Tax Planning - Hull on Estates and Succession Planning # 201
Listen to: Tax Planning – Hull on Estates and Succession Planning # 201
This week on Hull on Estate and Succession Planning, Ian discusses tax planning and how tax issues are connected to estate planning. Ian focuses on four main issues of Canadian domestic tax planning. These issues are:
1. Capital gains tax in Ontario and Canada
2. The use of an estate freeze as a domestic tax planning tool
3. Dealing with tax planning the context of an estate or the sale of a business
4. Family succession generally
If you have any comments, please email us at hullandhull@gmail.com or leave us a comment on our blog.
Ian M. Hull - Click here for more information on Ian Hull.
Welcome to
Ian Hull: Hi and welcome to Hull on Estates and Succession Planning. You’re watching and possibly listening to episode 201.
Well welcome back. I apologize, we’ve been remiss on a couple of weeks now on getting a podcast out but we’re back on line here. Suzana, as you can see, is not here this week but part of the reason we wanted to get back on line was because we’ve been embarking on so many different projects in respect of our practice, but more importantly with respect to some speaking we’ve been doing. I personally just got back from Ottawa, spent a couple of days up at the CALU Conference, the Canadian Association of Life Underwriters. And myself, Deb Stephens and Paul Gibney lectured or spoke at a workshop last week. Fascinating workshop and it’s an interesting conference because they had some great speakers for the life insurance agents to listen to including the Prime Minister of Canada.
The topic we discussed, though, was one about Estate litigation and avoiding Estate litigation and the special role that an advisor can play in that process. And we had some really interesting feedback from these advisors who are selling obviously life insurance but also are financial advisors and so we had a broad spectrum of input from our discussions and some of the topics that we put forward.
So fresh off of that we’ve wanted to move on to a topic. We know we’ve been doing some charitable giving podcasts. We wanted to shift a little away. Without Suzana here I’m gonna take a run at my own attempts to deal with a little different topic because this is one that came out of the CALU Conference as one that really was front and centre with the group of advisors and that is, the whole question of tax planning. Now as we always say in our podcasts, and always to our clients, we’re not a firm of tax experts but what we are is a firm who see tax issues interwoven into the Estate planning on a daily, sometimes minute-by-minute, basis. So we wanted to step back and look at some issues relating to Canadian domestic tax planning, and let’s just talk about the main categories.
The first one is, of course, capital gains tax and some of the unique characteristics of capital gains taxing in Ontario and Canada. Second one is the use of an Estate freeze as a domestic tax planning tool. The third issue is dealing with tax planning in the context of an Estate or a sale of a business and that is succession planning at its best. Either it’s during your lifetime or it’s after death and what are some of the tax nuances there that we have to be alerted to. And that ties into, of course, our fourth one which is just family succession generally and the kind of domestic tax issues that we face.
At the Conference there was a great discussion by Paul Gibney of Thorsteinssons who talked about the use of trusts and some of the unique skills that we have to be mindful of when using trusts and tax issues that relate to that. Obviously at CALU Conference we talked about the use of insurance and some of the creative tools that it brings with it. We talked about really helpful use of an annuity or using whole life and what they call T100 policies to get us to…give us some extra protections. So let’s just start with that one and we’ll kind of work backwards just because it was fresh in my mind in terms of how we were dealing with the tax issues.
One of the things that we’ve noticed is that trust law, and we’ve talked many times in this podcast, creates an interesting trust option, gives you tax options, gives you control options. And the classic scenario, of course, is take some capital, put it into a trust, either on your death or during your lifetime into an inter vivos trust and then let that capital grow and feed off interest off that to have a certain part of the beneficiaries such as, for example, a wife or children, enjoy the interest only and then the grandchildren would enjoy the capital. That’s an easy scenario. And at the Conference, what we explored was an option of how do we deal with the fact that the income beneficiaries, those who are getting the interest income out of the trust, are always at odds with those who want to get the capital at the end of the day. And at the Conference it was really handy because we had a true capital beneficiary there and that was Debra Stephens who is the Children’s Lawyer. And she will typically represent those grandchildren or those minor children, I mean, who are going to receive the capital in her practice. So it was a great dialogue between us. And we talked about some of the problems with the trust structure, tax-wise and just from a process standpoint and we talked about an insurance solution. And an interesting solution that may work for some people. So I wanted to just talk through that a little bit today and probably into our next podcast because it has some interesting nuances.
But let’s just…if we step back in the illustration just to set the stage, we have a classic trust as I say, income being established, the capital is let’s say $100,000,000…or that’s too high probably…let’s just say $1,000,000 goes into a trust. A person puts it into a trust and the interest income off that is going to feed the surviving wife or some of the kids, help them get through school and so on and the capital, that $1,000,000, is going to go to your great grandchildren or your grandchildren. So we’ve got kids who are going to enjoy some of the income, a wife that’s going to enjoy some of the income but the capital is going to go to the grandchildren. The tension in that trust arrangement has been talked about a little bit in podcasts before but I want to flush through that a little bit because that tension with a solution overlaid and the insurance solution was just something that was worth considering and I’ll just come to the solution and we’ll talk about how we arrived at it.
The solution was simply buy an insurance policy that…I mean an annuity…that will pay out the interest income on the life of the wife and the spouse and it would be, depending on the type of annuity policy you would have, you would at least guarantee that that person would enjoy a lifetime of interest at a fixed amount. And overlay on top of that, because that’s only solving the interest income group, that’s what we call the income beneficiaries. How do we solve the fact that we want to leave a legacy for our grandchildren in our scenario? And the way the idea was thrown on the table was buy a life insurance policy, a whole life insurance policy or a T100 policy on your life so that on your death, you have managed to leave that legacy as well. So you’re buying an annuity and you’re buying a life insurance policy. And we know that this can be funded because the person involved here has already decided that they want to put $1,000,000 aside for the benefit of others. And in this case during lifetime or on your death because of the capital beneficiaries.
It was an interesting idea and one that really…simple idea. We’ve still got a pool of money and say we could just for rough numbers take half of it and buy the annuity and take the other half and buy an insurance policy. You actually don’t have to work that high, you can probably use less to buy the insurance policy and get enough bang for your buck and use the rest to buy the annuity. But it’s the same starting point and that is, this individual has $1,000,000. How do I look after three groups of people: my wife, my children and their children? And this creative solution was put on the table and was talked through with some vim and vigor. Obviously at an insurance conference, the insurance products are used or considered much more intensely but it was a really interesting tool to get around the tensions. And those tensions we’re going to talk about in our next podcast in terms of the battle between the income beneficiaries and the capital beneficiaries and is that battle worth it.
So thank you very much for joining us. Again, I apologize for a little delay in getting these uploaded but we’re back and rolling and I look forward to our next podcast. Thanks very much.
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