Have you thought about the idea of remaining in your home, getting some cash out of the equity to enhance your lifestyle needs, and not having to make any payments on the loan or repay the loan until your surviving spouse dies? If you or your parents are 62 years of age or older, this is an option you may wish to explore. The concept is referred to as a “reverse mortgage”.

Reverse mortgages are becoming more popular, and are available to many people across Canada, particularly in the major cities. Many retirees have built up considerable equity in their homes, and may prefer to turn their largest asset into immediate cash and/or ongoing revenue and still remain in the home. People frequently prefer to remain in their own home, because it is in an established and familiar neighborhood, or close to family and friends. At the same time, they may also need cash or additional monthly income to meet personal needs such as travel, renovations, a new car or helping their children, but they don’t want to make monthly loan payments or pay tax on additional income.

The basic concept behind a reverse mortgage is simple. You take out a mortgage on part of the equity of your home, and in exchange, receive a lump sum of money and/or a monthly income for a fixed period or for life. If you are married, this would be for the life of the surviving spouse. This latter example is sometimes referred to as a “reverse annuity mortgage” or RAM, as part of the money obtained from the mortgage is used to purchase an annuity.

When you die (or if you are married, when your surviving spouse dies), the mortgage plus accrued interest must be repaid. You do not have to make any payments in the meantime. If there is any balance left in terms of residual equity in the home after the sale, it would belong to the senior’s estate. If there is a shortfall, you want to make sure the company absorbs that loss, not your estate.

Make sure that the reverse mortgage company has obtained an opinion from Revenue Canada that the lump sum payment and monthly annuity payments are tax-free, as long as you live in your home. You want to be assured in writing that the current ruling on the various means-tested programs, such as the federal Guaranteed Income Supplement (GIS), is that receiving the annuity will not interfere with your eligibility for, or reduction in, the GIS.

Since you still retain home ownership, you benefit from any appreciation in value of the home over time–that is, you get an increase in equity. For example, if your property goes up 10 per cent a year in value, and you locked in the mortgage on your property for the reverse mortgage or RAM at eight per cent, then you are technically ahead in terms of the interest differential.

In reality, however, because you are not making regular payments on your mortgage, the accumulating interest is being compounded, eroding away from the increasing equity. The reduction could be offset substantially by an attractive average annual appreciation in property value. Conversely, a low or zero property appreciation could result in the equity being eroded away rather quickly.

The good news, given today’s low-interest environment, is that you are paying less interest on the money that you are borrowing. The bad news is that if you obtain an annuity, you are receiving less return on that annuity investment. There are variables between reverse mortgages and RAMs on the issue of interest rates and other specific conditions.

Here are some points to consider and questions to ask:

What are the age requirements for the lump sum or annuity plan?
Do you need to have clear title on your home?
Can you transfer the mortgage to another property if you move? Are there any tax or financial issues involved?
What percentage of your home equity is used to determine the reverse mortgage or RAM, and what percentage of that is available for a lump sum payment and annuity?
Is the interest rate on the mortgage fixed for the duration of the annuity, or is it adjusted? And if adjusted, how regularly, and using what criteria?
If the reverse mortgage and lump sum are for a fixed term, what are the various terms available (l5, 20, 25 years)?
What if both spouses pass away unexpectedly just after the annuity begins?
What if the equity of the home (sold after the death of the surviving spouse) is insufficient to pay the mortgage and accrued interest? Is the estate liable for the shortfall?
Can you move out of the house, rent it, and still maintain the reverse mortgage plan? What are the tax implications, if any, of this option?
If the annuity is for life, is there a minimum guaranteed period of payment or will payments stop immediately upon the death of the holder and/or the death of the surviving spouse?
How will the income received under the proposed plan be taxed?
Will the income received affect your eligibility under any federal or provincial housing or social programs?
How will your children feel about the fact that the equity in your house could be substantially or completely eroded as an asset of the estate?

