Life Insurance for High-Net-Worth Individuals and Corporate Business Owners - Podcast and Blog

I was recently a panelist on a video podcast titled Life Insurance for High-Net-Worth individuals (“HNW”) and Business Owners. The link to the podcast can be found here. 

The panel was moderated by Simon Kay of IPS Insurance. Simon specializes in Life Insurance for HNW individuals and corporate business owners and is the pioneer of Private Underwriting.

Private Underwriting is a very exhaustive process, but in simple terms, it allows people with underlying health and lifestyle concerns to have all underwriting requirements collected independent of any insurance company. IPS can then identify any areas that might place upward pressure on premiums and work with the client and their doctors to clarify or address any areas of concern. IPS can then set forth a position and advocate solely for their client with the insurers on a no names basis, protecting their clients' privacy. Simon can be contacted at this email: simon.kay@ipsinsurance.ca

The other panelist was Jay Hershfield. Jay is a highly regarded tax and estate specialist with an insurance expertise (which you will undoubtedly agree with once you watch the podcast) and is currently a director with Scotia Wealth Management. Jay has a wide range of experience from working with the Tax Policy Branch with the Federal Department of Finance, a Life Insurance company and with several large Financial Institutions.
 

The title of the podcast is self-descriptive and discusses in fairly simple terms why you as a HNW individual or corporate business owner would want to consider permanent insurance even if you have no need for insurance based on your financial resources.

Simon is in the midst of editing a second podcast on some of the hard questions to ask when you are considering entering into a life insurance policy. I will post that podcast in the near future. I think it is excellent and a must watch if you are considering purchasing a permanent life insurance policy, if I do say so myself :)

As the podcast focuses on permanent insurance, I below provide a brief written summary on what is permanent insurance, some of the reasons to use it and where permanent insurance is typically used by HNW individuals and corporate business owners.

What is Permanent Insurance?

Unlike term insurance which typically covers temporary needs, permanent insurance provides lifelong insurance and is often used for longer term needs. The two most common types of permanent insurance are Whole Life and Universal Life, and most policies combine a death benefit and savings component to the policies.

Why Use Permanent Insurance?

Permanent insurance can provide liquidity and efficiency for an estate. This liquidity and efficiency together with the ability to equalize an estate, can help facilitate family harmony after the passing of a parent.

Where a corporation is the beneficiary of permanent insurance, the Return on Investment is in many cases greater using insurance than where you create your own investment or sinking fund; because the insurance proceeds are credited to the capital dividend account (see this prior blog post on the capital dividend account) and can typically be paid out tax-free (subject to certain tax rules discussed in the second podcast).

Uses of Permanent Insurance?

The following are some potential uses of permanent insurance:

1. Estate planning – On death (typically upon the last spouse to pass-away), the value of your estate will be allocated in some combination to the CRA in taxes, your family or charity. Permanent insurance can be used to provide the liquidity for paying your estate tax liability, estate equalization with your family, charitable purposes or simply estate growth/maximization by leaving a larger estate to your family from the insurance pay-out.

2. Business or partnership agreements – Permanent insurance can be a very tax effective way to buy out a deceased partner or shareholder under the terms of a partnership or shareholder agreement, especially for corporate shareholders by utilizing the capital dividend account.

3. Legacy Assets – For HNW individuals, insuring the tax liability related to legacy assets such as residential or commercial real estate, cottages or a small business seems somewhat counter intuitive, as you would assume the estate can just sell those assets or others to pay the tax liability related to the legacy assets. However, on numerous occasions I have had parents express a desire to have their estate keep legacy assets after they pass away, for sentimental reasons or because they think the future appreciation will be significant. They therefore purchase permanent insurance to cover the legacy asset tax liability, to alleviate the income tax pressure on the estate.

4. Passive Income rules- Permanent insurance can shelter income tax-free within a policy, which effectively reduces taxable passive income for a corporation and therefore can potentially reduce the small business claw back for corporations.

5. Charitable – You can name a charity as beneficiary of a policy or make a bequest of the death benefit from a permanent policy to a charity of your choice and your estate will receive a charitable tax credit upon your death. You can also purchase or transfer a policy (this may result in a taxable deemed disposition, so speak to your accountant first) to a charity and you would receive a tax credit on the yearly premium payments.

This is my last blog post of 2022, so Merry Christmas and/or a Happy Holiday and a Happy New Year to you and your family.

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.

