


Hoverers are an even lower species than the waiters. These children often pay little or no attention to their parents their whole life, but when their parents get sick or older, they start hovering around. Many years ago one of my clients was very sick and was expected to pass away any day. I received a call from one of his children. I assumed the call was going to be the bad news that my client had passed away and the child was going to provide me the details of the funeral. The call was indeed to tell me their parent had passed away, but they were not calling to tell me about the funeral arrangements; their question to me was when they could start accessing their inheritance. I just felt sick to my stomach.

Don’t ask me why I decided to write about this topic. I guess as I have stated many times in my blog, I am just fascinated by how money affects people’s behavior. Thankfully, most people fall into the first two groups. If you are a Waiter or Hoverer, consider taking a good look at yourself in the mirror.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, July 11, 2016

The Best of The Blunt Bean Counter - Probate Fee Planning- Income Tax, Estate & Legal Issues to Consider

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a June, 2011 blog post on Probate Planning that has had over 27,000 page views, making it one of my most popular.

It has been my experience, that many people are so concerned with minimizing their probate fees, that they often inadvertently create substantial income tax and/or legal issues that dwarf the benefits from the probate savings. So be careful and obtain professional advice when undertaking probate planning.

Probate Fee Planning - Income Tax, Estate & Legal Issues to Consider


Planning to reduce or eliminate probate taxes requires one to navigate a minefield of income tax rules, joint tenancy and right of survivorship issues and legal precedents. Questions of legal versus beneficial ownership of property and evidence of intention often come into play. The scary thing is, that this type of planning is often done by the uninformed.

When I started writing this post months ago, my objective was to provide probate planning techniques. However, as I wrote and researched, I realized the legal concepts were extremely complex and beyond my area of expertise. Consequently, this blog post became more conceptual in nature than initially planned. After reading this blog, I hope it becomes clear to you that you need to consult a tax or estate lawyer when undertaking any significant probate planning.

Probate Fees in Ontario


In Ontario, probate fees (technically called the “estate administration tax”) are levied on a deceased taxpayer’s estate at the rate of $250 on the first $50,000 of assets and $15 per $1,000 thereafter. Consequently, if a person were to die with assets of $1,000,000, the estate would have a probate fee liability of $14,500. An estate of $5,000,000 would have a probate fee liability of $74,500. For the other provinces, see this summary.

Two of the more common strategies to minimize probate fees are making gifts and transferring assets to joint tenancy. While these techniques may reduce or eliminate probate fees, they can create significant income tax and estate issues if not done properly.

Gifts to children and your spouse


If cash gifts are made during a person’s lifetime, they will reduce the value of his or her estate for probate purposes. If the gift is made to a child under 18 years of age, the income earned on the gifted property (i.e.: interest and dividends) will be attributed back to the person making the gift for income tax purposes. Where a cash gift is made to a spouse, the income earned on these assets (i.e.: interest and dividends as well as capital gains and losses) is attributed back to the person making the gift for income tax purposes. Cash gifts made to children who have attained the age of 18 do not invoke the income attribution rules in the Income Tax Act. So, you can make a gift to an 18 year old child which will reduce probate fees and not create any income tax problems.

Where non-cash gifts of capital property (such as gold or stocks) are made to a person other than your spouse, the property is deemed to be sold at its fair market value for income tax purposes. Thus, if a mother were to gift 1,000 shares of BCE having a total cost of $10,000 and fair market value of $30,000 to her 20 year old son, she would realize a capital gain for income tax purposes of $20,000, even though the shares were not sold and no money was received.

In an effort to avoid probate fees, some families seek to “add” the names of children to the title of a surviving parent’s home. This is done by transferring the title to the house from the surviving parent (“original owner”) to the children and surviving parent, as joint tenants (the “new owners”). Upon the transfer, the original owner/parent is treated for income tax purposes as having sold a portion of the transferred house based on the number of new owners. For example, if the new owners were parent and two children, each new owner will be treated as owning a one third interest. This means the original owner/parent in this example will be considered to have disposed of a 2/3 interest in the house. The 2/3 sale would be tax-free due to the principal residence exemption. However, 2/3 of any increase in value from the date of the gift until the house is ultimately sold will not be eligible for the principal residence exemption (assuming that the children have their own principal residences). If you are into horror stories, check out Jim Yih's blog for a nightmare of a story of a parent that put a child on title to her principal residence.

