The Best of The Blunt Bean Counter - Estate Planning - A Tale of a Father's Selfless Act of Love

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 January 2012 blog on a father's selfless act of love. That act: getting his estate in order so he did not leave his estate in disarray for his loved ones.

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Lynne Butler, of Estate Law Canada blog fame, had a blog titled “What my father’s death taught me about estate planning." What was interesting about this blog post, is that Lynne essentially got out of the way and just said you have to read this amazing article. I wondered why Lynne had so little to say until I actually read the guest post on the Getting Rich Slowly blog. Essentially, Jody (the guest poster) relayed how her father planned while he was alive, to make her job as an executor as stress free as possible. If there was ever a selfless act of love in a financial sense, this is it.

This blog was of particular interest to me as I have written several blogs on this topic: Where are your Assets, Speak to your Executor-surprise only works for birthday parties, not death and You Have Been Named an Executor Now What. Like Lynne, I was amazed at how much thought Jody’s father put into his estate. This contrasts with the average person, who often does not even inform their executor that they have been named, let alone provide a roadmap that can be followed once they are gone.

In her guest blog, Jody discusses the steps and actions her father undertook while he was alive to minimize the fees associated with administering his estate, and just as importantly, to keep the process as stress-free for his daughter as possible. While I cannot do Jody's guest blog justice (you really should open the link above and read it), the following is a summary of some of the steps her father took to ensure he minimized Jody's stress in administering his estate.

To help assist in administering your estate, you may wish to download the BDO Estate Organizer so that you have a detailed document for your family and/or executor.  You can link to the estate organizer and download the document here.

Professional team

Jody’s dad not only built a team of advisors - a banker, accountant, insurance agent and lawyer - but he also ensured that he introduced his daughter to each of these advisors while he was alive and ensured that she had their contact information. Think about how smart that was. How much easier is it to communicate and work with someone you can put a name and face to?

Fees

Jody’s dad negotiated the estate fees with his lawyer down to 2% from the typical 4-5%. One can easily see why the lawyer accepted the lower fee. Jody’s father was so organized; the estate probably took one-quarter of the time most estates need to settle. Not only did he negotiate the fee, but he also put those fees aside in a separate account.

Joint Accounts

Jody’s father added Jody to his bank accounts, which allowed her to seamlessly pay bills. As Jody is American and there are no probate fees in the U.S., this was not done for probate purposes, but only for easing the administration of the estate for Jody. See my blog on Joint Bank Accounts Documenting your Intention, to understand some of the issues of using joint bank accounts in Canada.

 

Preparing for death

Jody’s father pre-paid his funeral expenses and even had a master binder that included funeral instructions - he told Jody to go to “F” for Funeral in his binder. Jody essentially had nothing to do but follow instructions.

In addition, her father left extra money for miscellaneous expenses that always arise on an estate. The extra money, whether left in a joint accounts or actually just given to a responsible child, is very important in Canada. The banks will typically pay for the funeral expenses and the probate fees, but access to the funds for any other expenses can be problematic until probate is authorized. Consequently setting aside funds so your executor will not need to beg the bank for access to accounts is a great idea.

Executor Fees

When Jody’s father informed her she would be named executor and he offered compensation, she, like many children, declined because she did not feel that she should charge her father.

However, after undertaking the executor’s job, Jody had this to say: “After he passed away and I realized all that it entailed, I found myself thinking that maybe I should have taken him up on that offer. Being the executor of an estate — even a very well-planned estate — took about 10 to 15 hours a week for months. It’s a big job. I found myself resenting my brothers since I was doing it all.”

The above is a very insightful and honest comment and is the reality in many estates. Jody’s father showed even more insight when he disregarded Jody’s protestation on accepting an executor fee as he had arranged to give her 1% extra when his IRA was distributed.

I cannot say it better than Jody

I conclude with one more quote from Jody. “I honestly consider my father’s financial planning to be a selfless act of love. Despite his generosity, I would trade every last cent for ten more minutes with him. When someone you love dies, it’s brutal. Emotionally, and physically. Trust me; you really are in no state to make these types of financial or legal decisions on your own.”

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

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Estate Planning- A Tale of a Fathers Selfless Act of Love

When I wrote my blog post for My 7 Links Project, I struggled with "the most beautiful post" link. Money and beauty are often diametrically opposed. However, thanks to Lynne Butler of the Estate Law Canada blog, I now know what a beautiful financial post would read like.

A month or so back, Lynne had a blog titled “What my father’s death taught me about estate planning”. What was interesting about this blog post, is that Lynne essentially got out of the way and just said you have to read this amazing article. I wondered why Lynne had so little to say until I actually read the guest post on the Getting Rich Slowly blog. Essentially, Jody (the guest poster) relayed how her father planned while he was alive, to make her job as an executor as stress free as possible. If there was ever a selfless act of love in a financial sense, this is it.

This blog was of particular interest to me as I have written several blogs on this topic, Where are your Assets, Speak to your Executor-surprise only works for birthday parties, not death and You Have Been Named an Executor Now What. Like Lynne, I was amazed at how much thought Jody’s father put into his estate. This contrasts with the average person who often does not even inform their executor that they have been named, let alone provide a roadmap that can be followed once they are gone.