Claiming the Principal Residence Exemption

Having reviewed my 600 plus Blog posts, I was shocked to realize I never directly wrote about the Principal Residence Exemption (“PRE”). I discussed the PRE from a tax reporting perspective, the tax implications of the PRE upon divorce, how the PRE works when you are constructing a new home, and how a Principal Residence (“PR”) is taxed upon death amongst a few other mentions.

So, I thought no better time than the present to discuss some of the technical considerations in claiming the PRE and how to decide whether to claim the PRE on your home or cottage.

The Tax Benefit of the PRE

The PRE typically provides homeowners with a tax-free exemption on the capital gain realized when you sell a property designated as your PR. It is one of the few remaining tax breaks for individuals and many Canadians consider the PRE a sacred cow for tax purposes. This is because many people plan to use the tax-free proceeds from the sale of their PRE to (1) cover in whole or part their retirement needs or (2) leave some or all of the proceeds from the sale of their PRE to their estate.

Over the years, there has been concern a government would look at eliminating or restricting the PRE (for example, in the U.S., the PRE is restricted to $500,000 on a joint return) to raise tax revenue. Liberal Finance Minister Chrystia Freeland in this interview (https://tgam.ca/3spnTFw) with The Globe and Mail Report on Business Magazine in the March, 2022 edition, said the following: “I want to be very clear that our government has absolutely no intention of altering the position on capital gains on the principal residence of Canadians. That is a very important part of how Canadian society works”. Hopefully, the Liberals and any future other governments, continue with this position.

The History of the PRE and Prior Elections

I assume this will apply to very few people, but if you purchased your home before 1971, you only pay tax on the increase in value from the December 31, 1971 (V-Day Value).

Another rule, which may apply to a few more people, is that prior to 1982, the PRE election was available to each spouse where title was held individually. That generous treatment stopped in 1982 and for any property purchased after 1981, it is no longer possible to claim two PRE’s for the same family. If you still have a property purchased prior to 1982, you can still make a separate PR designation between you and your spouse, but only for the years of ownership prior to 1982, and only if the properties were owned wholly by you or your spouse.

An election that may be relevant to many people is the 1994 Capital Gains Election. In 1994 the CRA eliminated the $100,000 capital gains exemption; however, they allowed taxpayers to elect to bump the adjusted cost base (“ACB”) of properties such as real estate (many people elected on their cottage property) to the lessor of the fair market value (“FMV”) of their real estate property or a $100,000. Many Canadians filed the T664 form to take advantage of this election and increased the adjusted cost base (“ACB”) of their real estate.

You should review your files or your 1994 tax return to confirm if you made an election.

The PRE-Formula and Calculation

According to the CRA, the calculation of the PRE is as follows:

A × (B ÷ C)

The variables in the above formula are as follows:

A is the taxpayer’s gain otherwise determined, as described above.

B is:

• if the taxpayer was resident in Canada during the year that includes the acquisition date, 1 + the number of tax years ending after the acquisition date for which the property was the taxpayer’s principal residence and during which he or she was resident in Canada; or

• if the taxpayer was not resident in Canada during the year that includes the acquisition date, the number of tax years ending after the acquisition date for which the property was the taxpayer’s principal residence and during which he or she was resident in Canada.

C is the number of tax years ending after the acquisition date during which the taxpayer owned the property. 

If you prefer “plainer math,” the formula is: the Number of Years Designated as your PR + 1) / Number of Years Owned x Capital Gain on Sale.

You will notice the PR +1 in the above formula. This +1 allows for two PR’s to be eligible for the PRE in the year one is sold and a new one is subsequently purchased.

So practically, the formula works as follows: Say you owned your PR for 25 years and sold it for a capital gain of $1,500,000 (but you only wish to designate it for say 20 years, as you want to save 5 years for your cottage-see discussion below), the PRE would be calculated as follows:

(20+1)/25 x 1,500,000 = $1,260,000. So out of your capital gain of $1,500,000, your PR exemption is $1,260,000 and you are taxable on the remaining $240,000 taxable capital gain.

Qualifying a Property as a PR

Under the Income Tax Act, in order for a property to qualify as your principal residence for a particular tax year, four criteria must be satisfied: the property must be a housing unit; you must own the property (either alone or jointly with someone else); you or your spouse or kids must “ordinarily inhabit” the property; and you must “designate” the property as a principal residence.

The CRA states that “Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered ordinarily inhabited in the year by that person.” So, it is a low threshold to achieve ordinarily inhabited. In addition, the CRA does not consider incidental or occasional rental of a property sufficient to prevent it from qualifying as a principal residence.

