Estate Planning & Testamentary Trusts

Estate Planning & Testamentary Trusts

by | Aug 2, 2023 | Financial Planning

March 21, 2022

I also cover this in a YouTube video. Click here to watch!

 

If you have children and your plan is to leave them the bulk of your estate, how do you make sure – in the case they get married and then divorced – that their ex-spouse doesn’t get 50% of the assets that you left for your child? Today I’m sharing with you a key strategy that will fix this problem. 

Here’s the thing, you can leave money “directly” to your child, but if they are married or get married in the future, they “commingle” this money – along with other assets they have to enjoy their lifestyle with their spouse – and end up getting divorced, their ex-spouse could end up with 50% of the remaining money that you left your child. 

 

So how do we correct this problem?

The solution is something called a Testamentary Trust. You can’t go out and set one up today, but it is created upon your passing and must be designed properly inside your Will.

Back when Jim Flaherty was the Federal Finance Minister, he took away a key feature of Testamentary Trusts, and so, some lawyers – who are not familiar with the Financial Planning Benefits of a Testamentary Trust – sometimes give the wrong advice about not using this strategy in your Wills.

 

Here are some key Financial Planning Benefits of a Testamentary Trust:

  1. It is set up upon the death of an individual.

  2. The Trust is considered an “Individual” for Tax Purposes – which just means it has a separate tax return.

  3. For the first three years of the Trust’s existence, it has graduated tax rates the same as an individual.

  4. Provides for Income Splitting with the Beneficiaries.

  5. Creditor Protection.

  6. Family Law Act – Divorce.

In this blog, I’ll be drilling down into those last three Benefits.

 

Income Splitting 

Let’s use me as an example. I have 3 children, and let’s assume my estate is worth $3M upon my passing. I have set up Testamentary Trusts in my Will for each of my children and my future grandchildren. That means each of my children would get $1M in their Testamentary Trust. 

Now, as I write this, none of my children have children… at least, that I know of! However, down the road when they do have children, they could take money out of the Testamentary Trust in the name of the grandchild. Now you’re taking the money out on your grandchild’s tax return, who should be in a lower tax bracket, thereby reducing your overall tax bill. So when it comes to income splitting or what some accountants like to call “income sprinkling,” this strategy is very strategic. 

 

Creditor Protection

If you leave money in your Will directly to your son, and he ends up getting sued, then the lawsuit can go after the money that you left your son. However, if you leave the money to your son in a Testamentary Trust, and your son then gets sued, the lawsuit can’t go after the money in the Testamentary Trust. This is huge. 

 

Family Law Act – Divorce

As I mentioned earlier, if you leave the money directly to your daughter, and she ends up getting married and then divorced, then the ex-spouse could end up with 50% of the money you left to your daughter. However, if you left the money to your daughter in a Testamentary Trust and she gets married and divorced, then the ex-spouse will end up with nothing from the Testamentary Trust. Now, the spouse might be able to go after the cash if your daughter commingles the money from the Testamentary Trust, so it comes down to making sure she is educated properly.

If you’d like to learn more about how to set up a Testamentary Trust in your Will, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

 

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

 

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

How does a Return of Premium work?

How does a Return of Premium work?

by | Aug 2, 2023 | Financial Planning, Risk Management

March 24, 2022

I also cover this in a YouTube video. Click here to watch!

 

So, what is the super cool feature called Return of Premium and which insurance products offer this coverage? By the end of today’s blog I’ll have not only shared with you how you can get this feature, but I will also warn you about some of its potential pitfalls.

I find insurance policies a necessary evil – but if we can purchase policies that protect us and our families, plus give us an opportunity to get a portion or 100% of our premiums back… Well, sign me up!

 

There are 3 common Return of Premium options in the marketplace: 

  1. Return of Premium on Death. This is somewhat obvious in how it works, meaning the pitfall is that you have to die to collect. So really this means the money is going back to your estate. 

  2. The Return of Premium that allows you certain risk management products, or in other words the “50% Return of Premium after so many years of coverage.” I will explain later how you can take advantage of this offer

  3. Finally the Return of Premium that says “Give me 100% of my money back after a certain time period.”

     

So for Critical Illness Insurance – otherwise known as CI – you can add on the feature of Return of Premium on Death. You’re either going to get a covered policy and receive the CI benefit, or if you die while it’s being processed, your estate will get 100% of the premiums that you paid back, 100% tax-free.