You can find out more about reverse mortgages by referring to the Yellow Pages, under “financial planners” or “mortgages”, or do a Google search online. The process of obtaining a reverse mortgage or RAM takes about four to six weeks on average, including the home appraisal, annuity calculations and other matters. As mentioned, the complexity of these plans makes it essential for you to obtain independent legal and tax advice in advance, and thoroughly compare the features and benefits to determine if this concept or other alternatives, such as renting out a basement suite or cashing out and downsizing to a condo, are more appropriate for your needs.

Over time, you have probably heard about various financial institutions in Canada having problems or even going under. How do you find out what protections you have for savings or chequing account deposits in a bank, trust company or credit union?

You should be cautious about where you put your money. Many people assume that their deposit funds are safe and protected, and they may well be, up to a certain amount. With foreknowledge and proper planning, you can protect all of your deposit money. Here is an overview of deposit money protection in Canada and where you can get further information. Check to make sure that the following information is current, as policies can change from time to time.

Deposits in a Canadian bank or trust company
These are protected by the Canada Deposit Insurance Corporation (CDIC), up to a certain amount. In Quebec, it is referred to as the Quebec Deposit Insurance Board. Funds are automatically insured for up to $60,000 for each separate account. If you have more than $60,000 deposited, you can divide your funds among several CDIC members who are separate financial institutions. Some banks and trust companies have subsidiaries that are separate CDIC members, resulting in a ceiling of $100,000 each. For information, brochures and confirmation that your deposits are covered, contact CDIC.

Deposits in a Canadian credit union
These are protected by a deposit insurance plan that is specific to each province. Each province can vary in its protection for savings or chequing deposits. Depending on the province, the protection could be from $60,000 to $100,000 to unlimited protection–that is, 100 per cent. Contact a credit union in your province to enquire. Ask your credit union for an informational brochure and protection confirmation, or contact the Credit Union Central of Canada.

There are many risk areas that could affect your financial net worth, cash flow, quality of retirement, and lifestyle. In many cases, you can eliminate, minimize, or control each of these risk areas by knowing about them, doing research, and making prudent decisions. Statistically, if you retire at 55 years of age, you can expect to live to 85 and have 30 years of retirement–almost as long as your working life. Planning to have enough funds to meet your lifestyle needs is obviously very important. Some of the following potential risk areas are interrelated, but they are considered separately because they should be specifically identified as risks. They all have financial implications, directly or indirectly. By obtaining customized financial planning advice from objective and qualified tax professionals, you should be able to anticipate and neutralize many of the following risks.

Currency risk
This is a particularly important issue if you are a Snowbird or travel a lot. If the Canadian dollar drops in value relative to the U.S. dollar, you will obviously notice an increase in the cost of living due to the reduced purchasing power of your Canadian money when you convert it to U.S. currency. The value of the Canadian dollar is dependent on many variables, both national and international. If it goes down five per cent, you have lost five per cent of your purchasing power in the United States.

Inflation risk
This is one of the most serious financial risks to those in retirement. Although both Canada and the United States currently enjoy very low inflation rates, that can quickly change. As you are probably aware, inflation eats away at your purchasing power. Inflation at five per cent will reduce your purchasing power by 50 per cent in less than 15 years. If you have investments that have interest rates or value that changes with the rate of inflation, or if you have annuities or RRIFs indexed for inflation, then your purchasing power would at least remain constant. If you have a fixed income, the inflation issue is especially critical.

For example, with Canada Savings Bonds, inflation would erode the purchasing power of the bond as well as the interest. You also have to look at the real rate of return on your money after tax and inflation is factored in. If you were earning 3 per cent interest and were taxed at 35 per cent, your net return would be 2 per cent. If inflation were 3 per cent, you would actually be losing purchasing power with your money, in real terms.

Deflation risk
If there is a severe or prolonged economic downturn or recession, the value of your assets could drop accordingly.