Only one-half of a hectare of land plus the home generally qualifies for the PRE. Any remaining acreage will typically be subject to capital gains tax. If you have a property that exceeds one-half hectare, there are some exceptions to the rule, but you will want to engage a professional to review the situation as the CRA administrates this area strictly. I have been involved a couple times in these situations and the issue is very complex based on tax law and legal precedents.

Which Property do you Claim the PRE on when you own a Home and Cottage

One of the more common issues in relation to claiming the PRE is when you own both a home and a cottage property and you have sold one of them. For ease of this discussion, I am going to presume the 1971 and pre-1982 rules are not applicable.

Assume you sold your cottage in 2022 and you are trying to determine if you should claim your cottage as your PR or pay tax on the capital gain and save the PRE for your home. How do you make the decision?

The answer is not necessarily simple, but in general, where you own a house and cottage, it will often make sense for any overlapping years of ownership to designate the property with the highest average gain per year of ownership for the PRE.

To be clear, I am talking about the property with highest yearly gain, not the largest gain per property. For example, if you have owned your cottage 10 years and it went up $500,000, the average yearly gain is $50,000. If your house has gone up $1,000,000 but you have owned it 30 years, the average yearly gain is only $33,333. So, while the house has a larger overall gain, the cottage has a larger average gain per year and you would likely designate the cottage for the 10 years you owned (or maybe 9 years plus one) as your PR.

In the above example, the answer is likely fairly clear-cut, as you sold the cottage and it has a significantly larger gain per year. But what if the cottage only had a $25,000 ($250,000 gain/10 years) yearly gain and the house had a $29,000 yearly gain. From a gain per year perspective, you should save the PRE for the house and pay tax on the cottage. However, from a cash flow and time value of money perspective, do you want to pay current tax on the $250,000 gain, or not pay any tax by designating the cottage as your PR for the 10 years and know you will pay tax whenever you sell your house (because you will have already designated 10 years)?

The answer is not clear and I have seen different people make different decisions. In addition to cash flow and the time value of money, you would also need to consider whether the 1971, pre-1982 rules and 1994 election would have any impact on your decision. A further consideration is do you think the house value will grow significantly in the future (for example the area is being developed), so that your yearly gain will increase significantly going forward.

In general, where you have multiple properties, you would start with the determination of which property has the largest yearly gain, but you would then need to consider various other factors (this should be done with your accountant) before making a final determination as which property to designate.

Reporting the Sale of a PR for Tax Purposes

In the good old days, administratively, the CRA did not enforce the reporting of the sale of your PR. But starting in 2016 (there was a one-year transition rule), the CRA made it mandatory for you and your spouse to report the disposition and designation of a PRE sold on your tax return or they will not allow you and/or your spouse to claim the PRE. You are now required to complete the PR designation section on Schedule 3 of your income tax return and complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). If you forget to make this designation in the year of the disposition, you must request the CRA to amend your income tax return for that year. The CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.

As discussed above, there are many issues to consider from a tax perspective when selling your home. In addition, there are strict reporting rules to which you should adhere.

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.

Tax Gain/Loss Selling 2022 Version

In keeping with tradition, I am today posting my annual blog on tax gain/loss selling. I write this blog annually because every year around this time, people get busy with holiday shopping (or at least online shopping these days) and forget to sell the “dogs” in their portfolio and consequently, they pay unnecessary income tax on their capital gains in April. Alternatively, selling stocks with unrealized gains may be beneficial for tax purposes in certain situations.

As I am sure you are more than acutely aware, the stock markets in 2022 have been very weak. Consequently, you may have realized capital losses in 2022 or have unrealized capital losses starring back at your from your investment statement. 

The goods news at this point in time is; if you reported capital gains in 2019-2021, you may be able to carryback any realized 2022 capital losses and/or possibly trigger capital losses on securities with unrealized losses to carryback.

In any event, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options in the next week or two and if you are a DIY investor set aside some time this weekend or next to review your 2022 capital gain/loss situation in a calm, methodical manner. You can then execute any trades you decide are investment and tax effective on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling.

I am going to exclude the detailed step by step capital gain/loss methodology I have included in some prior years blog posts. If you wish the detail, please refer to my 2020 tax loss selling post post and update the years (i.e., use 2021, 2020 & 2019 in lieu of 2019, 2018 and 2017). 

