Dealing with Financial Windfalls & how to stave off the Money Leeches

I am always intrigued when I read an article about a lottery winner or superstar athlete who has filed for bankruptcy. Although it is almost akin to purchasing one of the movie star rags in the supermarket, I can’t stop myself from reading about the trials and tribulations of those that blow immense fortunes.

Why I am intrigued is somewhat puzzling. As an accountant, I have come across many people who have come into money suddenly and I have observed first-hand how that sudden fortune can be overwhelming for those without a financial background.

Against the above backdrop, I found an interesting article in Advisor.CA by Stanley Tepner, First Vice President and Investment advisor with CIBC Wood Gundy titled Dealing With Financial Windfalls.

Mr. Tepner describes a financial windfall as “any distribution of financial assets that leaves the recipient with dramatically greater liquid wealth than they had been accustomed to managing before the distribution. The windfall may be the result of a major inheritance, the sale of a business or property, or the proceeds of divorce or insurance settlements.”

In my CA practice, I have seen several individuals come into windfalls. Some by virtue of their business or professional situations are better prepared to handle their sudden increased wealth. In my experience, individuals who sell a business for millions of dollars have often built a strong professional network around themselves as their business grew and typically they will have less problems dealing with the windfall as they already have an advisory team in place. The biggest issue many of these people face is boredom, as they miss the excitement of the deal and the “buzz” of business activity. Many of these people often rejoin the workforce in some capacity.

On the other hand, people who have a financial windfall from an inheritance or divorce are often knocked off balance and they require a strong professional support group to be put in place as soon as possible. The loss of personal and financial equilibrium I have observed in these cases is why I find Mr. Tepner’s advice for these cases compelling. He suggests that “as enticing as it is for financial advisors to demonstrate investment acumen or planning smarts, the best piece of advice you can give to a new windfall recipient is to stop and do nothing. Clients should not make any consequential decisions until they have had time to absorb their new circumstances.”

Stanley goes on to say that his advice applies as much to spending and giving money away as it does to investing the new found wealth. I find this advice bang-on. People who have inherited money or received a large divorce settlement are often still grieving the deceased or the end of their marriage (I will ignore the cynical who say many are waiting for their inheritance at the death bed or the divorced person married for the money in the first place). In addition to dealing with the emotional issues attached to death and divorce, money attracts two different types of unwanted attention: relatives and friends looking for a hand-out and those looking to invest those funds.

If a windfall recipient follows Stanley’s advice and parks the money in a short-term savings vehicle such as a GIC, they not only provide themselves some breathing and thinking room, but they will have a built in “out” when approached by the various money leeches. This is an important second step to take not discussed in the article. By in essence freezing the funds (or telling a little white lie that you have frozen the funds; but actually locking in the funds is a better alternative to resist temptation) you cannot gift, loan or otherwise invest that money for say six months or longer. This is a bit of a twist on Stanley's advice, but a strategy I suggest someone coming into a windfall consider, since it stops the leeches dead in their tracks.

By the end of six months or whatever period is selected, the recipient will have had adequate time to consider whether they wish to gift, loan or otherwise invest their money. Hopefully they will have taken advantage of some outside counsel and thus, any decision to give money away will not be impetuous.

Dealing with a financial windfall can be stressful. I would suggest that if you or someone you know is in this position, or will be in the future, you do nothing and freeze all decisions relating to money for six months to one year.

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.

Investment Bankers are from Uranus, the Protesters from Pluto

Last Saturday, Mark Schatzker of the Globe and Mail wrote an article titled Occupy Toronto: The one-week anniversary. I found this satirical article very funny.

One of Mark's "best quotes" was the following: “It’s weird protesting on Bay Street. You get there at 9 a.m. and the rich bankers who you want to hurl insults at and change their worldview have been at work for two hours already. And then when it's time to go, they're still there. I guess that's why they call them the one per cent. I mean, who wants to work those kinds of hours? That's the power of greed.”

