An estimated $751 billion will move from one generation to the next in Canada in the coming decade. That’s up dramatically from the estimated $509 billion passed between generations in the past 10 years.¹
“Any time there’s money in motion, that creates opportunity,” says John Natale, Manulife’s Assistant Vice President Tax of Retirement & Estate Planning Services. The challenge for advisors, he warns, is that the inheritors often take the money and run, with some U.S. studies finding that more than nine in 10 people who inherit wealth leave their parents’ advisors.²
Those don’t have to be the numbers in your practice. By working closely with clients to plan for the transfer of wealth, you can improve asset retention and help future-proof your business.
Estate planning conversations protect assets and families
“If you engage in proper estate planning with clients you develop strengthened relationships with them. You’re able to put your arms around them, so to speak, and they don’t look at you just as a money manager. They look at you as a trusted advisor, almost like an extended member of their family,” says Natale. “That value grows over and above just dollars and cents. It separates advisors, and I think it gives you a much greater chance of maintaining that relationship with the next generation.”
Estate planning conversations open the door to meetings that include your clients’ heirs. With them in the room, you have a chance for what Natale describes as a “dress rehearsal,” with no risk to them since their parents are paying for your services. “It’s a great opportunity for you to put your best foot forward and show them what you can do,” he says. And when the estate plan you build together ultimately accomplishes everything you intended it to, he adds, “you’re in a real position of strength to retain those assets and perhaps even acquire more.”
Furthermore, while the main goal of an estate plan is to facilitate a client’s desire to have assets flow to the people they want in the most efficient and tax-effective manner, the process of constructing one can help explain bequests to heirs.
“Failure to have those conversations can sometimes rip the family apart over very insignificant dollar amounts just because of the symbolic or sentimental nature of certain estate assets,” says Natale. “Any time people have an opportunity to communicate, explain what the rationale was [and] allow others to ask questions, I think it significantly reduces the chance of litigation and significantly increases the chance of the family staying healthy afterwards.”
Basics first: wills and beneficiary designations
According to a recent survey, almost half of Canadians (48%) do not have a will.³ For advisors starting an estate plan for their clients, making sure a will is in place is job number one.
Through a will, clients can state how they want their assets will be distributed after death, name an executor who will disperse bequests to beneficiaries and name guardians for minor children. A will also gives them an opportunity to plan bequests to reduce the tax bill on death. For example, they may choose to leave assets that have appreciated in value to a spouse so they can transfer at the deceased’s adjusted cost base instead of at the fair market value. More tax-friendly assets – such as cash, GICs and money market funds – can then be left to other heirs. Charitable donations can be specified in a will as well, with strategic planning to maximize the tax benefits.
Beneficiary designations are important too – and a quick win for advisors. When an asset has a beneficiary designation, it can transfer speedily and cost-effectively to loved ones. Natale recommends that advisors check their clients’ registered plans (RRSPs, RRIFs and TFSAs) and life insurance contracts, including segregated funds, to ensure that all of them have appropriate beneficiary designations.
If clients need extra motivation to get their paperwork in order, remind them that beneficiary designations on life insurance contracts allow assets to pass outside the estate, potentially reducing probate⁴ (where applicable), estate administration, legal and accounting fees, preserving privacy⁵, and protecting assets from creditors. Furthermore, some contracts, such as Manulife segregated fund contracts and GICs, waive deferred sales charges and surrender charges when the death benefit is paid to the designated beneficiary.
Property management: develop a strategy for the family cottage
Cottages often have significant monetary and sentimental value, says Natale, which makes it especially important to create a plan for their transfer. Canadians are entitled to utilize the principal residence exemption on one property at a time, and this can be applied to a cottage if a client ordinarily inhabits it. So a client may have a choice about whether to apply the exemption to a house or a cottage, and advisors can help them estimate the taxable capital gain for each and make the most advantageous choice.
However, as Natale points out, “If you’ve owned a house and a cottage for 10, 20, 30 years, the reality is both have probably increased significantly in value and, no matter what you pick, the one that’s not chosen is going to result in significant capital gains and tax payable when sold.” If it’s the cottage, and the client hasn’t planned to pay the tax bill, the executor may be forced to sell – leaving heirs with the residual cash value after taxes, but without the cottage.