Interest rate risk
Interest rates in Canada and the United States have been very volatile over the past 15 to 20 years on any type of interest-sensitive financial investment. In the early 1980s the prime rate was in the double digits, even up to 22 per cent. This was of course attractive for people with interest income from term deposits, mortgages, or bonds. By the mid-1990s however, rates had plunged to the low single digits, sometimes down to two per cent, which happened in the last several years. Interest rate risk can cut both ways, however. For example, if you set your lifestyle needs based on high interest rate returns, your lifestyle will be negatively affected when rates fall. Or if you lock yourself into a fixed-rate bond when rates are low and then interest rates increase, the value of the bond investment will go down when you try to sell it. Another example is a locked-in annuity bought at a low interest rate. If rates go up and there is inflation along with it, your purchasing power and lifestyle will be affected.

Government policy risk
The Canadian and U.S. governments are constantly changing the tax or pension laws, depending on the political philosophy of the party in power and economic pressures. For example, Old Age Security (OAS) pension payments are lowered if the recipient’s income exceeds a certain amount. This amount could become lower and lower over time. The Guaranteed Income Supplement (GIS) could be reduced, or the eligibility criteria tightened up. Federal and/or provincial income taxes could be increased.

At some time or other you have probably seen the ads: “Luxury Lifestyle at Affordable Prices!”–“Vacation the World!”–“Trade for Exotic Climes!”–“Buy Your Own Vacation Dream Home!” These refer to the concept of timesharing.

Other commonly used terms synonymous with timesharing include: resort timesharing, vacation ownership, multi-ownership, interval ownership and shared vacation plan. The timeshare concept has been applied to numerous other areas such as recreational vehicle and mobile home parks.

The timesharing business originated in Europe in the 1960s. The concept then moved to Florida in the 1970s to facilitate the sale of the sluggish condominium industry. Since then, timeshares have grown rapidly, with thousands of resorts throughout Canada and the United States, and around the world. These resorts range from Ontario cottage country resorts, to Florida condos, to Mexican beach villas.

There are two main categories of timeshares: “right to use” and “fee simple” ownership.

Right to use
This concept is much like having a long-term lease, but with limited use for perhaps one, or maybe two weeks per year. It is similar to prepaying for a hotel room for a fixed period every year, 20 years in advance. In other words, you don’t have any portion of ownership in the property, you only have a right to use it for a fixed or floating time period every year. The “right to use” concept involves condominiums, recreational vehicle parks and other types of properties.

The opportunity for return on your money in a “right to use” timeshare is limited or non-existent. This is because there is generally very little demand in the after-sale market, as well as other restrictions on resale or pricing of the resale. In practical terms, timesharing is primarily a lifestyle choice.

Fee simple ownership
There are different formats. One involves owning a portion of the condominium (for example, one-fiftieth of the property). Each one-fiftieth portion would entitle you to one week’s use of the premises. Other people would also buy into the property. Normally you would be allocated a fixed week every year. In other instances, it could be a floating time, with the exact date to be agreed upon depending on availability. In some cases, you might purchase a one-quarter or one-half interest. If the property is sold, you would receive your proportional share of any increase in net after-sale proceeds. You would also normally be able to rent, sell or give your ownership portion to anyone you wished.

Here are some of the issues to be aware of:

You may tire of going to the same location every year, as your needs may change over time.

The timeshare programs that include an exchange option (i.e., switching for a week in a different location) are not always as anticipated, in terms of availability, flexibility, convenience, or upgrade fee.

Make sure you know what you are getting. Some people who purchase the “right to use” type think they are actually buying a “fee simple ownership” portion.

Be wary of hard-sell marketing. In most instances, you are offered “free” inducements (buffet, cruise, etc.) to convince you to listen to the sales pitch. The dream fantasy is heavily reinforced, and high-pressure sales pitches, given by teams of salespeople, can go on for hours and can be very persuasive–if not aggressive. Furthermore, very manipulative techniques are sometimes used to get you to sign a credit card slip as a deposit.