Situations such as the above may be avoided in certain circumstances where a lawyer knowledgeable in tax and/or estate law separates legal from beneficial ownership before the transfer. The Canada Revenue Agency (“CRA”) has stated that where there is a change in legal ownership without a corresponding change in the beneficial ownership (the real value is in beneficial ownership), there is not a disposition of the asset for tax purposes. What could be accomplished in the above scenario is a transfer of legal title only, without changing beneficial ownership. This would have no income tax implications but would assist in dealing with probate issues.

A further problem with transfers to joint tenancy (such as the home above) arises because with a joint tenancy, the entire title will pass to the last person alive which often is not the intent of the parent. For example, if a bank account belonging to Mom is transferred into a new account in the names of Mom, Son and Daughter, as joint tenants with right of survivorship, and Mom and Son die together, Daughter would become the “owner” of the entire account. This was not likely the intent of Mom, who likely wanted the split the account between her two children (or her grandchildren if one of her children passed away) – if not for trying to save probate fees, Mom would have never done this.

Joint Tenancy can be problematic-The Pecore Case


If property is held as joint tenants with a right of survivorship, on its face, the property will pass automatically to the surviving joint owner and is therefore not subject to probate fees. I have seen many cases where parents put their adult children’s names on bank accounts and investment portfolio accounts. The parents consider these accounts to now be exempt from probate, yet the parent continues to report the income earned on these investments in their own name for income tax purposes. As noted above, it is the CRA’s view that if beneficial ownership has not changed there is no disposition for income tax purposes, which is in accordance with the parents plan above. However, in the CRA's opinion, the probate transfer will not be effective, thwarting the parents plan above (Note: I have had various estate lawyers tell me that are not concerned with CRA's view on probate, since they do not administer this legislation).

Many parents fail to look past the probate issue and their intention in regard to the funds is unclear, i.e., is it the parent’s intention that the funds held jointly with one child belong to that child or do they belong to all their children and there is an understanding that the child on the account will share with their siblings?

This issue was addressed in Pecore v Pecore , a 2007 Supreme Court case where the court addressed these two potentially conflicting intentions. Legally, these two intentions are known as the presumption of a resulting trust and the presumption of advancement. The presumption of resulting trust means that when a parent dies, the transferred assets form part of their estate and will be passed on to the beneficiaries of the will, typically all their children. The presumption of advancement presumes any transfer to a specific child belongs to that child. The potential for conflict is rife where a parent transfers assets into joint tenancy with one child for ease of administration.

In the Pecore decision, the Supreme Court stated that where assets are transferred without consideration (such as to a child to avoid probate) that the presumption of resulting trust will operate in almost all cases save transfers from a parent to a minor child. This means that where a parent transfers assets into a joint account with one child, there must be evidence of the intention to make a gift to that specific child. As I am not a lawyer, I cannot state what counts as irrefutable evidence, but from what I have read, a written document is a minimum requirement.

A good summation of the various legal concepts discussed above is found here in this article by lawyer James Baird.

If done correctly and carefully, gifting, creating joint tenancy arrangements and separating legal from beneficial ownership can result in the reduction or elimination of probate fees. However, as discussed above, probate planning can lead to unintended income tax and estate implications. It is thus essential that you engage a lawyer who is comfortable in dealing with these issues, most likely a tax or estate lawyer when undertaking any significant probate planning.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, July 4, 2016

Gone Golfing for the Summer of 2016

Druids Glen Ireland
This summer, I will again be posting a “Best of The Blunt Bean Counter” blog each week; so I can spend some time golfing and enjoying the good weather with my family.

