Content sponsored by National Bank
Estate planning is essential for high-net-worth investors. Here’s how tax and insurance strategies can ensure your wealth is preserved for future generations.
High-net-worth (HNW) individuals face a different set of financial challenges and opportunities than most Canadians. Typically, their concerns are less about funding their lifestyle in retirement and more about preserving and growing their wealth, and how to pass it on to the next generation.
“Questions we commonly deal with are, ‘What’s next? What’s the end game?’” says Patrick Gervais, principal director of National Bank’s Private Banking 1859 division. “‘Where are the kids going to school? Should we establish a family trust? Is there a sibling that needs to be taken care of?’ The main advantage affluent clients have compared to the vast majority of us is that they have options.”
“With a goal of estate and wealth planning rather than financial planning, the focus for HNW families is on utilizing tax strategies and insurance products to ensure the wealth is efficiently passed on to family members”, says Mr. Gervais.
“It’s figuring out, ‘What is the estate plan? What is my succession plan? How am I going to transfer these assets and who am I going to transfer them to?’” he says. “The key is working through the trusts and holding companies and using these corporate structures to minimize the fiscal impact and transfer as much money as possible in a structured and planned way.”
Strategies for optimizing your return
Patrick Gervais says that one issue facing some HNW investors is the hit to their investment income because of historically low interest rates, which has dramatically lowered their returns from fixed-income investments. Options to alleviate this problem would be to look at alternative wealth strategies including insurance and annuities to complement the existing portfolio.
“That can be a very interesting strategy because with an insured annuity, we manage longevity risk and generate guaranteed income,” says Mr. Gervais. “If you have a $3-million fixed-income investment portfolio, you can use $500,000 of that when you are 70 years old and buy an annuity and make it estate-neutral with life insurance. It diversifies your fixed-income portfolio and levels off your income in a very tax-efficient manner.”
Inheritance and taxation
Insurance can also be a tax-efficient way to ensure wealth is passed from the estate to heirs. That’s why HNW individuals often rely on insurance to pass on wealth far more than average Canadians, notes Mr. Gervais.
“When a modestly-wealthy individual passes [assets] on to the next generation, there is often estate depletion because of taxes and other factors. With high-net-worth families, when they make that inter-generational transfer, their actual net worth will pick up,” he says.
“It’s not magic, it’s just that they purchased a significant amount of insurance to cover taxes and figured out that getting a six to eight per cent equivalent return [using an estate bond] with no risk is not a bad trade.”
Mark Goodfield, an accountant and partner with BDO Canada LLP, says that a key difference between HNW Canadians and the general public is the time frame they work under.
"Affluent Canadians are not afraid of running out of money,” adds Mark Goodfield. “They worry about what will become of their estate after their passing," he notes.
Mr. Goodfield, who also writes the Blunt Bean Counter Blog and is author of the book Let’s Get Blunt About Your Financial Affairs, says that the HNW group often has the ability to use corporate-funded insurance (either universal life or whole life policies) to insure the lives of the owners of the corporation. It’s a tax-efficient way to pass on wealth to heirs when compared with leaving that money in regular investment portfolios.
“They are often getting significantly more funds to their estate because of that,” he says.
However, Mr. Goodfield points out that the Canada Revenue Agency (CRA) intends to pare back the advantages of this strategy next year, just the latest change as the CRA and HNW wealth advisers engage in a long-running taxation tug of war.
The art of surrounding yourself with the right people
To ensure they get the best advice and a holistic approach to estate planning, many wealthy individuals and their families typically assemble a team of experts in fields such as accounting, law and insurance. It is the job of wealth planning experts like those at Private Banking 1859 to orchestrate the efforts of this team to provide the best result for the client and extended family.
“At Private Banking 1859, we offer a much more complete service,” says Mr. Gervais. “We work hand in hand with these professionals in the development, management and execution of the plan.”
While wealthier people don’t have to worry about running out of money in their later years, they certainly can’t afford the luxury of improvising when it comes to managing their estate…
Do you have significant assets to manage or questions about your investments? Make an appointment with an advisor at Private Banking 1859 today. They will offer you strategies for achieving your long-term goals while controlling the risk to which your portfolio is exposed.
This article is offered by National Bank