There is usually an ongoing management fee for maintaining the premises.

Timeshare sales in Canada and some U.S. states are sometimes covered by consumer protection, in terms of your right to get your money back by “rescinding”, or canceling the contract within a certain time period.

Timeshares are a dream for some, but a nightmare for others. Speak to at least three other timeshare owners in the project you are considering in order to get their candid opinion before you decide to buy. Never give out your credit card for any reason as a deposit, or sign any documents without first speaking with a local real estate lawyer. Obtain a lawyer’s name from the local lawyer referral service or provincial or state bar association. Don’t let yourself be pressured. Check with the local Better Business Bureau. Then sleep on it for some time. If the deal seems “too good to be true,” it probably is.

Many Canadians own U.S. recreational property near border states. Retired Canadians who are seasonal residents of the U.S., or “Snowbirds” frequently own property in the U.S.

If either of the above situations applies to you, you may be renting out your U.S. property on a part-time or full-time basis when you are not using it. If so, you are considered a “non-resident alien” by the IRS (the U.S. Internal Revenue Service) and you are subject to U.S. income tax on the rental income.

Tax on gross rental income
The rent you receive is subject to a 30 per cent withholding tax, which your tenant or property management agent is required to deduct and remit to the IRS. It doesn’t matter if the tenants are Canadians or other non-residents of the U.S., or if it was paid to you while you were in Canada. The Canada-U.S. tax treaty allows the U.S. to tax income from real estate with no reduction in the general withholding rate. As rental income is not considered to be effectively connected, it is subject to a flat 30 per cent tax on gross income, with no expenses or deductions allowed. The 30 per cent withholding tax would therefore equal the flat tax rate.

Tax on net rental income
Since a tax rate of 30 per cent of gross income is high, you may prefer to elect to pay tax on net income, after all deductible expenses. This would result in reduced–and possibly no–tax. The Internal Revenue Code permits this option, if you choose to permanently treat rental income as income that is effectively connected with the conduct of a U.S. trade or business. You would then be able to claim expenses related to owning and operating a rental property during the rental period, such as mortgage interest, property tax, utilities, insurance and maintenance.

You can also deduct an amount for depreciation on the building. However, the IRS only permits individuals (rather than corporations) to deduct the mortgage or loan interest relating to the rental property if the debt is secured by the rental property or other business property. If you borrow the funds in Canada, secured by your Canadian assets, you would not technically be able to deduct that interest on your U.S. tax return. Obtain strategic tax planning advice on this issue.

Once you have made the election, it is valid for all subsequent years, unless approval to revoke it is requested and received from the IRS. However, you do need to file an annual return.

If you want to be exempt from the non-resident withholding tax and are making that election, you have to give your tenant or property management agent a Form 4224, Exemption from Withholding Tax on Income Effectively Connected with the Conduct of a Trade or Business in the U.S. Contact the IRS for further information.

When you file your annual return, show the income and expenses, as well as the tax withheld. If you end up with a loss after deducting expenses from income, you are entitled to a refund of the taxes withheld. The due date of your return is June 15th of the following year.

It is important to file on a timely basis. If you fail to file on the due date, you have 16 months thereafter to do so. If you don’t do so, you will be subject to tax on the gross income basis for that year, that is, 30 per cent of gross rents with no deduction for any expenses incurred, even if you made the net income election in a previous year. This is an important caution to keep in mind. Many people don’t arrange to have tax withheld at source, or file any U.S. tax forms, on the premise that their expenses exceed the rental income and the net income election is always available.

Filing requirements
You are required to report the gain or loss on sale by filing Form 1040 NR, U.S. Non-Resident Alien Income Tax Return. You would have to pay U.S. federal tax on any gain (capital gain), and if you own the real estate jointly with another person, such as your spouse, each of you have to file the above form. For more information, contact the IRS.