In her guest blog, Jody relayed the following things her father did while he was alive to minimize the fees associated with administering his estate, and just as importantly, to keep the process as stress-free for his daughter as possible. While I cannot do Jody's guest blog justice (you really should open the link above and read it), the following is a summary of some of the steps her father took to ensure he minimized Jody's stress in administering his estate.

Professional team

Jody’s dad not only built a team of advisors, a banker, accountant, insurance agent and lawyer, but he ensured he introduced his daughter to each of these advisors while he was alive and ensured that she had their contact information. Think about how smart that was. How much easier is it to communicate and work with someone you can put a name and face to?

Fees

Jody’s dad negotiated the estate fees with his lawyer down to 2% from the typical 4-5%. One can easily see why the lawyer accepted the lower fee. Jody’s father was so organized; the estate probably took one-quarter of the time most estates need to settle. Not only did he negotiate the fee, but he put those fees aside in a separate account.

Joint Accounts

Jody’s father added Jody to his bank accounts which allowed her to seamlessly pay bills. As Jody is American and there are no probate fees in the U.S., this was not done for probate purposes, but only for easing the administration of the estate for Jody. See my blog on Joint Bank Accounts, Documenting your Intention to understand some of the issues of using joint bank accounts in Canada.

 

Preparing for death

Jody’s father pre-paid his funeral expenses and even had a master binder that included funeral instructions - he told Jody to go to “F” for Funeral in his binder. Jody essentially had nothing to do but follow instructions.

In addition, her father left extra money for miscellaneous expenses that always arise on an estate. The extra money, whether left in a joint accounts or actually just given to a responsible child, is very important in Canada. The banks will typically pay for the funeral expenses and the probate fees, but access to the funds for any other expenses can be problematic until probate is authorized. Consequently setting aside funds so your executor will not need to beg the bank for access to accounts is a great idea.

Executor Fees

When Jody’s father informed her she would be named executor and he offered compensation, she, like many children, declined because she did not feel that she should charge her father.

However, after undertaking the executor’s job, Jody had this to say “After he passed away and I realized all that it entailed, I found myself thinking that maybe I should have taken him up on that offer. Being the executor of an estate — even a very well-planned estate — took about 10 to 15 hours a week for months. It’s a big job. I found myself resenting my brothers since I was doing it all.”

The above is a very insightful and honest comment and is the reality in many estates. Jody’s father showed even more insight when he disregarded Jody’s protestation on accepting an executor fee as he had arranged to give her 1% extra when his IRA was distributed.

I Cannot say it better than Jody

I conclude with one more quote from Jody. “I honestly consider my father’s financial planning to be a selfless act of love. Despite his generosity, I would trade every last cent for ten more minutes with him. When someone you love dies, it’s brutal. Emotionally, and physically. Trust me; you really are in no state to make these types of financial or legal decisions on your own”

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Joint Bank Accounts-Documenting your Intention

In my blog Probate Fee Planning-Income Tax, Estate and Legal issues to consider, I talk about how holding assets in joint tenancy can be problematic post the Supreme Court decision in Pecore v Pecore.

I further discuss that many parents who put funds in joint accounts with a child/children to save on probate taxes (sometimes creating substantial income taxes as result) are often not clear as to their intention in regard to the funds: 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 with an understanding that the child on the account will share with their siblings?

The Pecore decision states that where assets are transferred without consideration (such as to a child to avoid probate), the presumption of a resulting trust will operate in almost all cases save transfers from a parent to a minor child. This means that when 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 or the joint account is presumed to be held in trust for the parent’s estate and the proceeds are divided pursuant to the parent’s will. In certain cases it may have been the parent’s intention to share the funds with all their children equally; however, in other cases the parent may have wanted a specific allocation to a specific child.

In order to avoid the presumption of a resulting trust post Pecore, lawyers have been yelling from the rooftops that people need to document their intention in regard to joint accounts. Well, the enterprising law firm of Fish & Associates has tried to come to the aid of Canadians with The Joint Asset Planning Kit.

For $45 the firm will sell you a 15 page document that, according to the website, “allows a parent to clearly express his or her intentions regarding joint parent-child accounts. If a parent wants the assets in a joint account to go to the joint owner, then this is spelled out clearly in the document.”

On the Jointasset.com website, Barry Fish states that he took “pains” to ensure that The Joint Asset Planning Kit can't override a will. “We've been very, very careful to ensure that, under no circumstances, do we ever want this document to be construed as a revocation of a prior will or testamentary disposition.”

I want to be clear of two things at this point. Firstly, I have never met Barry Fish or any of his associates (although we were quoted together in this article on estate planning for the black sheep child) and I am not receiving any compensation for discussing their website. Secondly, I can only rely on Mr. Fish’s assertion that this kit will stand up in a court without having any effect on a prior will.