A Critical Illness Policy can also be designed with a term to the age of 75 – meaning you will have coverage from now until 75, and you can add on a 15+ years ROP on Surrender. So while you are alive, after paying premiums for 15 years, you can decide to either continue to pay the premiums each year, or you could ask for 100% of your money back tax-free. In this case, you are either going to get a covered CI benefit, and if you don’t, you qualify to receive 100% of your money back. This is what I call the Cadillac version of CI.

 

There is another Critical Illness Policy for business owners that is kind of cool. 

It is called Shared Ownership CI. This means that the Corporation pays the premium for the CI benefit and you personally pay the premium for the ROP on Death and the ROP on Surrender. Why is this cool? Because after 15+ years you can decide to surrender the policy and not only will you get back all the premiums that you paid personally, but you also get back all the premiums that the corporation paid – you get them all back personally and it is 100% tax-free money.

With Personal-Individual Disability Policies you can add on an ROP feature that allows you to receive back 50% of the premiums that you have paid if you haven’t claimed on the Disability Policy. This feature usually kicks in for every eight years you own the Disability Policy, and continues all the way up to the expiry date for the coverage. So if you haven’t contracted this policy, and you hit your eighth, 16th, or 24th anniversary, then you will receive 50% of your premiums back. The best part? That is 100% tax-free money.

If you’d like to learn more about how you can incorporate the ROP feature into your Risk Management Coverage or if you have already decided that you need to get the coverage in place, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

 

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

 

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

What is a TFSA?

What is a TFSA?

by | Aug 2, 2023 | Financial Planning, Investments

March 28, 2022

I also cover this in a YouTube video. Click here to watch!

 

What is a Tax-Free Savings Account (TFSA) and why should every Canadian citizen have one?

In this blog, I will give you all the necessary facts you need to consider so that you can make an informed decision about a TFSA for you and your adult family members.

Let me start out by saying – in my opinion – I think the government named the account incorrectly. It should have been called a Tax-Free Investment Account or TFIA because most Canadians are under the false impression that they can only have a TFSA at one of the major banks, all because of the word “Savings” in its name.

However, a TFSA is allowed to invest in almost anything, and I will share some ideas later in this blog on what I’m doing with my own TFSA in order to maximize my return by taking on additional risk.

 

So here is the history of the TFSA

It was first introduced in 2009 and you needed to be at least 18 years of age to open up a TFSA. Initially, you were only allowed to contribute $5,000 of after-tax money. This is key, because the money you are putting into the TFSA has already been taxed in your hands. Gradually, the annual contribution increased to $5,500, and then in 2015 – as a part of an election promise – the annual contribution was increased to $10,000. But, like most promises by politicians, once they got elected, they reduced it again to $5,500. Today the annual contribution sits at $6,000.

 

Now why is this important to you?

Because if you haven’t opened up a TFSA account yet, and you were at least 18 years of age or older in 2009, then you can put at least $75,500 into a TFSA today.

Each year a new contribution room is automatically created and if you forget or don’t have extra money to put into a TFSA for that particular year, then you get to carry that contribution room forward.

Now, it is very important that you don’t over-contribute to a TFSA. If you put too much into a TFSA, then Revenue Canada (the CRA), will charge you an interest penalty equal to 1% per month on your excess contribution. So be careful when calculating your contribution room.

I also advise you to be aware of this: if you take money out of your TFSA in, say, 2021, then you are only allowed to put that money back into your TFSA the following year – in this case, 2022. Because you were contributing “after-tax” dollars into the TFSA, when you take money out, it is completely tax-free money.

 

Think about it for a minute, if you were to contribute $6,000 per year for the next 25 years – and you received a conservative 5% net rate of return each year – then you would have a bucket of $300,000 in tax-free money. Plus, if you received a higher rate of return – say 7%, for example – then you would have a bucket of $406,000 in tax-free money.

 

Now, I did promise to tell you what my strategy is for my own TFSA… 

For background purposes, I will share with you that I have a high-risk tolerance – which means that I don’t look at my investment statements when the markets are down. I also don’t look at my investment statements when the markets are up. Why? Because whatever that number is, it is not my number. I am not planning on touching my TFSA for at least another ten or 15 years, so why would I be looking at the value today?

My TFSA is fully funded with shares of a private start-up company. If you research my background, you will know that I initially started my career in the Information Technology world of Corporate Canada before moving into the world of start-up software companies. 18 years ago I left that world to become a Financial Planner. In other words, I know the stats: only one in eight start-up companies survive. So for me, based on my risk profile, I am okay with those odds. 