In addition, you would have to report any capital gain on the sale of your U.S. property in your next annual personal tax return filing with Revenue Canada. Remember, you have to report your worldwide income and gains and pay tax on 75 per cent of any capital gain, converted to the equivalent in Canadian dollars, at the time of sale.

Since tax laws, regulations and filing forms can change at any time, make sure you speak to a professional accountant who is skilled in U.S. tax matters.

Are you interested in buying recreational property in the near future? For example, a cottage, cabin, or chalet – maybe own it outright, or jointly buy the property with family, relatives or friends? Maybe you want to buy an apartment or townhouse condo in a resort or recreational community – and own it outright, or own a ¼ or 1/10 share in it with others? Maybe you already own recreational property? Possibly the property has already been passed down through various family generations?

Whatever scenario above best describes your current circumstance or wishes, there are tax implications when it comes time to sell, transfer, or bequeath your recreational property. If you have not yet bought a property, you have some tax planning advantages.

Here is an overview of the types of tax issues and strategies to consider. As in any tax planning, you need to get customized advice for your own situation from professionally qualified accountants with tax expertise. You also want to have the coordinated advice from a skilled estate planning lawyer to avoid future potential conflict in the family. As tax, legal, and estate planning issues are frequently intertwined, planning needs to be strategically integrated. This article is simply intended to stimulate awareness, and motivate you to do some prudent tax and estate planning, by giving general guidelines.

Selling the Property

There is no capital gains tax on disposition of a principal residence. Up until 1982, a couple could own two properties, eg the home primarily lived in, and a recreational property for example, and each designate one of the properties as his or her principal residence, and therefore sell or transfer both properties tax-free. The federal government changed the tax laws as of 1982, so there can only be one principal residence for tax purposes.

However, let’s say that you do not have any children, or your children do not want to use your vacation property as they own their own second properties, or live too far away geographically. In this situation, passing the vacation property down through the generations is not an option. You wish to sell it for your retirement, lifestyle, or financial needs. Maybe due to health reasons, you do not use the property much anymore, or it is becoming too costly to maintain.

You could still have some tax saving options available. Depending on your circumstances you might be able to designate one of your two properties as your principal residence for tax purposes. For example, if you owned a Whistler, B.C., chalet that had appreciated $2 million over 15 years, that originally cost you $500,000, that would be a $1.5 million capital gain. If the residence you lived in primarily was located in Chilliwack, B.C., that cost you $100,000 five years ago, and is now worth $300,000, that would be a $200,000 capital gain. If you deemed or designated your Whistler property as your principal residence for tax purposes when it was sold in 2006, you would not have to pay capital gains tax.

What about your Chilliwack property in this scenario? When it was sold, you would calculate the portion of the time you held the property prior to the sale of the Whistler property, eg five years, and add one year. Then calculate the total number of years before you sold the Chilliwack property. For example, if you sold the Chilliwack property in 2016 and therefore had held it for 15 years in total, the portion of capital gains that you would need to declare would be 5 years + 1 = 6 over 15 years, or 6/15th of the capital gains on sale. If it sold for a $500,000 gain, you would need to declare a gain of approximately $200,000, and pay tax on 50% of that gain, eg $100,000. Depending on your personal taxable income and marginal tax rates in that taxation year, and based on tax advice, you might have to pay up to $50,000 for the property sale.

You see, you still might be able to have your cake and eat it too!

Professional advisors are essential to protect your interests. They can provide knowledge, expertise and objective advice in areas in which you have little experience. It is important to recognize when it is necessary to call in an expert to assist you. Because of the costs associated with hiring a lawyer, accountant or financial planner, some people are inclined to try the do-it-yourself approach. This can be a shortsighted decision, not to mention detrimental to your financial interests.