You have three options in respect of capital losses realized in 2022:

1. You can use your 2022 capital losses to offset your 2022 realized capital gains

2. If you still have capital losses after offsetting your capital gains, you can carry back your 2022 net capital loss to offset any net taxable capital gains incurred in any of the three preceding years

3. If you cannot fully utilize the losses in either of the two above ways, your can carry your remaining capital loss forward indefinitely to use against future capital gains (or in the year of death, possibly against other income)

Tax-Loss Selling

I would like to provide one caution about tax-loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes with the intention of re-purchasing those stocks, and one or two of the stocks take off during the 30-day wait period—raising the cost to repurchase far in excess of their tax savings.

Thus, you should only consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock. Your advisor may be able to "mimic" the stocks you sold with similar securities for the 30-day period or longer or utilize other strategies, but that should be part of your tax loss-selling conversation with your advisor.

Identical Shares

Many people buy the same company's shares (say Bell Canada for this example) in different non-registered accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their non-registered accounts but ignore the shares they own of Bell Canada in another account. Be aware, you must calculate your adjusted cost base over on all the identical shares you own in all your non-registered accounts and average the total cost of your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell is higher in one of your accounts, you cannot pick and choose to realize a gain or loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchases an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and is added to the cost base of the new shares acquired.

Transferring Losses to a Spouse who has Capital Gains

In certain cases you can use the superficial loss rules to transfer a capital loss you cannot use to your spouse. This is complicated and should not be undertaken without first obtaining professional advice.

Tax-Gain Selling

While most people are typically looking at tax-loss selling at this time of year, you may also want to consider selling stocks with gains to net-off against capital losses, for marginal tax rate planning, charitable purposes (see below) or other reasons.

Donation of Marketable Securities

If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a non-registered marketable security that has gone up in value. As discussed in this blog post, when you donate qualifying securities, the capital gain is not taxable and you get the charitable tax credit. Please read the blog post for more details. 

Settlement Date

It is important to ensure that any 2022 tax planning trade is executed by the settlement date, which my understanding is the trade date plus two days (U.S. exchanges may be different). See this excellent summary for a discussion of the difference between what is the trade date and what is the settlement date. The summary also includes the 2022 settlement dates for Canada and the U.S. which are both December 28th this year.

Corporations - Passive Income Rules

If you intend to tax gain/loss sell in your corporation, keep in mind the passive income rules. This will likely require you to speak to your accountant to determine whether a realized gain or loss would be more effective in a future year (to reduce the potential small business deduction clawback) than in the current year.

Summary

As discussed above, there are a multitude of factors to consider when tax gain/loss selling. It would therefore be prudent to start planning now with your advisors, so that you can consider all your options rather than frantically selling at the last minute.

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.

Common Estate and Tax Planning Issues

Over the years, I have reviewed many individuals’ financial affairs. Most people have their affairs somewhat in order, but there are typically still some issues to be considered or holes to be filled. Today, I list some of the most common issues and gaps.

Estate Issues

The most common estate planning issues I have observed relate to wills, powers of attorney, estate documentation and insurance. I discuss these below.

 

Wills

Wills always seem to have multiple issues and errors of omission when I review them. These five are the most common:

1. No Secondary Will – Depending upon your province of residence, a secondary will can be used to reduce the probate taxes due upon your death. This would most typically apply to shares you own in private companies and other personal items. It is my understanding that Ontario and British Columbia are the two main provinces where secondary wills are used, so check-in with your advisor if you live in a province other than Ontario or B.C.

2. Old or Dead Executors - As many people do not update their wills on a regular basis, I have often found their executors have passed away or they are very old (if your children are not your executors). You may want to review your executor selection and ensure you have at least one “youngish” executor.

3. All the Children are Executors – Keeping with the executor theme, many people have all their children as executors. I suggest that if you can finesse this with your children, in some cases it is better to only have one or two of your financial savvy children as executors, to avoid the estate being bogged down. This is not always practical given family dynamics, but is more efficient and can often reduce sibling friction.

4. Individual Bequests are Missing – Estate lawyer Charles Ticker notes in his book “Bobby Gets Bubkes: Navigating the Sibling Estate Fight that one of the biggest issues children have post-mortem, is where a parent had promised a child a certain personal item, be it jewelry, art, purse etc. and it is not reflected in the will. Parents, make your will consistent with your promises.

5. Blended Family Issues – Blended family issues can be so complicated, there is sometimes “paralysis by analysis” and they are just ignored. In this blog post I wrote in June 2020, I note that estate planning is complicated enough in a first marriage; second or third marriages multiply the risks and complexity. You may want to read the wills and estate planning sections of this blog post on blended families.