I will tell you it has been over six years since my first round of financing, and I have since participated in three additional rounds of financing; the company I have invested in happens to now be cash flow positive, with plans to possibly go public in the next two to five years. 

For the record, I did not tell any of my clients about what I was doing with my TFSA, because it brings with it a higher level of risk than what most Canadians are looking for. So investing in start-up companies is not for everybody, but it’s absolutely something we can talk about. 

If you’d like to learn more about TFSAs, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

 

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

 

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

Are you working with a Real or Fake Financial Planner

Are you working with a Real or Fake Financial Planner

by | Aug 2, 2023 | Financial Planning, Risk Management

March 31, 2022

I also cover this in a YouTube video. Click here to watch!

 

Now here’s a question you may have never thought of needing to ask yourself: are you really working with a Financial Planner or just somebody who calls themselves a Financial Planner?  Well, by the end of this article I’ll have supplied you with all the necessary information needed to determine if your current Financial Planner really knows what they’re talking about – and if the recommendations they’re making to you and your family are correct.

 

Right now, in so many provinces across Canada, anybody can call themselves a Financial Planner and get away with it. 

As an industry, we are asking for reforms and regulations to protect the public from rogue people who pretend to be Financial Planners – the ones whose sole pursuit is selling products, moving onto the next opportunity and leaving many mistakes behind.

When I am in need of a doctor – a specialist – I want to find a doctor that has a number of degrees and designations after their name. I am seeking out someone who has gone to school for a number of years, someone who is a real expert in their field. Ultimately, I’m looking for someone who knows what they are actually talking about.

This same practice should be used when seeking out a Financial Planner to work with. We have similar acronyms after our names that you should be looking for to ensure the person that you are sitting down with is actually a Financial Planner.

So – you want to make sure the person has a business or a math background; additionally, they should have at least their Certified Financial Planners designation (CFP), which is the gold standard when it comes to Financial Planning. The second designation you should be looking for is the Chartered Life Underwriter (CLU) designation. The CLU designation really focuses in on working with business owners and complex estate planning. Those two designations – either the CFP or the CLU – are what’s really required in order to call yourself a Financial Planner.

Starting this year, if you want to enroll in the CFP program, you must already have a university degree – just like lawyers and accountants need to have a university degree, so will Financial Planners. This is just one step of many that the industry needs to take in order to protect the public.

Currently, I am working on a number of client files and you can see during the information gathering process that many business clients have no clue if they are maximizing the effectiveness of their corporation, and whether or not they are paying way too much in taxes to Revenue Canada.

 

Just to give you an example… 

One client I dealt with had a Critical Illness Policy that they owned, but when I reviewed the documents, I noticed that the brother was listed as the beneficiary of the policy. Now, if this was a Life Insurance Policy, that might be correct, but this was a CI policy. So, I explained to the client that they were making the premium payments, but if they contracted a critical illness, the payout would be going to the brother. Boy, were they displeased when I showed them their own documents. Needless to say, they fired their previous Financial Planner since they clearly didn’t know what they were doing.

 

Life insurance is a no-brainer to have inside a corporation. Time and time again I see business owners owning life insurance policies personally instead of corporately and that is just not being wise. 

Why would you take money out of the corporation – paying 30% or 40% in personal taxes in order to pay for the life insurance premiums – when that policy could be inside the corporation?

Plus, depending on which province you are in, you’re using 11-12% corporate dollars to pay those life insurance premiums. And, if you did pass away unexpectedly, the death benefit would be paid into the corporation, at which point your accountant would prepare paperwork to declare a “Capital Dividend” and the life insurance proceeds would come out of the corporation tax-free. What I’m trying to say is: there is no downside to owning the Life Insurance Policy inside the corporation.

So, again, I ask the question: why are business owners still owning Life Insurance Policies personally? Part of the answer is that the person who “sold” them the product didn’t know what they were doing.

 

Cash flow management is key to running a successful business. However, during my analysis of many client files, I find out that their current Financial Planner has never taken the client through a Cash Flow Management exercise. Never! 

In a more recent client engagement, once we took them through a Cash Flow Management exercise, we were able to save the client $33,000 a year in personal cash flow – which meant we reduced their personal taxes by at least $10,000-$15,000 each year. If we hadn’t come into their lives, they would have continued to make Revenue Canada rich.