For instance, if you decide to process your own income tax return rather than hiring a professional tax accountant, you may miss out on tax exemptions that could save much more than the cost of the accountant’s time. Or, a person who does their own will or power of attorney could end up having the document deemed invalid due to a technicality. Alternatively, lack of professional tax and estate planning could result in a lot more tax being paid during your lifetime and on your death, than was otherwise necessary.

Professional advisors include lawyers, accountants, financial planners, investment advisors and others. They serve different functions, and you have to be very selective in your screening process. The right selection will inspire confidence, enhance your peace of mind, reduce taxable income and protect your legal and financial health. The wrong selection will be costly in terms of time, money and stress.

There are many factors you should consider when selecting advisors. Here are the most common ones:

Qualifications
Before you entrust an advisor with your affairs, you need to know that he or she has the appropriate qualifications to do the job. This may include a lawyer’s or accountant’s professional degree, or in the case of a financial planner, professional training accreditation and experience relative to their professed area of expertise. Lawyers have to be accredited to practice law, but anyone can call themselves an accountant or financial planner.

When selecting a professional accountant, look for a Chartered Accountant (CA) or Certified General Accountant (CGA) designation. A financial planner should have a Certified Financial Planner (CFP) or Chartered Financial Consultant (CHFC) designation.

Experience
It is very important to take a look at the advisor’s experience in the area in which you need assistance. Factors such as the degree of expertise, the number of years of experience as an advisor, and the percentage of time spent practicing in that area are critically important.

Compatible personality
When selecting an advisor, make certain that you feel comfortable with the individual’s personality. If you are going to have an ongoing relationship, it is important that you feel comfortable with that relationship in terms of the degree of communication, the attitude, the approach, the candor and the commitment to meet your investment needs. A healthy respect and rapport will increase your comfort level when discussing your needs, and thereby enhance further understanding of the issues.

If you are not comfortable with the “chemistry” of the relationship, don’t hesitate to find another advisor. If you don’t like someone, it is only human nature to resist contacting them, and that could compromise your best interests.

Objectivity
This is an essential quality for a professional advisor. If advice is tainted in any way by bias or personal financial benefit, obviously it would be unreliable, and potentially self-serving. That is why you want to get a minimum of three opinions on your personal situation before deciding which professional to select.

Lawyers and professional accountants (i.e, CAs, CGAs) cannot obtain any direct or indirect collateral benefit from advising you, as it would be a conflict of interest. This could result in a professional negligence claim and/or professional disciplinary action including the loss of a practicing licence. However, when dealing with a financial planner, it is a different situation. Some offer fee-only services and receive no other benefit from their advice, and confirm this in writing. Others obtain a fee as well as commissions from the products they recommend or sell to you. This could potentially influence the nature of their advice. You need to clarify these issues in advance.

Trust
It is vital that you trust the advisor you select. Whether the person is a lawyer, an accountant, or a financial planner, if you don’t intuitively trust the advice as being in your best interests, never use them again. You cannot risk the chance that the advice is governed by the financial self-interest of the advisor, with your interests as a secondary consideration.

Fees
You need to feel comfortable with the fee being charged, and the payment terms. Is it fair, competitive and affordable? Does it match the person’s qualifications and experience? Most initial meetings with a lawyer, accountant or financial planner are free, or have only a nominal fee. This meeting provides an opportunity for both parties to see if the advisory relationship would be a good fit.

Comparison
It is a good rule of thumb to see a minimum of three advisors before deciding which one is right for you. You need that qualitative comparison to know which one–if any–of the three, you want to rely on. Seeing how they respond to your questions will be a good reference point. The more exacting you are in your selection criteria, the more likely it will be that a good match is made, and the more beneficial that advisor will be for you. Write down your questions before your meeting so you don’t forget, and prioritize them in case you run out of time. If you have a partner, friend or business associate who attends with you, you will have the opportunity to objectively debrief afterwards in terms of your impressions and assessments.

When going through the process of selecting an advisor, you can get prospective names from friends who have a trusted advisor, the Internet, the Yellow Pages, or from professional associations in your province (i.e., the law society, chartered accountants association, certified general accountants association or financial planners association). The initial consultation is usually free, but make sure you confirm this before you go to the appointment.