As this is now the third year in a row, that I have posted my "Best of" during the summer, maybe a more appropriate title should be; "The Sort of the Best of The Blunt Bean Counter".

Anyways, you can read them again if you wish and if not, I won't take it personally. I hope you have a great summer and I will see you in September, if after six years I can come up with something new to write about.

Monday, June 27, 2016

What Small Business Owners Need to Know - Section 85 Rollovers

Section 85 of the Income Tax Act ("Act") provides for the transfer of certain assets with inherent tax liabilities to a corporation on a tax-deferred basis. Thus, accountants often utilize this section of the Act, to meet many of the objectives small business owners have.

Section 85 is most commonly used as follows:

1. Incorporation of a business – A sole proprietor has decided that their business is growing and ready for the next stage (incorporation). They can transfer all of their business assets to the new corporation under section 85.

2. Sale of a proprietorship – Section 85 helps sole proprietors looking to sell their business utilize the capital gains exemption by providing under certain circumstances for the transfer of their assets to a new corporation in exchange for shares; and those new shares are sold shortly thereafter. The typical 24-month holding period requirement for the use of the capital gains exemption will typically not apply in this situation (this is technical and your accountant should be consulted to ensure all criteria are met).

3. Crystallization of capital gains – A small business owner can make use of the capital gains exemption by using section 85 to transfer their current shares back to their corporation in exchange for new shares redeemable at a higher value – usually up to the maximum capital gains exemption available. For 2016, the exemption is $824,117 which is indexed annually. See this this blog post on the complexities of accessing the capital gains exemption.

4. Estate planning and income-splitting – Section 85 can help transfer an individual’s business to a future generation and allow the growth of the business to accrue to the new generation also allowing for dividend sprinkling. However the attribution rules and “kiddie tax” should also be considered when dealing with minor children.

5. Asset Protection – Section 85 allows small business owners to transfer assets usually land and building used in their active business out of their operating company to a holding company on a tax-deferred basis.

Some Technical Details


Section 85 is a valuable tool for corporate transfers because of the flexibility provided by a tax attribute known as the elected amount (“EA”). The parties involved in the transaction (typically the small business owner personally and corporation they own) can choose within limits, what the EA is and that becomes the deemed proceeds of disposition of the selected assets. Thus, in most transactions the parties elect the EA to be the adjusted cost base of the asset being transferred and thus, there is no gain, since the EA is the same as the cost. For example: if you have an asset with a cost base of $100 and a fair market value of $100,000, you could elect at $100 to avoid any adverse tax consequences.

If you elect a higher EA than the adjusted cost base, a capital gain will result. In cases where a small business owner wants to “crystalize” their capital gains exemption, they will often elect to trigger a gain equal to their capital gains exemption to bump-up their cost base of their shares and thus the small business owner pays no tax as their capital gains exemption eliminates the capital gain, however, alternative minimum tax may sometimes apply.

In order for subsection 85(1) to apply, both the taxpayer and the corporation must jointly elect in prescribed form T2057 – Election on disposition of property by a taxpayer to a taxable Canadian Corporation. There are various administrative matters that need to be considered when filing this election.

Section 85 is probably one of the most powerful and most utilized tax planning tools for tax practitioners. Therefore careful planning should be undertaken. When planning to utilize section 85 rollover, the below factors should be considered or adverse tax consequences could apply!

1. What types of property can be transferred? Attention needs to be taken when determining what types of property to transfer under section 85. The most commonly mistaken property that cannot be transferred is real property held as inventory i.e. land and building (Note: most people hold their real estate as capital property and not inventory). However other planning can be achieved to rollover real property held as inventory to a corporation on a tax deferred basis.

2. Should you transfer accounts receivable under section 85(1)? Other provisions of the Act should be considered to allow for the most tax efficient rollover of A/R.

3. What type of property can be received for transferring assets to the corporation? Can you receive cash or a promissory note in return without triggering punitive income tax consequences?

4. Do you have to receive shares in return for the assets being transferred? Can you receive a fraction of a share?

5. What type of corporation can you transfer the assets to on a tax deferred basis? Can it be a non-resident corporation or non-resident individual?