Powers Of Attorney

The two most common issues I come across with Powers of Attorney "(POA) are:

1. They are often not done!

2. The personal healthcare POA is out of date and does not reflect the significant health care issues that should be considered from extraordinary health measures to mental capacity (see this blog post) to assisted death.

Estate not Documented

I have seen many estates with no documentation in respect to the assets that constitute the estate and where the assets are located. I wrote about this a couple weeks ago, so I will not re-iterate. Here is the link to the blog post.

Insurance

Most people dislike paying insurance. However, parents often have family legacy assets they wish to keep in the family such as cottages, rental properties, family businesses etc. I have seen several instances where these legacy assets must be sold by the estate or to keep these assets in the family, excess taxes are paid as a work around solution. Often, life insurance, typically permanent insurance, such as Universal or Whole life would have made financial and tax sense and emotional sense (where the parent wanted a legacy asset to remain in the family).

I discuss many other uses of insurance for estate planning purposes in this blog post including the most popular, being life insurance to cover an estate tax liability on death.

Income Tax Issues

Capital Dividend Account

The capital dividend account (“CDA”) is a cumulative tax account that tracks certain amounts (most commonly the non-taxable portion of capital gains) that are not taxable to a Canadian Private Corporation and may be distributed tax-free to the company’s shareholders. See this detailed blog post I wrote on the subject.

Over the years, I have often seen this account not tracked or overlooked. A brief discussion of your corporation’s CDA balance should be part of your annual discussion with your accountant to ensure that you are not leaving any tax-free money on the table.

Charitable Donation Tax Efficiency

I have written several times (the last time being this blog) that many people do not maximize the tax benefits of their donations. If you plan to make a charitable donation and you own marketable securities with unrealized capital gains, it is far more tax-efficient to donate the securities in lieu of cash. This is because the capital gain on the security is not subject to tax when donated. For example, if you own shares of Bell Canada with a cost of $1,000 and a fair market value of $5,000, you would have to pay capital gains tax on the $4,000 capital gain when sold. However, if you donate the shares, the capital gain is deemed to be nil and you still get the donation tax credit.

Where you have a corporation and own marketable securities, it is even more tax-efficient to make a corporate donation, as the capital gain is eliminated and the capital gain gets added to the CDA account discussed above.

Unfunded TFSA

I find it very surprising how many people still have unfunded or partially funded Tax-Free Savings Accounts (“TFSAs”). These accounts allow you to grow your money tax-free and provide substantial flexibility in using and replenishing the account.

In the early days of TFSAs, the contribution limits were not large and people did not want the hassle of opening the account. However, as of Jan 1, 2022, the contribution limit for a TFSA is now $81,500. So, if you have not contributed, get going. If you have contributed haphazardly, check your balance with the CRA and get caught-up.

Capital Loss Utilization

I often see people pay tax on capital gains that is unnecessary, as they could have sold securities that had unrealized losses to reduce the gain and the related tax.

As 2022 has been a tough year in the markets, you may want to undertake some tax-loss selling before the end of the year. I will have my annual tax-loss selling blog in a couple weeks which is very detailed to assist in your tax-loss selling planning.

Estate Freeze

As per my blog Estate Freeze -A Tax Solution for the Succession of a Small Business undertaking an estate freeze in the right circumstances is often a great way to defer a families tax liability to the next generation. However, not everyone agrees as per this blog Are Estate Freezes the Wrong Solution for Family Business Succession?

I am a proponent of using an estate freeze where it fits a families needs. Over the last two years I have seen three estates that caused tax havoc for families that could easily have been minimized with an estate freeze several years ago.

Hopefully you and your advisors have already considered most of the issues discussed above. If not, you may wish to “clean-up” any holes in your planning and ensure the efficiency of your estate and tax 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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Explaining Your Estate to your Spouse and Future Steps to Settle the Estate

Two weeks ago, I discussed the importance of documenting and explaining your estate to your spouse (and also possibly your executors). I noted that while documentation was vital (using an estate summary type document), it was only the first step in trying to reduce the stress your spouse will have in settling your estate. 

 

A second crucial step is explaining in “plain English” and practical terms what the documentation means. Today, I will expand on what you may want to consider explaining to your spouse and the future steps they may need to take to settle your estate.

Note: I will be providing some links that provide details on how to deal with some of these estate issues. I do not have the expertise or the time to confirm all the information in these links is up-to-date and accurate. I do not know any of the authors of the articles, so I'm unable to endorse them. Please use this information as a starting point only, it may or may not, be the gospel.