A “living will” is designed for those who are concerned with the quality of life when death is near. It is a written statement of your wishes to the people who are most likely to have control over your care, such as your family and your doctor. In order to ensure that your wishes are carried out, you should have a copy of the living will where it can be accessed quickly (in your wallet or purse, for example). Also give a copy to your spouse and to your family doctor. You should review your living will wishes from time to time, and make changes if necessary.

The purpose of a living will is to convey your wishes in the event that there is no reasonable expectation of recovery from physical or mental disability. If you so specify, you will be allowed to die naturally, with dignity, and not kept alive by artificial means or “heroic medical measures.” A living will is merely an expression of your wishes and is not legally binding upon your doctor or the hospital in charge of your care in Canada. However, some provinces, such as Quebec, Ontario and Manitoba, have legislation on the issue of living wills–they all officially endorse the concept, if your written instructions are correctly done. Check on the current legislation in your province.

To obtain a sample living will with an instructional booklet and/or videotape, in Canada, contact:

Centre for Bioethics
University of Toronto
88 College Street
Toronto, Ontario M5G 1L4
Tel: (416) 978-2709
Website: www.utoronto.ca/jcb

The cost of a living will booklet is $5, or $24.95 for 2 booklets and a videotape. You can also obtain information from their website.

Estate planning refers to the process required to transfer and preserve your wealth in an orderly and effective manner, and a properly drafted will is the foundation of a strategic estate plan. From a tax perspective, your estate planning objectives include:

• minimizing and deferring tax on your estate
• minimizing taxes on your death so that most of your estate can be preserved for your heirs
• moving any tax burden to your heirs, to be paid only upon the future sale of the assets.

There are various techniques to attain the above objectives. Some of these include:
arranging for assets to be transferred to family members in a lower tax bracket

• establishing trusts for your children to maximize future tax savings
• setting up estate freezes (generally for your children), thereby reducing the tax they pay in the future on the increased value of selected assets
• making optimal use of the benefits of charitable donations, tax shelters, holding companies or dividend tax credits
• taking advantage of special income tax options to minimize tax or payments on your present assets.

Stages of estate planning
Estate planning is an ongoing process, as your circumstances, needs and wishes change. Regardless of your age, the issue of estate planning, in conjunction with your will, is an essential element of life planning. There are different stages in a person’s life though, and consequently, certain issues may arise that require different estate planning strategies. Here are some of the key stages:

Young family
In this stage, you are just starting to accumulate assets and possibly raise a family. Preliminary planning is important. Do a financial status review, needs assessment and wish list to help with will preparation and estate planning.

• Draw up a list of all your assets and liabilities, current income and expenses, and projected income and expenses over the next five years.
• Outline a five-year plan in terms of what goals and needs you have during that time.
• Assess your life and disability insurance needs and protection to make sure it is adequate for your present and projected needs.
• Review your savings programs such as RRSPs and education-funding programs for your children.
• Decide on how you would like your assets to be distributed in the event of your death. Draw up a list of who should receive what. (You and your spouse may want to make separate lists and then compare notes and come to an agreement.)
• Select an executor and trustee of your will.
• Decide on a guardian for your young children. This is obviously a very important decision, and great care should be taken in the selection.
• Consult with professionals, such as a lawyer, accountant and trust company, on matters to do with wills, estate planning and trusts.

Mature family
In this stage, your priorities, needs and concerns are changing. Your children are adolescents or in their 20s, so the issue of the guardianship and education of your children is not as important a consideration now. You are probably in your peak earning years and have accumulated considerable assets. You may be separated, divorced, remarried, or living common-law. All these changing circumstances have considerable legal and estate planning implications.

• Assess your financial status, and personal and life needs, goals, and priorities. This is an ongoing process. In projecting your future financial income for example, you could be receiving a large inheritance.

