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. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, February 26, 2018

Prescribed Rate Loans – One Last Kick at the 1% Rate

I have discussed the use of prescribed rate loans several times over the years. In this post, I will review a couple of the best ways to use these loans. However, time is now of the essence, if you wish to implement one of these loans. The current prescribed rate of 1% will be rising to 2% effective April 1st as per this Advisor.ca article and many people only see the rate slowly rising from here over the next few years.

The two most common ways to use a prescribed rate loan are:

1. A loan to a spouse as detailed in this blog post.

2. A loan to minor children using a family trust as detailed in this blog post.

To recap (read the actual posts for all the details), the Income Tax Act contains income attribution rules that typically reallocate income to the higher income earner when he or she tries to income split with his or her spouse or children. However, there is an exception to the above attribution rules where an individual makes a loan to a spouse or minor child and interest is charged on the loan at a rate at least equal to the CRA’s prescribed interest rate at the time the loan was made. The benefit is as follows:

Where the loan carries interest at a rate no less than the prescribed interest rate, the attribution rules will not apply. For the loan to avoid the income attribution rules, the interest owing must be paid each year within 30 days after the end of the year (i.e. January 30th).

For example, say you make a $100,000 loan to a spouse with minimal income. Your spouse will be required to pay you $1,000 in interest by January 30th of each year. However, if they use the loan proceeds to invest in marketable securities and they make a 6% return, or $6,000, your family will have tax savings of up to $2,700 ($6,000-1,000 x 53.5% the highest tax rate in Ontario).

Income splitting with minors can be problematic because minors generally cannot enter into an enforceable contract. Thus, it is suggested that where you make a prescribed loan to a minor, a family trust be utilized to navigate the enforceability issues.

Tax Changes to Private Corporations


As I have discussed on this blog multiple times, the government has implemented changes to the taxation of private corporations. In December they released the legislation in relation to the revised tax on split income rules . We are still waiting (likely in the budget this week) for the rules on earning passive investment income in a corporation.

To date, it does not appear that these rules will impact prescribed rate loans, subject to this weeks budget. However, before you consider implementing a prescribed rate loan, you need to discuss this issue with your accountant to ensure they are onside with the idea and that you clearly understand the requirements and changes in legislation.

Finally, it would be prudent, based on what we know, that the proceeds of these loans only be invested in public marketable securities and not in private corporations or related corporations.

If you are interested in maximizing a prescribed rate loan, you only have a few weeks to get this loan in place to beat the increase to 2%.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, February 12, 2018

No Will? You’re in Famous Company!

Readers of my blog are aware of my inclination to harp on the fact that you should have a will, and where you have a will in place, that it should be updated for significant life events. As discussed last week, in my post Power of Attorney for Personal Care – Mental Capacity and Medical Assistance When Dying. I also think it is important to have up-to-date powers of attorney for financial and personal care. But today, we are talking wills and the lack of such for some famous people and the lessons you may learn from their estate planning miscues.

In my blog post “Canadians Don’t Have the Will”, I highlighted a 2016 survey conducted by Legalwills.ca, that found 62% of Canadians do not have wills.

The 62% number is astronomical and in my not so humble opinion, just irresponsible. I thought of this survey, when I was recently told by a colleague that they were working on an estate where the first spouse passed away without a will, and then the surviving spouse died a couple years later without ever having a will drafted. I can maybe understand that some couples don’t have wills based on the premise “everything will just automatically flow to the surviving spouse”, although this thinking may be flawed depending upon your province of residence as noted in this link for the laws of Ontario when you die intestate (without a will). But for a surviving spouse to not have a will drafted is just beyond my comprehension.

Since the advice of accountants, lawyers, finance columnists and bloggers is obviously being ignored, I thought instead of lecturing that you should have a will, I would reflect on the folly of not having a will by looking at famous people who have died intestate and the messes they left behind.

Please note: I have no ability to confirm that these people did not have wills and I am relying on articles and other internet sources for this list, so I cannot guarantee its accuracy. Some of the stories in respect of these people’s deaths and estates are fascinating. You may wish to read in detail the links and source documents I provide below.

Famous People Who Supposedly Died Without a Will


The Musicians

There seems to be a correlation between being artistic and financially irresponsible as noted by the extremely famous musicians I note below. This does not surprise me, as I have suggested in prior posts on naming executors, that at the risk of generalizing you will want someone more anal than artistic to carry out this task.

Prince


In this article by People Magazine it was reported “A Minnesota judge has made it official – despite Prince’s estate being worth an approximated $250 million, the singer did not have a will in place to declare the distribution of his assets. A hearing was held Wednesday morning, according to court documents obtained by PEOPLE, and the judge has approved Bremer Bank, the institution Prince trusted with his finances over the years, to move forward with handling his estate – both personal and financial business”.