Introduction to Your Advisory Team

Depending upon your personal situation, you may have an accountant, lawyer (maybe even multiple lawyers -one for estate, one for corporate etc.), a private banker, an insurance advisor, an investment manager, or investment advisor. It is one thing to document who these people are, it is another to explain what each of these people do for you and your family and to get your spouse comfortable with them while you are alive.

I suggest you try and do the following with your spouse:

1. Review the section of your estate summary that lists your advisors with your spouse. This section should include the name of the advisor and their contact information. I would then verbally discuss with your spouse what services each of these advisors undertakes for you and your family (i.e. your accountant provides personal tax services, files the family trust, prepares financial statements for your family corporation etc.). This will provide some context to your spouse. After you discuss this with your spouse, you may want to consider writing up a brief summation of your discussions and attach it to your estate summary document.

2. Depending upon how open you are about your financial affairs with your spouse, consider including your spouse at a minimum in your yearly meeting with each of your advisors. This will ensure they get to know these individuals and will provide your spouse a comfort level should they need to contact them about your estate. It will also provide them a greater clarity of your financial affairs. If you are not comfortable with your spouse knowing all the financial details of your life, then arrange lunches or more opaque meetings with these advisors, so your spouse will have some level of comfort with them.

3. After meeting these individuals, it is useful to ensure your spouse understands the granular details of how these people would help them if you passed away. For example, it is not enough for your spouse to know the investment manager is the person who manages your investments. They also need to understand that if you pass away, this is the person who they will contact to ensure they have money coming in to pay the bills and that this person would assist them in understanding their financial situation going forward.

4. My last point on this topic is that if you are a professional advisor and provide these services for your family, you need to clarify who will take over for you. I had not thought of this until my wife asked me who would prepare the family tax returns going forward if I passed away.

Contact Person

When a spouse passes away, the surviving spouse is grieving and overwhelmed. While it is vital to introduce your spouse to all the above professionals, it is even better if you have a financially savvy family member, friend, or executor whom your spouse knows intimately and is comfortable with, to initially assist your spouse, to get their bearings in dealing with the estate. In a best-case scenario, this person is an executor of the estate. However, this does not necessarily have to be the case, as this person is hopefully someone who can provide both emotional support and financial direction.

If you are lucky enough to have such a person in your life, ensure they are okay assisting and let your spouse know who this person is. To be clear, I am not suggesting this person take on executor like responsibilities (it they are not the executor), but just be a sympathetic friendly ear who acts as the initial quarterback until your spouse gets their feet underneath them. This person for example would help direct your spouse who to contact immediately and what matters can wait.

Funeral Costs

While any estate summary should include your burial wishes and details, a practical matter is paying for the funeral costs. Most banks will allow you to pay for the funeral costs from an estate account before probate, but it can be an administrative headache. So, discuss the best way to ensure your spouse has the funds to pay for the funeral. That is often as simply opening a joint bank account (if you do not have one) and ensuring there is always a minimum amount in the account to cover funeral expenses and a month or two household expenses.

Insurance

Ensure that your estate summary includes all insurance policy details and specifically where to find the original policies. Hopefully, you have introduced your spouse to your insurance advisor, and they can help or guide your spouse to navigate the various steps and forms to obtain the insurance proceeds. I know with one estate I was an executor, the insurance company initially balked at paying the proceeds and we needed a lawyer to get involved to get the proceeds paid. In most cases it is smoother than that, but you never know.

Here is a link on how to claim an insurance benefit after death. As noted above, I do not have the time or expertise to ensure the information is correct and up to date. Again, this link should be at worst a good starting point, as I do not know or endorse the writer (I just googled to find an article on the topic).

Investment, Real Estate and Tax Information

You likely have a virtual or physical filing system for your historical investment, real estate and tax information (as well as current information accumulated during the year for tax and other purposes). It is not enough to just document this information in your estate summary, you need to also note the location of this information in your summary. Furthermore, to ensure clarity, physically show your spouse where you keep this information even if you think they know where it is.

Historical investment and real estate purchase information may be required for future cost base purposes, so you need to ensure there is a summary in your estate file.

Personal Items

In a perfect world all personal items are easily accessible and included in your will. One of the biggest issues with families is not documenting who receives your personal items or even worse, telling a beneficiary they are to receive an item and then it is not allocated in your will. It is therefore very important to ensure your spouse has a list of your personal items and where they are located. If for some reason you do not wish to list these items in your will, at least make a list for your spouse of these items and who should receive them. It is my understanding this list may not be legally binding if not in your will (you should confirm with an estate lawyer), but at least you would have your wishes known. Again, to ensure family harmony, your will/list must be consistent with what you have verbally told your children, grandchildren etc. about the items they will inherit.