If you have a lawyer, I suggest you consider meeting with them to draft a document stating your intention in regard to any joint bank accounts (this is the case whether you want a joint account to be shared equally by your children or not). If you do not have a lawyer, you may wish to consider purchasing The Joint Asset Planning Kit, but be clear, I am not endorsing such, just noting the kits existence for your consideration.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Common Personal Income Tax Errors

In today’s blog, I will discuss some of the more common personal income tax planning and personal income tax tracking errors I observe as a tax chartered accountant. Most of these planning and tracking errors are very subtle in nature. Many taxpayers utilize income tax software programs to prepare their personal income tax returns; I would suggest that these programs would not necessarily bring these matters to your attention, as the issues are not input based.

The following are common errors I observe on a consistent basis:

Transfer of investments with unrealized losses to a RRSP

Where you transfer an investment with an unrealized loss to your RRSP as a RRSP contribution, the capital loss on the disposition to your RRSP is disallowed. For example, if you bought shares of Research in Motion for $50 and transferred it from your non-registered trading account to your RRSP when the value was $35, the $15 capital loss would be denied. I have seen taxpayers claim this capital loss when they are not entitled to do so. Thus, you should be extremely careful to ensure you do not transfer any investments with an unrealized capital loss to your RRSP.

Spousal RRSP

A spousal RRSP counts as a contribution by the contributor. If Jennifer has a RRSP contribution limit of $18,000 and contributes $18,000 to her husband Tom’s RRSP, she receives the $18,000 income tax deduction and cannot contribute to her own RRSP. If Jennifer contributed $12,000 to Tom’s RRSP, she can only contribute up to $6,000 to her RRSP. The combined total cannot exceed her $18,000 RRSP limit. However, I often see people misinterpret these rules and make total contributions that exceed their RRSP contribution limit.

T3 income tax slips

These tax slips may contain an amount indicated in Box 42. This box relates to the return of capital on income trusts and similar investments. The amount in Box 42 indicates the amount of tax-free distributions received during the year and must reduce the adjusted cost base of the related investment. Many people do not keep track of their reduced adjusted cost bases. For example, if you purchased an income trust or similar investment for $14 in 2010 and the amount in Box 42 in the 2010 T3 slip is $1.50, the new adjusted cost base of that investment would now $12.50. If you were to sell the investment in 2011 for $15, the capital gain would be $2.50, not $1.

Depreciation on rental properties

A very subtle but significant error is in connection with rental properties. Many people purchase rental properties with friends or relatives and do not give any consideration to signing a partnership or joint venture agreement in regards to the property. This is a complicated legal issue, however, for income tax purposes, if the property is a partnership, the capital cost allowance [(“CCA”), known to many as depreciation for tax purposes] must be claimed at the partnership level and thus, the partners share in the CCA claim. However, if the property was purchased as a joint venture, each venturer can claim their own CCA, regardless of what the other person has done. (I will discuss this issue in greater depth in an upcoming blog on the income tax implications of owning a rental property).

Joint bank accounts

Many spouses arbitrarily open bank and investment accounts in the names of both spouses even though only one spouse may have earned and contributed all or the majority of the funds. This may lead to incorrect tax reporting results. For personal income tax purposes, technically, the spouse who earned and contributed the money to the account originally should report 100% of the interest, dividends or capital gains that are earned in that account on the original amount (there is no attribution back to the contributing spouse on the income earned on the income (i.e. “secondary” income). This is not necessarily what I see happening in reality.

Car expenses and home office related to employment

Many employees require their cars for work or are required to maintain a home office. Should you fall into either of these categories, you should ensure you get your employer to sign Form T2200, which will enable you to deduct these costs as employment expenses. Often, when I ask whether a taxpayer if they have obtained the Form T2200, they answer no.

Interest expense

Many people use their line of credit to borrow to make investments. The interest on these monies is typically deductible for income tax purposes. However, many people also use their line of credit for personal expenses, thus, mixing non-deductible personal interest expense with deductible investment interest expense. Where this is the case, you should track the amount the principal amount of the line of credit used for the investments on an excel spreadsheet for back-up in case of an audit by CRA. For example, if you took out $15,000 on your line of credit to make an investment, and the total line of credit balance is $100,000, you should allocate 15% of that month’s interest to your deductible interest expense. Any repayments to the line of credit must be prorated between the personal and non-personal amounts outstanding and cannot be allocated in whole to one or the other. Taxpayers often believe that they can apply the full repayment to the personal portion of their line of credit and therefore can claim a higher interest expense deduction for personal tax purposes.

1994 capital gains election

In 1994, the $100,000 capital gains exemption was phased out. However, individuals were eligible to make an election on their 1994 personal tax return to bump the value of their capital properties by up to $100,000. Many people made this election on their cottages and stock investments and never informed their children. Where the parent ages and forgets about this election or in some cases passes away, the children may not be aware of this election and the estate can pay more income tax than is necessary.

Tax planning does not always mean NO tax

The errors noted above are actual physical income tax planning errors. However, the biggest error committed by many people, is more mental than physical; when they attempt to reduce their income tax bill at any cost. As discussed in my blog The Income Tax Planning dog, wagging the Tax Dodge, this philosophy can often be at a significant personal detriment. 

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.