Prince's former manager, Owen Husney, in this USA today article said “he was too smart to have overlooked something that crucial and he had teams of lawyers, business managers and accountants over the years who would have advised him it was crucial”. Assuming that no will ever surfaces, it is mind numbing that with so many advisors, Prince did not have a will in place and it could have fallen through the cracks (unless he just refused to have one drafted).

"It's astonishing, absolutely astonishing that he did not have a will," says Jerry Reisman, an estate lawyer on Long Island who's been following the case. He predicted trouble ahead. You're going to have 'siblings' coming out of the woodwork alleging they are siblings. Everyone is going to be fighting over this estate.”

Will Lesson #1: Run Out and Write Your Will 

Hendrix, Marley and a Cast of Thousands


In this LegalZoom,com article the writer notes that both Jimi Hendrix and Bob Marley died without wills and that their estates were subject to legal battles for years. Musicians such as Prince, Jimi Hendrix and Bob Marley have complicated estates due to the publishing rights they hold on their music, the typically massive demand for their music once they pass away and the value in unreleased material that is often released posthumously.

Other musicians that have purportedly died without wills include Kurt Cobain, Barry White, Tupac Shakur, James Brown, Sonny Bono and Amy Winehouse.

Athletes

Many athletes are known for blowing fortunes, but you would again think that their advisors would have ensured they had wills in place, but that apparently is not the case, or the athletes ignore their advice.

Steve McNair


Mr. McNair who played in Super Bowl XXXIV as the starting quarterback for the Tennessee Titans and was the NFL’s Co-MVP in 2003, did not have a will. He also had, in addition to his wife and children, a girlfriend - who murdered him in a murder-suicide. The sad details of this case can be read in this Probate Lawyer blog. 

If this story is not tragic enough, this Family Archival Solutions Inc. article discusses how McNair’s mother subsequently lost her home because Mr. McNair had not put his mother’s name on the house or made provision in a will for her to inherit the property as he had intended for her.

Will Lesson #2: Unintended Consequences Transpire when a Will is Not Drafted

Lamar Odom


This is a story about almost dying without a will. In 2015, former NBA star and ex-husband of Khloé Kardashian was hospitalized after being discovered unconscious
at the Love Ranch, a brothel in Crystal, Nevada. Mr. Odom’s heart supposedly stopped several times and was touch and go to live. Luckily for him, he survived the ordeal. As Mr. Odom supposedly did not have a will, it was reported that if he died, his estate would have all gone 1/3 to Khloé and 2/3 to his children. It is my understanding that Odom and Khloe had a good relationship despite their divorce and she was there at his side while he recovered and she did not want his money. So this is not a story about an ex-spouse trying to get something that was not hers, but clearly reflects that an ex-spouse may be entitled to your estate or part of it, if you are not careful.

Will Lesson #3: When You Do Not Have a Will, Your Ex-Spouse May Inherit Part of Your Estate

Other Famous People Who Died Without a Will (or Updating Their Will)


Martin Luther King


Mr. King who was assassinated on April 4, 1968 was one of the best known civil rights activists in the World. His “I Have A Dream” speech made in 1963 during the march on Washington is known as one of the finest speeches ever given. Unfortunately, when assassinated Mr. King was only 37 years old and did not have a will per this Forbes article.

This LA Times article discusses how the children are threatening his legacy as the estate battles on 47 years after his death in respect of his tomb, sermons and memorabilia.

Will Lesson #4: When You Die Intestate You Create Possible Conflict amongst Your Family

Pablo Picasso


As detailed in this 2016 article by Vanity Fair on the estate of Pablo Picasso,  Picasso did not have a will and left over “45,000 works, all complicated by countless authentications, rights and licencing deals”. The legal fees on this estate have were supposedly over $30 million.


Will Lesson #5: When You Die Intestate, Your Estate Can Be Withered Away in Legal Fees

Heath Ledger


As I noted in the introduction, I not only stress the importance of a will, but that it must be updated to reflect significant life events. Heath Ledger died of an accidental drug overdose in 2008 during the editing of the Dark Knight Batman movie in which he played the Joker and posthumously won the Academy Award for best supporting actor.

Mr. Ledger had a will drafted a few years earlier in which his parents and sisters were beneficiaries. He however, had neglected to update his will upon his marriage to actress Michelle Williams and on the birth of their daughter Matilda. However, unlike many messy and nasty estate fights highlighted in this blog post, Heath’s family as detailed in this People article altruistically handed over the entire estate to Matilda. It is nice to see some kindness amongst the greed and fighting of the other estates.

Will Lesson #6: Update Your Will for Life Events, or You May Negate the Benefits of Having a Will

Howard Hughes


As per Wikipedia, Howard Hughes “was an American business magnate, investor, record-setting pilot, film director, and philanthropist, known during his lifetime as one of the most financially successful individuals in the world. He first made a name for himself as a film producer, and then became an influential figure in the aviation industry. Later in life, he became known for his eccentric behavior and reclusive lifestyle—oddities that were caused in part by a worsening obsessive–compulsive disorder (OCD), chronic pain from several plane crashes, and increasing deafness”.