Mortgage Life Insurance

Lenders typically require mortgage life insurance and upon death, the insurance will typically clear the debt. Ensure your spouse is aware of the insurance and where details of the mortgage and related insurance can be found.

Loyalty Points

We all love our loyalty points. I have seen loyalty points addressed in wills (although I have read some providers will not respect the will), but they are often overlooked. There are far too many loyalty programs to review, but here is a link to a 2019 blog post on many of the most popular loyalty program. It is possible given the date of the article; some policies have been changed by the providers.

You will want to ensure the passwords for these programs and account numbers are included in your estate summary.

Supplementary Credit Cards

Often a spouse will have a supplementary credit card. This article discusses what happens when there is a joint (supplementary card) in step #4 and goes into depth what to do about credit cards in the deceased spouses name. 

 

Telephones and Two-Step Verification

 

Yesterday I was provided a great piece of advice I had never considered. So many services we use now require two-step verification. If you are too quick to cancel a deceased spouse's telephone, you will not be able to access certain services to update or cancel those services if second-step verification is a text to the deceased spouse's phone.

 

Digital World

We live in a digital world. From cryptocurrency to cloud vaults, to blogs, to social media platforms, we are all very much involved in the digital world. It is very important all digital information is listed along with associated passwords in your estate summary. Again, there are so many digital platforms I could not even try to cover a tenth of them. But here are summaries of what happens to your accounts when your spouse passes away for three of the most popular, Gmail, LinkedIn and Facebook.

What Happens to Your Gmail When you Die?
What Happens to Your LinkedIn Account After Death?
What will happen to my Facebook account if I pass away?
 

The scary thing about this blog post is that it is shockingly far from exhaustive. However, it's a good start to help explain your estate to your spouse and the steps that may need to be taken upon your death.

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.

Documenting and Explaining Your Estate to your Spouse

I hope everyone had a safe and enjoyable summer. Mine was pretty good except for the 5mm kidney stone that decided to come on down in mid-July and took 12 days to finally pass ☹. But as they say, all things shall pass and once the stone did, I had an enjoyable time catching up with family, friends and golf and learning a few new barbeque recipes courtesy of YouTube.

Over the years, I have posted numerous times about “Stress Testing your Finances” and recommended that you document and review your estate with your spouse (and possibly executors). I emphasized in these blog posts that you do not want to pass away without leaving your spouse a listing of your financial assets and a roadmap of how to deal with estate matters. When your healthy and of sound mind, you need to assist and prepare your spouse to deal with and navigate your estate, by clarifying and discussing various financial issues and making introductions to your advisors, amongst other estate matters. To be clear, each spouse should have a reciprocal exchange.

I do not want to regurgitate my prior blog posts, so at the bottom of this post, I will link three of the more pertinent posts I have written should you wish to read or re-read them again. Today, I will talk about explaining the details of your estate to your spouse and future steps they may need to settle your estate.

Since 2012 when I first wrote on this topic, I have taken my own advice and provided my wife with a summary document I update as necessary with various financial information, passwords and anything else I think would help her settle my estate with the least amount of stress. This document is kept in our safety deposit box. I know other people keep it in the cloud, where they have a secure personal locker. Where you keep the document does not matter, the key is competing the document.

I think our household is representative of some if not many Canadian households, where most financial matters are generally taken care of by the “financial oriented” spouse (as opposed to sharing the financial duties), especially where the other spouse does not work in a financial oriented capacity. In these households, financial communication can sometimes be lacking.

This year, based on various questions my wife has asked me, from how certain payments would continue if I passed away, to what happens to travel points, to whom would prepare her taxes etc. I realized I am one of those “financial spouses” who has not sufficiently explained what my estate summary means to my wife in practical terms beyond the documentation I have provided.

Given my experience with my wife, I decided to delve into greater detail (there will be tons of detail) in my next post the first week of October, on the “explaining” and “future steps” required to settle your estate. Until then, here are the prior links on this topic I noted earlier:

The Blunt Bean Counter: Stress Testing Your Finances and Your Death - The Comprehensive Test

The Blunt Bean Counter: Just Do It – Write Your Financial Story! What the Heck are You Waiting For?
 

Here is also a link to an Estate Organizer (note the document cannot be amended)

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.