If you’d like to learn more about working with an actual Financial Planner, and not somebody who is just trying to sell you products, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

 

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

 

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

info@moaklerwealthmanagement.com

1 416 840 8544

Ontario Dentist Magazine

Ontario Dentist Magazine

by | Aug 1, 2023 | Dentists, Financial Planning

Sean Robertson BHSc DDS

John Moakler BMath, CFP, CLU, CSC

Rick Goldring BA, CFP, CLU, ChFC

Choose Your Own Adventure: The “Perms and Combs” of Career Investing and Practice Sale Strategies

Remember those “Choose Your Own Adventure”
books in elementary school? They involved a
character who experiences a different journey
and eventual outcome based on the options
created by the author and chosen by the reader. Also
known as “Secret Path” books, the same one could yield
different journeys for their characters, even with some
of the same choices made by the reader. Based on the
number of choices, there were different permutations
and combinations that created a different story. For a
young, developing mind, these stories gave a sense that,
to some degree, the reader could control the outcome,
and that choices have consequences. Sometimes, these
consequences could be anticipated, while other times
they could not.
Then, in high school, finite math involved the study
of permutations and combinations, often abbreviated
as “perms and combs.” Permutations are mathematical
sequences where the order of the number set matters.
Combinations are sequences where order does not affect
the outcome. Perms and combs could be thought of as a
mathematical model of the choose your own adventure
books.
When we look at “real life” from a financial perspective,
there are an infinite number of choices with consequences
and benefits, and with dynamic, external
influencers. Even when we control for external influencers
and changes in the economic climate, every dollar
earned can have a different legacy based on the strategy.
In essence, the perms and combs of a financial strategy
are endless, but they matter for the lead characters
in your life. For dentists, investment strategies and practice-sale considerations have an effect on retirement
outcomes, and are influenced by the climate of the stock
market and practice marketplace.
This article will review six financial options for a dentist’s
financial “adventure.” Three are presented from
the perspective of career investing, and how different
long-range approaches can result in different retirement
savings outcomes. The other three are presented from
a practice-sale perspective, showing how different strategies
of practice-sale considerations can yield different
after-tax, take-home profits. By no means are these scenarios
exclusive or exhaustive, but they give pause for
consideration of how dentists can strategize and choose
their own path.

A career of investing
As a dentist, you are an associate or practice owner. As
a practice owner, you have both challenges and benefits.
Owning a practice requires not only investing in
your clinical skills but also investing in your team and
the practice to support patient care and meet current
standards. The investment in practice ownership can
offer a rewarding career, but it requires staying on top
of clinical technologies, administrative responsibilities,
infection prevention and control protocols, and
patient-management considerations. Continued learning
and relearning are critical for any clinician to maintain
and grow a practice. Being an entrepreneur in dental
practice ownership can be demanding, invigorating and
satisfying — sometimes all in a single day.
The early years of practice ownership often require
focus on practice growth, but some consideration should also be given to a retirement plan. A dentist retiring at
age 65 should expect that she and/or her spouse will have
at least another 30 years of life to enjoy, with the majority
of that time doing the things they want, when they
want. In essence, dentists spend the first third of their
lives preparing for a career in dentistry, the next third
practicing dentistry, and the final third in retirement.
To maximize that final third, it is critically important
to plan and prepare for retirement early on in a dental
career. There are a number of options to consider in planning
for retirement through a career of investing that can
yield vastly different outcomes; we will highlight three
theoretical options.
The first common, simple and straightforward
approach to investing is a T4 salary approach. This can
be effective in creating retirement savings but may also
require contributions to the Canada Pension Plan (CPP),
which can have a negative return on the funds contributed.
This scenario of career investing may result in an
“RRSP trap,” where the investor is forced to contribute to
RRSPs in order to reduce the tax bill during her working
years, only to find that tax is deferred to the final third
of her life.
A second option could be a blend of T4 salary and T5
dividends for the dentist’s paycheque, where one could
minimize the amount of T4 salary to coincide with any
government-support programs (child care, tax credit,
etc.). This would permit the reduction or elimination in
CPP contributions, saving up to $8,000 per year. In this
scenario, creating a portfolio of real-estate properties to
generate rental income that is then used to pay down
debt and increase wealth could be considered.
A third career-investing strategy could follow the second
option presented but use the dentist’s professional
corporation or a newly created real-estate holding company
to invest in a “Whole Life Par Policy.” This could be
designed with immediate access to cash value. Designing
such a policy would mean the policy holder would pay
the insurance premium on a Monday and on a Tuesday
a lending institution would provide the owner with 90
to 100 per cent of the premiums back at a prime rate
of interest. These borrowed premiums could be used to
reinvest in the practice or in real estate. 

