FI Financial

Group of Companies

Estate Planning

EstatePlanningConsepts.GIF (51397 bytes)

 

 

Succession Of The Family Business (click here)


Introduction to Estate Planning

The term "estate planning" does not describe a single, simple activity. Rather it comprises a range of actions designed to achieve two major goals. The first and foremost of these is to ensure that the property which a client has accumulated over a lifetime is used and distributed, both prior to and after death, in a manner which is consistent with our client’s desires. The second is to help preserve this accumulated property by taking steps to minimize the taxes which can cut into an estate, both prior to, and upon the client’s death.

Who Needs Estate Planning? And Why?

Given the broad definition assigned to the term estate planning, virtually every person in the country who has income and owns property needs estate planning in some form or another. To grasp this, consider what falls under the rubric of estate planning:

1. Estate Creation

The first aim of estate planning is to encourage the individual to think about the need to save for the future, the provision of care for dependents and the type of life desired for family members. Next come the setting of goals and the making of plans to achieve those goals.

Good planning, started early enough, will help to create the estate which ultimately is to be passed on to the heirs. Thus, minimization of current income taxes and the selection of investments on the basis of long-term as well as short-term goals are important estate planning facets.

2. Estate Conservation

As suggested at the beginning of this chapter, the conservation of capital, especially in the form of minimization of taxes, is a very important aspect of estate planning. Thus, the need for planning for this purpose follows closely on the heels of estate creation.

3. Retirement and Disability

In the broader sense of the term, estate planning includes planning for the future needs of the estate owner, not just those of his family after his death. Thus, a good estate plan must focus on financing the retirement years and look at sometimes unpalatable contingencies, such as a total inability to work.

4. Liquidity

Lack of liquidity is one of the major problems for almost every estate which is not properly planned. The vast majority of people in this country are, comparatively speaking, asset rich and cash poor. If a person owns a business worth a million dollars and dies, where does the money come from to pay any taxes? Will there be a buyer for the business? Will sons or daughters wish to take over? No matter what the question, there is a need for cash. Good planning provides that this cash will be available from some source.

5. Death and Equity

People who are prompted to overcome their reluctance to make plans associated with their own deaths generally think about two questions. The first is who will get my estate? The second is will there be enough at my death to take care of my family properly? This second question is particularly important where a major asset, such as a business, will be taken over by one child - and there is a desire to provide equitably for other children. Estate planning forces people to think about these matters and to make decisions, sometimes difficult ones, about what they want to happen after their deaths.

Perhaps because the estate planning process often discloses opportunity for significant tax savings, many professional advisors and their clients seem to equate "estate planning" with "tax planning". Such thinking implies a wrong priority. What our clients want to have happen to their property is of primary importance. Indeed, when closely questioned, most clients will favor the course of action that ensures that their expressed intentions will be carried out over tax-saving alternative plans that involve changing those intentions. For example, a testator planning to leave an art collection to an adult child might be advised to leave it to a charity instead, in order to effect a substantial tax saving at death. Yet few people in that situation would change their intention for the sake of the tax saving only.

Another misconception about estate planning is that it means planning only for a period commencing at death. As one’s own death is a subject about which many people wish to avoid thinking, this misconception helps to account for the unfortunate reluctance on the part of some individuals to plan their estates. Undeniably, they will never see the ultimate results or personally benefit from planning which does not product results until after their deaths. But the term "estate planning" also encompasses the building of an estate, so that plans for our client’s own future and the minimization of the taxes that will be incurred before death are very properly part of today’s estate planning.

A third misconception about estate planning - also a cause of reluctance to become involved - is the notion that it is only for persons with large estates. Many property owners wrongly feel that they do not own enough assets to make estate planning worthwhile.

Overcoming the reluctance to spend time and money for proper estate planning is one of the main difficulties which the professional advisor may have to deal with.

The withdrawal of the provinces from the succession duty and gift tax field left income tax as the only tax imposed in relation to transfers of capital property, both inter vivos and at death. Then came the unexpected proposal, in the May 1985 federal budget, for a cumulative lifetime exemption from tax of $500,000 of capital gains, to be implemented on a graduated basis over a period of six years. For many taxpayers this signaled a need to review existing estate and financial arrangements and to adopt new tax planning strategies.

In addition to the massive tax changes of recent years, there have been some important changes in the laws affecting estate planning. For instance, corporate law has seen the rise of "one man corporations" and the enabling of corporations to buy back their own shares. Both of these developments have resulted in the introduction of new corporate estate planning techniques.

Family law reform is an ongoing process in many provinces. Amendments in this area of the law impose constraints on what individuals may or may not be able to do with their property. To mention just one example, recent legislation in a number of provinces prevents a married person from leaving a family home free and clear to anyone other than his or her spouse.

Succession law has also been a recent subject for reform. Ontario, for instance, has changed the formalities necessary for making of a valid will. Now a holograph will - one entirely hand written by the testator and signed without witnesses - will be valid.

These burgeoning changes in various statues, both federal and provincial, require advisers to keep abreast of a wide range of legislation to ensure that they continue to provide their clients with up-to-date advise.

 

Other Considerations

While it is true that most people benefit from involvement in estate planning, those who gain the most are generally those who have already accumulated substantial estates. Not only do they save larger amounts by arranging their affairs in the most efficient and effective manner, but their estate problems tend to be more complex, requiring more elaborate and carefully thought out solutions. For the professional advisors of such people a simpler but at the same time more demanding definition of estate planning is appropriate; trying to find resourceful solutions to the estate problems of successful people.

It follows from this definition that we are obliged to become totally involved in the situation at hand. Our role as the adviser may be summarized briefly as follows:

  1. to assist the estate owners in crystallizing their objectives,
  2. to determine and report on what obstacles lie in the way of attaining those objectives, and
  3. to devise solutions designed to overcome or remove those obstacles.

Clearly these steps place the emphasis on determining the nature of the problem first, and the method of solving the problem second. Thus, the all too common error of presenting preconceived solutions to presumed problems is avoided.

The foregoing points are, of course, only a brief, non-comprehensive summary of the extremely complex issues facing a professional who undertakes to help others plan their estates. The professional should see himself primarily as one who raises the appropriate questions with clients and who has the technical skill to suggest solutions based upon their desires. The clients’ needs and goals should be paramount and their fulfillment should take precedence over any desire on the part of the professional to sell services or products, whether in the field of law, accounting or life insurance.

top of page

To view a graphical representation of the above:

Slides: Succession Of The Family Business (click here)

Text:   Succession Of The Family Business (click here)

Call us toll-free at (866) 444-2745 with questions or comments about this web site.
Copyright © 1996-2015 Hatton Financial Inc.
Last modified: December 06, 2011