As someone who has dealt with several investment bankers over the years, I almost fell on the floor laughing. This quote, although a figment of Mark's fertile imagination, actually encapsulates the polar opposite views on money and work-life balance the bankers and protesters have. I can envision the protesters on the street chanting, while the investment bankers, who work incredibly long hours look down upon the protesters like they are aliens from another planet, because they don’t value the almighty dollar. Meanwhile, it does not take much imagination to conceive of the frustration of the protesters, who cannot voice their complaints to the very people they despise, because the bankers are working day and night to make money; so much so, that they are not accessible.

I am not sure everyone will agree, but I think this was a brilliant observation by Mark. Whether you side with the Bay Street bankers or the protesters, Mark has poignantly pointed out how diametrically opposed the two sides are.

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.

The Outrageous Penalties that can be assessed for not filing IRS Information Forms

The recent U.S. tax amnesty program that concluded in September was controversial to say the least. Even Finance Minister Jim Flaherty weighed in saying that “U.S. authorities are spreading unnecessary stress and fear among law-abiding Canadians in their aggressive pursuit of offshore tax cheats.”

In the last week or so there have been a couple articles stating that the IRS may be softening its position in regard to Canadians, however, in the meantime, the filing requirements remain unchanged.

There has been much written about the requirement to file U.S. returns. However, in this blog I want to discuss other U.S. forms that may be required for Canadians who have to file U.S. tax returns whether as U.S. citizens or deemed U.S. residents.

As I noted in prior blogs, I used to file U.S. tax returns, but have not done so for almost two years. Thus, this blog is just for information purposes; please see your U.S. advisor to ensure compliance with your filing requirements and confirm any penalty provisions applicable to you.

Form TD F 90-22.1

This form was front and centre in regard to the amnesty filing program. This form is required to be filed by any U.S. citizen or resident who has a financial interest in, or signature authority on, a foreign bank account (i.e. any account in Canada, whether a bank account or investment brokerage account).

Failure to file this form could result in penalties ranging from $500 for a negligent violation, to $10,000 for a non-willful violation to a maximum of $100,000 or 50% of the value of the account for a willful violation. The potential penalties seem absurd for not filing an information form. Some think the hidden agenda of this form is to provide the IRS full disclosure should you die and be subject to U.S. estate tax.

Form 8891

This form is used to report any Registered Retirement Savings Plan (“RRSP”) or Registered Retirement Income Plan (“RRIF”) you hold in Canada and the related income from your RRSP or RRIF. Before you have a heart attack, the income does not need to be reported if you elect to defer recognition of the income on your RRSP or RRIF until the time you receive it. By making this election you should be able to offset any U.S. tax by claiming a foreign tax credit for the Canadian income tax you pay upon the withdrawal of funds from your RRSP or RRIF. This form must be filed each year for each RRSP or RRIF you hold.

There is interestingly no penalty set out on Form 8891. I have been told by some that the penalty for not filing this form is up to 35% of the value of the RRSP or RRIF, however, I have seen others speculate that since no penalty is specified, the penalty could be as low as $135. In either event, I would file the form and not chance the higher penalty.

Form 5471

This form must be filed by Canadians filing U.S. returns who own at least 10% of the stock in a Canadian corporation. There are different filer requirements, so speak to your advisor as to which category you fall into. Under some filer requirements, you are basically required to translate your corporation’s Canadian financial statements into U.S. financial statements. This is a lengthy and very expensive exercise.

The penalty for non-compliance is $10,000 per missed filing and a reduction of foreign tax credits.

Form 3520

This form is required to be filed by any U.S. person who received a distribution from a foreign trust. For estate planning purposes many Canadians create family trusts that include themselves or children who are U.S. citizens or residents and thus fall under this filing requirement.

In addition, and more relevant for most Canadians, some U.S. tax specialists think that this form must be filed to report both Registered Educations Savings Plans (“RESPs”) and the Tax-Free Savings Accounts (“TFSAs”).

The penalty for not filing this form is equal to the greater of: (1) $10,000, (2) 35% of the property transferred to the trust, (3) 35% of the gross distributions from the trust, and (4) 5% of the gross value of the trust assets.