6. Determining the amount to elect if intellectual property is being transferred (i.e. goodwill)?

Once the assets are transferred to the corporation, there is no mirror provision available to roll them back out. It is generally advisable to include a price adjustment clause in case CRA does not agree with the estimated FMV of the property transferred (it is recommended that a valuation be undertaken to support the fair market value). The CRA recently published an Income Tax Folio: S4-F3-C1 – Price Adjustment Clauses that deal with the various types of situation in which a price adjustment should be included.

Other items to remember include GST/HST. Usually this tax will apply to the transfer price or the FMV of the assets. However an election can often be made which would allow the transfer of the assets to be exempt from GST/HST if certain conditions are met.

Section 85 is a very powerful provision of the Act and must be used with care. All of the above questions should be considered prior to commencing a rollover. There are other issues not mentioned above due to complexity. Always consult a tax specialist when dealing with rollovers.

[Thanks to Lorenzo Bonanno of BDO Canada LLP, for his assistance with this blog post]

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Small Business Owners - Get on my Mailing List


If you are an owner-manager and/or a shareholder in a corporation and have not signed up for my corporate mailing list, please email me at bluntbeancounter@gmail.com

I will be sending out specific mailings on matters of importance to small business owners and I am considering, depending upon the interest, holding a roundtable for small business owners who are in the Toronto area. [I have not yet sent out a mailing, as I have been busy with December 31st corporate year-ends due June 30th. I will for sure send out something this summer].

Monday, June 20, 2016

Life Insurance - Review Your Coverage

Many of us purchase life insurance between the ages of 30 and 40 and subsequently pay no further attention to our life insurance needs. Today, I have a simple objective: to encourage you to review your current coverage.

Ask yourself this question. Has there been a change in your personal circumstances since you last purchased life insurance? If the answer is yes, now is the time to ensure you have sufficient coverage.

We hate paying life insurance for two reasons:

1. It forces us to accept our mortality.

2. As we age, the cost of life insurance becomes prohibitive, so most people who are lucky enough to live a full life, let it lapse (especially in the case of term insurance) and thus, have paid substantial sums of money for no monetary return (although, I think living is probably a fairly good non-monetary return).

Luckily, most of us get over these two hurdles and purchase life insurance to cover, amongst various things, the following:

1. Income replacement – life insurance acts as a replacement of income for the deceased person. This is very important where one spouse/partner is the breadwinner. The objective here is to allow your family to live in the manner they are accustomed to.

2. Financial security for dependents – somewhat related to #1, insurance ensures your spouse/partner is taken care of the rest of their life, and your dependants are financially covered until they are ready to join the workforce.

3. Mortgage protection - insurance pays off the family’s largest debt, typically the mortgage on their home.

4. Funding of University - many parents want to ensure their children are educated and use insurance to backstop that goal, in case they were to pass away.

Your Life Insurance Coverage Check-up


You may wish to review the following items or issues, to ensure your current life insurance coverage is up-to-date:

1. Your current salary or self-employment income – review your income. Has it changed significantly since you put your initial life insurance in place? If the answer is yes, and you are like most people in that your monthly family spending has expanded in proportion to your higher income, you will need more insurance to replace that income and increased family spending.

2. Life Expectancy – life expectancy continues to increase. In Canada, the average female is expected to live to about 84 and the average male to about 80. There is approximately a 25% chance one spouse/partner will live to the age of 95. The question for you is: what assumptions did you make about life expectancy when determining your life insurance needs for you and your spouse/partner/family? You may want to revisit those assumptions.

3. Debts – review your current debt load. Has your mortgage increased or decreased? Have you tapped into your Line of Credit for home renovations or investment purposes? Have you incurred any new personal debt?

4. University – many children attend university outside of Canada because the enrollment at many Canadian professional schools is very limited. Do you think your child(ren) may need to do such? If so, those costs could be 3-5 times higher than those of a child who studies in Canada.

