No financial planner could have predicted the events of the past 12 months: a novel pandemic, an ensuing health crisis, and financial developments that affected stock markets, labour markets, and households worldwide.
While stocks have largely rebounded, personal finances may still be subject to the pandemic’s recurring waves. “Some people are feeling on edge,” says financial advisor Robert J. Kerr, BSc’66.
Kerr is founder and chairman of Kerr Financial Group, one of the longest-standing personal financial planning firms in Canada. His firm advises on investment management, risk avoidance, income tax planning and estate strategies.
The pandemic has created an increased interest in estate planning: protecting assets, delaying taxation, and supporting loved ones. “Our clients are always interested in those kinds of things,” says Kerr. “Estate planning is just a part of life planning.”
Kerr shares his insights below.
Has your firm noticed any changes in client behaviour since the COVID-19 pandemic began?
Yes, but mostly those who are anxious about being at home. Some are working from home and saving money – they’re the lucky ones. Others have lost their job and are having trouble finding another.
My biggest concern is that people might be investing on their own and taking on too much risk; they may run into trouble down the road.
At what point should someone seek professional financial advice?
Most people start at their bank; they can help with mortgages, education plans, life insurance, and investing.
But as your wealth grows, so do your opportunities for improving your tax and investment position. That’s when you may want to seek an advisor who can provide more personalized responses to your financial questions.
Some Canadian lawyers and notaries have noted that the pandemic has resulted in increased interest in estate planning. Does financial planning play a role in that?
Yes. In fact, I would argue that estate planning should happen with a financial planner before consulting a legal advisor!
Supporting your loved ones if something were to happen to you is a real concern. Ideally, your planner understands you and your financial situation well; they know what your needs are, what your strategies should be, and can work with your lawyer or notary to implement it. Ideally, both advisors know enough about the other’s field to team up together.
What are your top financial priorities when estate planning?
1. Assess your financial situation, goals, and objectives
- Identify assets, debts, and liabilities.
- Quantify your current and future spending needs.
- Do you own property outside of Canada? If so, you want to avoid a big tax bill from a jurisdiction outside of Canada.
2. Assess your personal priorities
- Are you concerned for loved ones? You can help them achieve their goals.
- Do you have children living internationally? Create a plan that works best for them.
- Want to help your community? You can do that as well.
3. Discuss your intentions
- Talk to your loved ones about your wishes. You don’t want to surprise them.
- If you want to support a charitable organization, let them know; there may be options that benefit you and your loved ones.
The three potential beneficiaries of an estate are loved ones, charities, and the government. How does each impact the other?
A lot of estate planning is tax planning. If you leave all your assets to your loved ones, the government will take a big share of taxes from you.
Leaving a bequest to charities could reduce your tax bill substantially, but you likely want to keep loved ones in mind as well.
You could leave all your money to the government, but most of us don’t want to do that. So it’s a question of balancing those three different options.
Can you specify how leaving a charitable gift may minimize taxes?
It’s particularly effective with securities that have large capital gains growing in them. By giving that security away you can save as much as 75 percent of the gift in income taxes – 50 per cent on the charitable donation plus 25 per cent on the capital gain you would have paid.
There are many different options. I have clients with a life insurance policy who have now found they don’t need one. You can make a charitable institution the owner and beneficiary of that policy: any outstanding premiums you are required to pay may become tax-deductible, and the insurance proceeds go to the charity.
Another option is charitable gift annuities: assigning a gift to a charitable institution now and receiving income in exchange: for the rest of your life, or for a certain period of time. It’s a way to do something charitable now while still getting income from those assets.
Donating retirement plan assets such as RRSPs and RRIFs – either now or in a will – may generate a donation receipt, and the charity isn’t taxed. So instead of losing 50 per cent to taxes, the full value goes to a good cause.
A charitable remainder trust means putting assets into a trust and making a charity the residual beneficiary of that trust. I’ve had U.S. clients put real estate or stocks into a trust for McGill; they receive an initial charitable donation credit, a lifetime of benefits, and the exclusion of the residual asset value from the estate. Meanwhile, the assets grew in value, but the University didn’t have to pay taxes because it’s a charitable institution. (This strategy is not as effective in Canada due to different tax rules.)
Your long-term plans are shaped by your personal circumstances and concerns, which is why I recommend long-term planning with a financial advisor rather than simply working with a lawyer. Yes, you are giving away some of your wealth. But you can reduce your income taxes, and the gift is going to a good cause.
What will your legacy be?
McGill is celebrating its 200th anniversary with the goal of securing 200 legacy gifts. For more information, please contact us.
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