The above discusses some of the U.S. information forms U.S. citizens and residents may be required to file. The penalties do not seem proportional to the importance of the forms, so for the sake of Canadians required to file U.S. returns, let’s hope the IRS truly does soften its position on penalties for at least past transgressors.

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.

Advice for Entrepreneurs

In one of my blogs, I said that I have developed a sixth sense in “sifting out,” among the people I meet, those which will most likely be successful. Based on this comment, one of my readers suggested that I write a blog on the “distilled” advice I would provide to an entrepreneur starting a business. I really liked his/her suggestion and thus this blog was born. My comments, based on 25 years of observation are discussed below.

Personal Relationships

In my opinion, the most important issue facing any entrepreneur involved in a relationship or married, is their significant other. Starting a business requires a significant time commitment and comes with a large element of risk. If your significant other is not willing to support you both financially and spiritually, either your business or marriage/relationship is doomed. Where there is resistance to starting the venture, or the other person does not have the same risk threshold, they seem to just drain the enthusiasm and energy from the entrepreneur. Thus, in my opinion, if there is not buy in from your significant other, your chance for success is diminished before you start.

Be Honest With Yourself

The first thing you must ask yourself before you commence any business is; are you an entrepreneur by choice or circumstance? If it is by choice, move to the next paragraph. If your reason is circumstance, such as being laid off due to a recession, you must realize that unless you are starting a service industry or similar industry where you have portability of your clients or customers (i.e.: you start your own law practice and when the economy picks up, if you are hired by law firm, you can take your clients with you to the new firm), this will potentially be a lifelong commitment. If you cannot make a long-term commitment, do not start your business, as it will most likely be doomed to fail.

Business plans and cash flow statements

My first suggestion is to walk before you run. Make sure you start slowly and have everything you require in place. To ensure you have everything in place, you need a business plan and cash flow statement.

Developing a business plan forces you to consider all aspects of your new businesses from production to the marketing and professional fees you will incur. A business plan acts as an initial road map, and although it will change, it provides initial direction.

In almost all cases, the banks will require a business plan and statement of cash flow. For any new business, the revenue line is an educated guess at best, however, the expenses and cash outlays are fairly predictable and as such, you will have some cost certainty. Once you know your costs, you know the minimum amount of revenue you will require to pay off your creditors and lenders.

Partners and employees-Know Your Abilities

Most people are either sales oriented or business oriented. If you are strong in both aspects you have the best of both worlds. Whether you start with a partner or hire an employee later, know your strength. If you are a sales person hire a good bookkeeper or accountant to help you. If you are the business person, hire a good marketing person or get advice on how to market your product or service.

Type of business

If you are developing computer software or apps, you are entering an industry with few barriers to entry and your costs may be limited to the utilities in your basement. However, if you intend to start a service or manufacturing business you may have serious barriers to entry and financing issues.

Financing

Whether you are starting a services business or manufacturing business, you will likely require financing. Although you may be able to access some small business loans (research which loans are available to start-up businesses), financing is often problematic for a start-up business and, even when you can obtain financing, you will almost always require some personal capital. Thus, where possible, you should try to start your business after you have worked a few years and built some capital. If you are lucky enough to attract venture capital, the VC's will want to see that you have significant "skin" in the game. Many young entrepreneurs access family money, either as loans or as equity. However, since many start-up businesses fail, you should ensure that if you borrow or capitalize your business with money from your parents, you do not put their retirement plans in jeopardy.

Where possible, have a line of credit or capital cushion arranged in advance.

Marketing

If you cannot afford to hire a marketing consultant to ensure that you have a market for your product or service, then utilize the internet for research and, more importantly, talk to people in the industry. Although some people may view you as the competition and avoid speaking to you, others benefited from a mentor when they started and may be willing to speak to you and, if you are lucky, they may be willing to provide some mentorship along the way. Either way, get out there and pound the pavement and speak to people.

Don’t discount your services or product

One of the biggest mistakes I have seen entrepreneurs make is discounting their services or products to get business. The problem with this is that your customers will refer you to their friends as a cheap provider and you will get referred customers who are only looking for discounted services. This cycle is very hard to break. Sell for a fair price, but don’t become known as the person with the “cheap prices” unless you can truly make money in that manner.