If clients want to keep the cottage in the family, a variety of strategies can help. Life insurance can be used to cover protected capital gains taxes on the cottage. Alternatively, especially if the cottage has experienced a recent dip in value, it may be better to bite the tax bullet today. The cottage can be transferred into an inter-vivos trust for the kids, but with that comes a deemed disposition and taxes payable every 21 years. It can also be sold to a client’s heirs with future taxes deferred until the heirs’ death – and perhaps with the mortgage, if any taken back by the client, forgiven in the client’s will.
“Transferring the cottage to the next generation now will trigger a capital gain now [but] you’re getting more tax certainty for estate planning purposes as you’re capping your tax liability for the cottage and passing responsibility for any future capital gains to your kids ,” says Natale.
Delayed gratification: consider paying bequests over time
Clients may be more comfortable with assets distributed to their heirs gradually instead of all at once. Traditionally, trusts were the only way to achieve this. They remain the best tool in certain situations, such as when a client wants to delay the start of payments or to preserve government benefits for a beneficiary with a disability. However, they have some important drawbacks.
“One of the issues with trusts is usually you need to have a certain threshold of financial assets for it to be cost-effective, because you do incur some upfront costs and then some maintenance costs,” says Natale. “Specific nuances within segregated fund contracts that some companies, including Manulife, offer [allow you to] structure the death benefit in the form of an annuity so the beneficiary receives periodic payments as opposed to a lump sum.”
Manulife’s Annuity Settlement Option is so cost-effective it can be used for small and large bequests. Unlike trusts, there are no ongoing annual trustee and accounting fees. Clients can choose payments for the rest of a beneficiary’s life or for a specific time period, and add a guarantee that a minimum is paid out to the beneficiary or the beneficiary’s heirs. It’s even possible to have multiple beneficiaries, some of whom receive regular payments and some of whom receive a lump sum.
That flexibility makes this a good solution to consider anytime you have a client who is concerned that an heir’s health, financial or other circumstances make a lump-sum bequest inadvisable.
Building intergenerational bridges with a cheque in hand
All the wealth transfer planning strategies advisors put in place for their clients come into sharp focus after a death.
“The bills don’t stop – the condo fees or the mortgage payments, the car insurance, the utilities,” points out Natale. “So how powerful is it for the financial advisor to be able to walk up with a cheque for those beneficiaries? Never mind the fact that, from a business perspective, it allows them again to demonstrate their value and cement their relationship with the next generation.”
With or without a death benefit cheque, it’s the expert execution of a well-thought-out estate plan that demonstrates follow-through, builds trust and is the key to capturing your fair share of money in motion.
Help clients make well-informed choices with the Estate Cost Comparison Tool
When weighing the advantages and disadvantages of seg funds versus mutual funds, many investors don’t take into account how much seg funds can save them in probate⁶ (where applicable), executor, legal and accounting fees. The Estate Cost Comparison Tool allows you to quantify that added value for clients.
Advisors can input a dollar amount invested in a non-registered mutual fund or seg fund, along with assumptions including life expectancy, rate of return, MER differential and estate-related fees. Then the tool transparently shows both costs and savings. It also highlights the non-financial benefits seg funds offer such as a quick death benefit payout and provides clients with a customized report that puts a dollar amount on the estate administration and probate savings of segregated fund solutions.
“Understanding what their options are, the pros and cons, the costs and the benefits associated with those costs, clients can make an informed decision as to what’s best for them and their situation,” explains Natale.
1 business.financialpost.com/personal-finance/parents-will-pass-on-750-billion-to-kids-over-next-decade/wcm/8d39b0e2-e23b-4066-9241-9ffec1a5ae3a 2 www.thinkadvisor.com/2016/03/01/how-advisors-can-stop-losing-clients-heirs-as-clie?slreturn=1503933211 3 www.advisor.ca/tax/estate-planning/48-of-canadians-have-no-will-survey-230734 4 Probate does not apply in Quebec 5 In Saskatchewan jointly held property and insurance policies with a named beneficiary are included on the application for probate but do not flow through the estate and are not subject to probate fees. 6 Probate does not apply in Quebec