As discussed in this New York Times article it took over 20 years to sort out the estate of the reclusive Howard Hughes. Mr. Hughes did not leave a will and his estate was subject to various forgeries.

Will Lesson #7: If You Have Not Decided to Draft or Update Your Will After Reading These Stories, I Give Up!

While most of these famous people had substantial estates, the lesson is still the same for the average person. Have a will drafted (and powers of attorney) so that you ensure your estate goes to whom you wish and it is not frittered away on legal battles that not only cost significant sums, but destroy the lives and relationships of your loved ones.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, February 5, 2018

Power of Attorney for Personal Care – Mental Capacity and Medical Assistance When Dying

While I still act as a corporate accountant, I am spending more and more of my time providing wealth advisory services to my current and new clients, which allows me to utilize my tax, estate planning and general accounting background. When I combine these technical aspects together with the experience I have gained in respect of understanding the nature of people in relation to their families and their wealth, I am able to provide a comprehensive plan for their current, retirement and estate planning.

In providing these services, I always ensure my clients have up to date wills and powers of attorney (“POA”) for their finances and personal care (health). In many cases, the POAs are either very old or not even in existence. When discussing POAs for personal care, I advise my client that there have been many changes in the law in respect to heroic measures and medical assistance in dying and depending upon their personal and religious views, they need to review these issues with a very qualified estate lawyer.

I thought today, I would do a bit of a Q&A on some of these issues and specifically the mental capacity required to make these decisions. I thus turned to my resident estate and wills expert, Katy Basi, for some direction.

Please note Katy's answers are specific to Ontario, if you live in another province, you will need to confirm that province’s legislative provisions.

If you are a reader of this blog, Katy needs no introduction. If you are a new reader of the Blunt Bean Counter, check out some of Katy’s guest blogs from estate planning for extended families to New Will Provisions for the 21st Century – Your Digital Life to Cottage Trusts among many other posts.

I thank Katy for her assistance with this blog post.

Power of Attorney for Personal Care and Medical Assistance When Dying


Below is a summary of the responses to my questions from Katy. I was personally very surprised at some of her answers to my questions, but given this complex, controversial and still evolving area of law, I guess in retrospect, I should not be surprised.

Questions and Answers:


Mark: Katy, a concern for all of us as we age is mental capacity. How does mental capacity affect POA‘s for health?

Katy: “First we need to appreciate that a POA for personal care is only relevant and effective when the person in question does not have the mental capacity to make their own health care decisions. I am asked fairly commonly by my clients to include provisions regarding medical assistance in dying in their powers of attorney for personal care. This request usually comes on the heels of a discussion about whether or not to include a “no heroic measures” clause in their document. I have to tell my clients that the legislation does not allow a mentally incapacitated person to have medical assistance in dying. This is the case even if the person requested this assistance, when they were capacitated, in writing via their power of attorney for personal care.”

Mark: So, are you saying that even where you have requested medical assistance in dying in your POA for personal care, if you do not have mental capacity when the medical assistance is desired, that request is essentially voided?

Katy: “There is a clear distinction in the medical assistance in dying legislation between a person who has the capacity to make their own personal care and health care decisions, and a person who does not have this capacity. The former can request medical assistance in dying if all of the other conditions of the legislation are met, and the latter cannot. As a person’s power of attorney for personal care is only effective upon the person losing their capacity to make personal care and health care decisions, by definition the document is only relevant upon incapacity. At that time medical assistance in dying is off the table as an option".

Katy clarifying note to Mark: "This exclusion only relates to medical assistance in dying – your most recent verbal or written instructions, made while capacitated, otherwise govern your personal care and health care".

Mark: This provision seems unfair?

Katy: “So under one view the legislation is discriminatory – people with capacity can obtain this assistance, and those without capacity cannot. So, I guess that if I have a grievous and irremediable medical condition, which is another requirement under the legislation, I hope that I at least have capacity, as otherwise I cannot receive medical assistance in dying. If I am mentally incapacitated, with a grievous and irremediable medical condition, my power of attorney for personal care can request that all heroic measures stop at this point, and that lots of morphine and other pain relief be administered. But that’s it – medical assistance in dying cannot be given, and I will have to die on my own, when my body finally gives up”.

Mark: So, is there anything that can be done in case of mental incapacity?

Katy: “For some clients we include a clause in their power of attorney for personal care that indicates their desire for medical assistance in dying if they are in a situation where the other conditions of the legislation are met, in the event that the current requirement to have capacity is amended by future legislative changes. A bit of a Hail Mary, but why not?”

I thank Katy for her insights on this complex topic.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates, and income tax law (including incorporation's and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues and for their specific province.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.