Keep Your Books Yourself

This is a bit of an unusual suggestion, but if possible you should initially keep your own books and learn about accounting. You may require a bookkeeper to assist you, but you will always be a better decision maker if you understand your own books. You do not want to be dependent on your bookkeeper.

Watch Your Accounts Receivable

It is imperative that you get in the habit of collecting your accounts receivable on a timely basis. This is important for both cash flow and establishing with your customers that you will not allow them to drag out payments. As you grow, you must print out your accounts receivable listing at least every 30 days and either follow up yourself or have your office assistant/A/R clerk call to promptly collect your overdue A/R.

Give it Time to Grow

Most businesses require three to five years to begin to mature and solidify. Thus, you will need patience and an understanding that you will not be “raking in the cash” for several years.

Your Psyche

Many entrepreneurs at some point in their business lives have been perilously close to bankruptcy or have actually had a business go bankrupt. While not always the case, entrepreneurs seem to have nerves or steel or at least give that impression. You may be able to be successful without those steely nerves, but they would be an attribute if you start a business, so you can face down the many challenges that will confront your business.

Post Mortem

It has been my experience that when entrepreneurs reflect upon their businesses, they almost all say that if they knew about the physical toll, long hours and financial stress they would endure, they would not have started their business.

But that is the wisdom or weariness of age. New entrepreneurs are driven and they have boundless energy and they do succeed in spite of the above noted risks and stresses. However, it is vitally important to plan and to try to implement or consider many of the factors I have noted above to make the journey a little less bumpy.

The BDC currently has a program to support young Canadian entrepreneurs www.facebook.com/bdc.ca in which they donate $1 for every time the above badge is downloaded

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.

Why Survey: Are your Employees not your best source of Client Information?

Wow, what a stunning revelation. According to a recent survey by RBC Wealth Management, the top three concerns of high net worth clients are the transfer of wealth at death, minimization of taxes and financial needs during retirement. Who would have guessed such? How shocking! Could/should RBC's wealth management advisors not have conveyed this message to the wealth management department in the first place?

RBC completed 2,500 surveys during sessions with their high net worth clients and, according to Howard Kabot, vice-president, Financial Planning, RBC Wealth Management Services, they found that their clients “are very concerned about estate planning. What happens to their wealth during retirement and after they are gone are their main priorities… Clients tell us that they want to make sure their families are appropriately taken care of and that their financial plan is as efficient, effective and prudent as possible."

If I was RBC, I would be concerned that my high net worth clients are going to ask themselves the question, "why did I have to tell RBC this, should RBC not already have been aware of my concerns via my advisor?". I have written about most if not all these “estate planning concerns” in my blog during the last year because I know that they cause apprehension to my high net worth clients. I didn’t conduct sessions and surveys, I just listened to my clients concerns during meetings and lunches etc.

This survey reminds me of a variation of this theme. Years ago a friend of mine worked at a company that in its infinite wisdom decided to engage an efficiency consultant. She told me she could tell her employer everything they needed to know about how her company could become more efficient for the cost of a free lunch. The company paid the consultant hundreds of thousands of dollars for advice that was discarded a year later when the organization became dysfunctional. Why companies do not first access the opinions of their human internal resources (employees) in these type situations is somewhat mystifying.

Obviously, I am just picking on RBC to make a point; this could be a survey by CIBC, BMO or Scotia or any other large company. In addition, before you marketing types attack me, I know this survey was probably partly undertaken by RBC to learn about their clients and partly to be released as a study. But why do companies spend money on endless surveys and consultants when their employees should have most if not all the answers?

One would think that RBC should have been able to determine its clients’ top concerns through a session with its own wealth advisors. These findings could then be confirmed with 50 or so clients to make sure the advisors are in sync with their high net worth clients.

My firm is by no means the most progressive in the world, but we constantly request feedback and suggestions from our staff on internal and client matters. We even have outside consultants solicit opinions from our staff in confidence so they won’t withhold their true feelings out of fear of recrimination.