The Best of The Blunt Bean Counter - Are Accountants Really Truly Boring?

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 2012 post titled "Are Accountants Really Truly Boring". 

 

I think this is the third time I have posted this blog, but I figured lets go with some humour (or what I perceive as humour) to end the summer. I have taken the liberty to play around with the original a bit by adding a couple updates.

Are Accountants Really Truly Boring

The joke goes like this. "When does a person decide to become an accountant?" Drum roll please. The answer…"When they realize that they do not have the charisma to become an undertaker." Or how about this one? Question: "What does an accountant use for birth control?" Answer: "Their personality."

With a reputation like that, Flo Rida will not be penning any rap songs called Wild One’s featuring accountants. So, are we accountants that boring or do we take an unfair rap?

Unfortunately, in general, I think the rap is probably warranted, although perception may be reality. How would us CPAs be viewed if there had been a TV show called LA Accountant, instead of LA Law? Did you know John Grisham got his undergraduate degree in accounting? What if his books had been about accounting firms instead of law firms? Accountants would then be looked upon as cool dudes/dudettes with a conservative bent.

In 2016, we finally got top billing with the release of the Ben Affleck's movie titled, "The Accountant". Prior to seeing the movie, I was so excited. A movie about accountants, starring a good looking well known actor; finally, the world was going to see how cool accountants could be. Boy, was I surprised when I found out that Ben's role in the movie was that of a freelance accountant for dangerous criminal organizations who is a stone-cold killer. However, upon reflection, maybe his role will give accountants a bit of a bad boy image and cause anyone to think twice before criticizing their accountant :)

Is it nature, or nurture? I think probably a combination of both. Many accountants by nature are cautious and conservative. Years of training to refine these character traits amplify the situation in non-professional environments. It would probably help if our dress style did not include pens hanging from our dress shirts, pencils behind our ears, or if we occasionally loosened our ties both literally and figuratively. I always had this underlying desire at a cocktail party full of accountants to run about the room and loosen all their ties.

Personally, although I have pride in my profession and my job, I know the boring stereotype precedes me and I try not to advertise the fact that I am a CPA upon initially meeting people. You can only have so many people at parties walk away after you tell them you are an accountant (or at least walk away after they ask for your advice on a tax situation of theirs) before you get a complex.

Classic Bean Counter

Unlike many accountants, I don’t advertise my profession with a vanity licence plate with the initials MG CPA. Although I am considering getting one saying “The BBC” [The Blunt Bean Counter]), but I am concerned everyone will just think I am just a British public television expatriate.

When I am outed as an accountant, I say I am a wealth advisor who will maximize your net worth and minimize your taxes, to make my job sound sexier. Although my naturally boring nature often gives me away, many of my other characteristics are non-accountant like and I enjoy surprising people when they find out this blunt, sometimes arrogant, sometimes confrontational and very occasionally humorous person is an accountant. My happiest social outings are when someone says, “Wow, I would never have thought you to be an accountant”.

So, are any of my kind not boring? I did a search of famous people who studied to become accountants and came up with this list. For those of you old enough to remember the Bob Newhart Show, Bob Newhart the namesake and star made the list and was a former accountant. Now I am not sure Bob helps our cause. He was funny, but in a boring deadpan style. 

To my surprise, the above list has many famous musicians (in addition, Janet Jackson wanted to be an accountant if she was not a singer). You would figure any musician would break the stereotype as they lead wild and crazy lifestyles. Yet, the list includes Kenny G, a great saxophone player. Although Kenny is a great musician, I typically hear his music in my dentist's office.

 

However, as you go down the list, you will find two of the most famous rockers in history studied accountancy (at least for a short time); Robert Plant of Led Zeppelin and Mick Jagger of the Rolling Stones. Finally, proof, supper-cool accountant types exist!!  

In 2018 our athletic image got a boost when Scott Foster, an accountant by day became the Chicago Black Hawks emergency goaltender for one night. This story is detailed in this article.

Another former accountant with attitude (who actually made a career of accountancy) is Paul Beeston.  Mr. Beeston, who was a CPA with Coopers and Lybrand, was also the President and CEO of the Toronto Blue Jays and later the President and COO of Major League Baseball. Paul is a cigar chomping, fun loving, non-sock wearing CPA. Yes, there is one out there.

There you have it, proof that there is an accountant (and a couple who studied accountancy) out there who does not fit the stereotype. Anyways, if you ever meet me, I will be easy to spot. I am the outgoing accountant who will be looking down at your shoes instead of staring down at my own shoes :).

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.