5. Cottage – do you plan to leave the cottage to your children? You may want to ensure you and your spouse/partner have enough insurance to cover the taxes on the last of your deaths.

6. Estate Planning – some parents wish to use their insurance to leave a legacy to their children. If that is you plan, is your current insurance sufficient? If you are one of those parents, consider converting part of your term insurance to permanent insurance, if your policy allows such, or consider purchasing some new permanent insurance. If you have a private corporation, consider a corporate funded insurance policy as discussed in this blog post.

The above discussion is fairly simplistic. As noted, the main objective of this post is to have you review your current life insurance, to ensure it is sufficient for your current needs. If you determine your insurance is insufficient, make an appointment with your insurance advisor.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, June 13, 2016

The Income Tax Implications of Divorce Where You Own a Home and a Cottage

A few months ago, I was at a party when one of the party-goers started chatting to me about their
divorce. I ended up fielding various financial questions for which I referred them back to the matrimonial lawyer (I should have known they were not talking to me because of my bubbly personality).

But all was not lost. One of the questions they asked me about was the income tax implications of transferring their principal residence to their name, and the cottage to their spouse, as part of their divorce. As these transfers are often “messed up” and/or ignored in divorce agreements, I realized they had a least provided me a future blog topic. So today, I discuss the implications of transferring your home or cottage to your spouse upon divorce.

Principal Residence Exemption


In general, where you have lived in your home since its purchase, any gain upon the sale of that home is tax exempt because of the principal residence exemption (“PRE”). Where you own a house and cottage, things get more complicated, as you and your spouse may only designate one residence between you for purposes of the PRE, for each tax year after 1981 (prior to 1982, each spouse could designate one principal residence and thus you could possibly claim the PRE on both your home and cottage).

If you are happily married and own a home and cottage, in general, when you dispose of the properties, you would allocate the PRE to the property with the largest yearly capital gain. This calculation can be complex and typically leaves one property as taxable, or at least partially taxable (i.e. you may have owned your home 5 years before you purchased your cottage, so you have 5 years of PRE to claim on your home).

Where a couple is divorcing, how you allocate the PRE claim on your cottage and home is often problematic.

Spousal Rollover on Divorce


Unless you elect otherwise, where you transfer capital property, the Income Tax Act provides for a tax-free rollover to your former spouse if the transfer is in settlement of their property rights (transfers by title pursuant to a court order or provincial legislation also are provided for). In plain English, you can transfer, say a cottage, to your former spouse with no immediate income tax consequences, although, they assume the cost base of that cottage.

The Issue


One would think that based on the PRE and the tax-free spousal rollover, that where a divorcing couple has a home and cottage, things should be simple. However, since a couple can only claim one PRE during the marriage (other than when a spouse who was throughout the year living apart from and was separated under a judicial or written separation agreement) that is definitely not the case. This one PRE rule per couple is clearly noted in this interesting case, Balanko v The Queen.

Consequently, it is vital that the right to the PRE or the allocation of the PRE must be accounted for in any marriage settlement, for both purposes of the actual claim, and the related income tax one of the spouses may incur. If the use of the exemption is not addressed in the separation agreement, it is then a first-come, first-served claim.

In this article, the authors on page 1122 suggest that you consider at the time of separation or divorce that you complete a principal residence designation Form T2091.

Example


Say Tom and Katie are seeking a divorce and jointly own a family home (the home cost $300,000 and is now worth $1,000,000) and cottage (the cottage cost $500,000 and is now worth $1,000,000). In their divorce settlement, they agree that Tom will take the home and Katie the cottage (in real life, the house and cottage values and related income tax costs may be disproportionate and the value and tax discrepancy is equalized in some manner). This cross transfer of title can be done tax-free as discussed above; Tom assumes a cost base of $300,000 on the family home, and Katie a cost base of $500,000 on the cottage.

Katie has plans to sell the cottage immediately and to buy a new house. Katie’s lawyer and tax advisor decide to keep silent on the issue as to who can claim the PRE, since they know she will claim it first. Should Katie claim the PRE, Tom could be stuck with a tax liability approaching $175,000 when he eventually sells the home.