In my opinion, most of these surveys are a waste of time and money and the resources would be better spent talking to your staff on the ground. Assuming your employees are on the ball, you will get most of the information you need from your staff and their interpretations and understandings can be confirmed by a limited survey of your clients. More importantly, if your clients’ opinions do not agree with what your employees expected, you will have identified a huge expectation or communication gap which adds further value to the whole exercise and then you can commission a full fledged survey.

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.

How to Save Tax with Flow-Through Shares

Flow-Through Limited Partnerships are marketed as income tax shelters by many investment advisors. They are however, investments in junior resource companies, with the associated risk. Today I provide the ABC’s of these often misunderstood tax-assisted investments in a guest blog titled How to Save Tax with Flow-Through Shares I wrote for Jim Yih of the Retire Happy Blog .

The Retire Happy Blog was the winner of the Globe and Mails Canada’s Best Personal Finance Blog contest, a well deserved honour and is definitely a blog worth checking out if you have not already done so.

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.

The NBA Strike- How Not to Split a Billion Dollar Pie

The National Basketball Association (“NBA”) has already cancelled the first two weeks of the 2012 basketball season. There are various issues being negotiated as discussed in this article, but most of us just see a huge income pie, with millionaires fighting for a bigger slice of that pie. Currently 57% of the basketball-related income is allocated to the players and 43% allocated to the NBA owners. The owners are striving to change that allocation to 47/53% at a minimum.

The proportion of the labour dispute that relates to negotiation on philosophical issues as opposed to greed is unclear. What is clear to the casual observer is that both sides are forgoing millions of dollars by cancelling the first two weeks of the season and they risk losing multi-millions of dollars if the season is cancelled. These monies will never be recouped. With a pie this large, can’t everyone be happy?

I find it somewhat perplexing, if not disgusting, that all these millionaires cannot come to an agreement, so I decided to look at why these negotiations have not proven successful. Academically and psychologically, one possible explanation for why the NBA negotiations have failed to date is the Fixed Pie Concept. Max Bazerman, a Straus Professor at the Harvard Business School, speaks about the mythical fixed pie concept. He states that the fixed pie concept is an assumption by the negotiating parties that the resource pie is fixed and this assumption, is one of the most destructive assumptions parties bring to negotiations. “The mythical fixed pie mindset leads us to interpret most competitive situations as purely win-lose. For those who recognize opportunities to grow the pie of value through mutually beneficial tradeoffs between issues, situations can become win-win.”

Based on this concept, the NBA players and owners must stop fixating on the current pie and whether a 57/43% allocation is fair or not, and start considering acceptable compromises which permit them to expand the size of the pie. The NBA pie has grown enormously in the last ten years or so through marketing to Europe, shirt sales, music videos, etc. The players and owners must now determine if they can jointly continue to grow the NBA pie such that even with a more equitable split, all parties still win. In the alternative, maybe there is a shrinking pie syndrome occurring and both sides feel the pie has been maximized. In either event, the pie is enourmous, just split it.

The NBA owners are also stating that they are adamant competitive balance in the league is every bit the issue as splitting the income pie is. The NBA is unwavering to date in its stance that every team, regardless of market size, should have the chance to win a title through constrained payroll and contract terms. This model is based on the National Football League which uses a hard salary cap to allow small market teams such as Green Bay to be competitive.

If the NBA owners are truly serious about this issue then I applaud them. Every basketball fan I know was truly appalled at how Lebron James and Chris Bosh manoeuvred to join Dwayne Wade in Florida last year with the Miami Heat to create a dream team. Most basketball fans were pleased to see the Heat lose, but teams were decimated in Cleveland and Toronto as the selfish NBA players changed the competitive landscape at their whim and flaunted it in the fans’ faces.

Personally, I don’t care if the NBA plays this year or not, which seems to be a consensus amongst many disenchanted fans. I would suggest however, that once these bickering millionaires figure out how to share their pie, if the NBA has not addressed the issue of the inmates running the asylum and the perception that the players can make or break teams without impunity based on friendships and the desire to play where they want, then the whole strike will have been for not.

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.