You have probably heard of the concept of trusts. Sometimes they are referred to as family trusts, private trusts or corporate trusts. You have probably also heard of offshore trusts or international trusts. Generally there is a mystique about trusts, and a lot of unnecessary confusion about what they are, and when they should be used. Many people think trusts are just for the rich or for people with complex financial and investment affairs. That is not the case at all.

Trusts are a very common way of dealing with a range of personal choice, family or business options. After you have some additional insights into trusts and their uses, you may come to the conclusion that one or a number of trust options could meet your financial, estate and tax-planning needs.

Basically, a trust is a legal structure whereby a trustee deals with property or assets (such as cash, stocks, or bonds) over which the trustee has control, for the benefit of persons called beneficiaries. In some cases, the trustee could also be one of the beneficiaries. Although the trustee has legal title to the trust property, beneficial ownership rests with the beneficiaries.

There are two main types of trusts: living trusts and testamentary trusts. A living trust (also referred to as an inter-vivos trust) is established while an individual is alive, and comes into effect once the trust agreement is signed and the trust is funded. A testamentary trust is created under the terms of a person’s will and is therefore activated on the person’s death. It is funded from the proceeds of the deceased’s estate. These trusts serve different purposes and objectives and can have different tax implications.

Here is an overview of how trusts can be used.

LIVING TRUSTS

There are a number of creative ways that you can use a living trust. For example:

Family trust
In this situation, you could have some of the shares in a company owned by a spouse held in the name of a family trust. Say the shares are non-voting. This family trust could be comprised of the other spouse and the children. If it is structured in the right way, the monies going to the trust by means of dividends could then be distributed through dividends to each of the members of the trust. If the members of the trust were not receiving any other income, they could each take out $23,756 of dividend income each year, tax-free. If the family members were minors, the attribution rule would not apply, if the trust was formed properly. That is, the normal Revenue Canada policy of attributing income for a minor to the parents for tax purposes would not be applicable.

Estate freeze
If you own a company or have other assets that have shown a consistent pattern of growth over a period of time, and you anticipate that the growth will continue, an estate freeze using a corporation set up for that purpose, along with a living trust agreement, could be an effective strategy to consider. The practical effect of this technique is to freeze the value of the assets in your name as of the effective date of the agreement. All future capital gains will accrue to the benefit of your beneficiaries.

Providing for family members with special needs
If you have family members who are not able to handle their own affairs (due to mental or physical incapacity, for example), a living trust could be established to provide for their financial needs. On the recipient’s death, the rest of the funds in the trust could be left for some other party, such as a charity.

Giving to charity
You may wish to set up what is referred to as a “charitable remainder trust”, in which you assist your charity of choice by means of donating a residual interest in a trust to the charity. The most common method is for the capital in the trust to go to the charity on your death, and in the meantime, you receive the income earned from the assets in the trust. It is possible that the trust be structured so that you receive a non-refundable tax credit when the trust is established, representing the projected fair market value of the residual interest, or the “remainder” (the capital available on your death). If the capital is not going to be eroded during your lifetime, it is easy to project the remainder.

There are many other uses of a living trust, including supporting your children, divorce settlements, looking after your financial needs in your retirement, avoiding probate and ensuring the confidentiality of your wishes.

TESTAMENTARY TRUSTS

There are a range of uses for this type of trust. As mentioned earlier, these trusts are a part of your will. Common options include the spousal trust, trusts set up for minor children or grandchildren, providing for family members with special needs, discretionary trusts for children who are spendthrifts and gifts for charities. Here are some examples.

Spousal trust
In this situation, you set up a trust to provide income for your spouse throughout his or life, with the capital remaining at death going to the children or grandchildren. This type of trust is common when a spouse is ill or incapacitated or lacks financial expertise. A variation of this format, if there are no children or grandchildren, is to leave the capital to charity on the death of the surviving spouse.