Luckily for Tom, he has hired sharp advisors. They raise the issues during the divorce negotiations. After some back and forth, the parties agree that Katie will claim the PRE; however, Tom is entitled to an extra $87,500 in family assets to equalize him for his future income tax liability.

If you and your spouse have a home and cottage and are unfortunately in divorce proceedings, or in a dissolving marriage, it is imperative your family lawyer and/or tax advisor consider/negotiate which spouse will be entitled to the PRE and whether a PR designation and/or tax equalization payment needs to be considered.

This blog post is for general information purposes only. The author is not a lawyer and the discussion above does not constitute legal or other professional advice or an opinion of any kind. The information above is provided solely to raise awareness of the issue. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, May 30, 2016

Financial Ethical Wills - For Estate Planning and Managing Family Wealth


Last week, you read about the benefits of an ethical will. These wills are a way for you to share your personal beliefs, spiritual values and hopes for the future with your family. Today you will discover how some people are using ethical wills, to set forth their financial principles and values.

As a parent, a financial ethical will can help you accomplish one or all of the following:
  1. Allow you to explain your estate planning
  2. Assist your family in maintaining the wealth you created
  3. Provide your family guiding principles of how to conduct business
  4. Set forth how you hope your monetary legacy is to be used 
  5. Discuss your philanthropy values and principals.

Estate Planning - Explaining Your Decisions


As you may have read in my blog titled One Big Happy Family - Until We Discuss the Will, I am a proponent of family meetings to discuss your estate planning (or at least parts of it). Given that many people are uneasy with having a family meeting to discuss money and inheritances, an ethical will provides you the opportunity (albeit after you have died) to clarify for your family your thinking and decision making process in respect of your estate planning.

However, be mindful; if the objective in writing your ethical will is to be positive and motivating, you may need to consider whether the clarity you wish to provide to your family relating to your estate planning decision making process, is in keeping with this objective.

Business - An Ethical Will Provides Guidance for a Family Business


Given the tremendous failure rate of second and third generation businesses (only 30 percent of all family-owned businesses survive into the second generation and only 12 percent will be survive into the third generation), an ethical will can be used to convey the guiding principles of your family business, and even set forth the challenges and opportunities you foresee for the company going forward.

In his article "Reintroducing the Ethical Will: Expanding the Lawyer’s Toolbox", written for the American Bar Association, author Scott E. Friedman provides the following insightful comment:

“In contemplating the scale and variety of intra-family conflict, we have come to the conclusion that many such conflicts are, in part, attributable to the death of a leader who had not thought to clearly transfer his or her intentions, wishes and wisdom to the surviving family members. Lacking direction and the benefits gleaned from a legacy of insight and wishes passed on by the patriarch or matriarch, surviving children often become absorbed in the negative emotions of selfishness, resentment and jealousy, which all inevitably leads to trouble for the business”.

Thus, any guidance and direction you can provide to your children may be invaluable as they try to navigate through the issues of succession of a family business.  

Philanthropy - Setting the Tone for Family Giving


You can use an ethical will to ensure your philanthropic values are carried forward by your children. Here is a quote taken from an article by Eric L. Weiner, Ph.D. written for the practice management section of the Financial Planning Association, in which a parent said the following:

“I would love to see you become responsible members of the community and philanthropists. To that end, I have set up a donor-advised fund as the main conduit for our philanthropic interest. This fund will give you and possibly your children the ability to make grants to worthy causes. I want portability so that you can direct grants to your own communities, as well as to national and international interests”.

Alternatively, instead of setting up a charitable fund, you could just encourage philanthropy by speaking to the importance of charity in your ethical will and hope you lead by example and your children follow in your charitable footsteps.

Ethical wills provide you with a tool to impart both your spiritual and financial values and beliefs and principles to your children. You may therefore, wish to consider using an ethical will in addition to the traditional Last Will and Testament.

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