This option permits attaining life insurance coverage for the client to protect her family at the cost of pennies on the dollar.
Insurance companies in Canada reward each Whole
Life Par Policy with an annual dividend. Insurers have
been paying dividends for more than 150 years, with the
current dividend at six per cent. These polices can be
designed with immediate access to cash value, which is
not common knowledge. As such, we have found many
policy holders have policies that, although they were designed for them, limit access to the cash value for at
least 10 to 14 years. A customizable approach is always
necessary to achieve the best outcome in the interest of
the client.

When it’s time to sell

The first option here considers that dental practices can be sold as shares in a dentistry professional corporation,
or sold as an “asset sale.” In the case where a dentist was
not incorporated or had already taken advantage of the
available lifetime capital gains exemption (LCGE) at the
time of sale, an asset sale may be chosen over a share
sale. If we choose the path of an unincorporated dentist
who is ready to appraise and sell her practice, we know
that the seller cannot take advantage of the LCGE as in a
share sale. In an asset sale, a seller is taxed on the various aspects of the practice, including the hard assets and the goodwill at the time of sale. For a purchaser, buying a practice as assets rather than shares presents an opportunity to depreciate the purchase according to the cost of capital allowance as set by the Canada Revenue Agency (CRA). What this means is that a buyer can “write off” the goodwill and hard assets of the purchase over decades of ownership through the allowance of depreciation that does not exist in a share purchase. Therefore, at the same valuation, an asset sale has the benefit going to the buyer and the disadvantage to the seller. Because of this, it has been argued that for a seller to end up with the same net result on an asset sale as she would with a share sale, the valuation of the practice would have to be increased by more than 30 per cent (1). Often, this can be justified by an appraiser with the consideration of allowable depreciation for the buyer. The challenge is that buyers often look at practice value as a percentage of gross revenue, and the optics of this in the marketplace can create a tougher sell. Additionally, the increase in valuation has to come from the goodwill, since the hard assets of the practice cannot change in value. In accordance with Canadian tax law, goodwill is depreciable at five per cent of the total value annually, whereas many hard assets can be depreciated at 20 per cent annually. With this in mind, and in our experience, buyers and lenders may be more reluctant in today’s climate to permit an asset sale at an inflated value. With a practice at the same valuation as a share sale, our theoretical seller could end up losing up to 30 per cent of realized profit to taxes when her practice sells as an asset sale.
In imagining a second scenario where the same practice
owner had incorporated her practice three years prior
to her appraisal and intended sale, the outcome looks
very different at the same valuation. When the practice is
sold as a share sale with a single dentist as a shareholder in her own dentistry professional corporation, the first
$883,384 is exempt from taxes due to the LCGE. At a
comparable valuation, this creates a clear advantage to
the seller. Although the buyer does not have immediate
benefit from the purchase of the share sale, they are
permitted to sell the practice down the road in the same
arrangement.
A third scenario involves incorporation with the addition
of a spouse as a shareholder. Imagine our theoretical
dentist incorporated and registered her dentistry professional corporation in 2008, when she graduated. She was
recently married and has decided to add her spouse as
a non-voting shareholder to her dentistry professional
corporation for future tax advantages. In light of the
current climate and the shut-down period attributable
to COVID-19, her practice has a three-month window
where she was unable to practice dentistry in the past
year. She has had her practice appraised; it reflects a
reduced valuation due to the effects of the pandemic on
her practice’s revenue, the reduced capacity for treatment
using aerosolizing procedures, and increased caution
in the dental practice marketplace. With the resultant
lower practice valuation, she can now add her spouse
as a shareholder to the corporation and take advantage
of the practice’s recovery moving forward. As the LCGE
increases with inflation and the practice value increases
with growth and inflation, so too does the ability for her
spouse to take full advantage of the capital gains upon
practice sale. In the year 2038 when this dentist decides
to sell her practice and retire, both she and her spouse
will be able to take advantage of the LCGE as shareholders,
which could shelter half or more of the practice value
from taxes, resulting in a significant tax advantage as
compared to the other two scenarios of sale reviewed.

A happy ending
As the adage goes, “knowledge is power.” A comprehensive,
personalized approach taking into account your
career and retirement goals should include options and
strategies that help you get where you want to go — these
are your co-authors on your financial adventure. The
scenarios presented in this article are theoretical and not
exhaustive, but are intended to emphasize the idea that it
is not what you make in your career of earning, investing
and later selling your practice, it is what you keep. OD