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Halifax Estate Planning Council. February 2007 Case Study. The Case Study Facts. The Client: Dad (age 58) Immigrated to Canada in his twenties from Greece Owner of development ( “ Constructco ” ) and real estate holding companies ( “ Realco ” ) Actively involved in the businesses - PowerPoint PPT Presentation
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Halifax Estate Planning Council
February 2007 Case Study
Halifax Estate Planning Council
The Case Study FactsThe Client: Dad (age 58)
Immigrated to Canada in his twenties from GreeceOwner of development (“Constructco”) and real estate holding companies (“Realco”) Actively involved in the businessesSecond marriageOne son (28) from first marriage who is actively involved in the businessSecond wife (45) and daughter (16) who Mom wants to be involved in the businessElderly Grandmother (83) who Dad has brought over from Greece
Halifax Estate Planning Council
The Client’s Personal Assets- Initial Meeting
Jointly owns home with second wife FMV $800,000 ACB $600,000RRSPs $600,000Owns 100% of Realco and ConstructcoPersonally owns first rental property purchased4 unit building personally owned FMV $500,000 ACB $50,000
Halifax Estate Planning Council
The Client’s Corporate Assets
Constructco $500,000 Term insurance convertible to Universal Life
FMV $1,000,000 – land, work in progress, equipment
RealcoFMV $4,000,000 net of financingACB/UCC $800,000Debt $1,000,000 operating line
Halifax Estate Planning Council
The Client’s FamilySecond Wife (age 45)
Not employed, has a non-registered portfolio of $350,000 from inheritanceHome is jointly owned with client
Son (age 28)No significant assets, employed in Dad’s development business and works under a General Manager who reports to Dad
Daughter (age 16)From Dad’s second marriage
Halifax Estate Planning Council
The Client’s FamilyGrandma (age 83)
Immigrated to Canada 5 years ago, lives in basement in-law suite of client’s home but desires her own condominiumLife savings is a $750,000 non-registered portfolio
Aunt (age 51)Second Wife’s sisterResident of NSLukewarm relationship with Client’s family;
Halifax Estate Planning Council
Dad 58 2nd Wife 45
Grandma 83
Son 28 Daughter 16
Real Co
Dad 100%
Constructo Co
Dad 100%
First Property
Dad 100%GM 45
HEPC 2006 CASE STUDY
Halifax Estate Planning Council
The PlanSuccession plan for businessesRetirement plan for Dad and WifeBusiness/financial plan for SonEstate plan for family
Constructco and Constructo2
FT
CONSTRUCTCO INVESTCO2
LEASECO CONSTRUCTCO2
Value Pref Shares$1,000,000
Shareholders’ Agreement of Constructco• Contractually obligates life insurance proceeds to fund purchase of Preferred Shares
(drafted to provide flexibility of a redemption or dividend)
Shareholders’ Agreement of Constructco2 • Provides shareholder exit mechanisms to ensure central control of company by a key
group of people (avoiding third-party sales, bequeathing shares and involvement by a trustee in bankruptcy)
DD2 shares - Son
SonDaughter
FatherSpouse
Son
GM
DD1 Shares
100% 60%25%
15%
Lease
100 Common100 Common
REALCO INVESTCO
FT
DADDAD$2,000,000Pref. Shares
$2,000,000Pref. Shares
85% Common 100% Common
(GM over time)
15% Common
Realco
Shareholders’ Agreement of Realco • Son has option to acquire up to 75% of common shares over a period of time if certain business milestones are met•GM has option to receive shares from the Trustees of the Family Trust over time
Halifax Estate Planning Council
Dad’s Planning to DatePurchased a $1,000,000 Joint Last-to-die insurance policy naming the Estate as beneficiary
Purchased $500,000 additional life insurance in Constructco$1,000,000 total insurance
Froze his interest in Constructco to a discretionary family trust (Trust 1)
Issued preferred Freeze shares
Preferred “super-voting” shares
Froze Realtyco to a different discretionary trust (Trust 2)
Changed beneficiary designation on his RRSP’s to Second Wife and his mother as contingent beneficiary
Halifax Estate Planning Council
Grandma 84
Dad 59 2nd Wife 46
Son 29
Real CoComms: D. Trust #2
Prefs: Dad “Freeze”
Supervoting
Constructo CoComms: Trust#1
Prefs: Dad “Freeze”
Supervoting
First Property
Dad 100%
$1,000,000 Insurance
Trust #1 Trust #2
Aunt 51
January 1, 2007
Daughter 17
Halifax Estate Planning Council
The Client’s Personal Assets- Date of Death
Jointly owns home with second wife FMV $800,000 ACB $600,000RRSPs $600,000 (Beneficiary: Wife; Contingent: Grandma)Owns Preferred shares
Realco – “Freeze shares”: $3,300,000Constructco – “Freeze shares”: $1,000,000Plus nominally valued “super-voting” shares of each;
Joint last to die policy: $1,000,000
Halifax Estate Planning Council
Current FactsDad & Second Wife died in a car crash on January 1, 2007
CSI crew cannot determine who died first
Daughter, now 17, has a new boyfriend, who is a drug dealer
Halifax Estate Planning Council
Distribution of Dad’s Estate
Dad was older than Second Wife and is therefore presumed to have predeceased Second Wife under the Survivorship Act, R.S.N.S. 1989, c. 454
“3(1) Where two or more persons die at the same time or in circumstances rendering it uncertain which of them survived the other or others, such deaths are, … for all purposes affecting the title of property, presumed to have occurred in the order of seniority, and accordingly the younger is deemed to have survived the older.”
Halifax Estate Planning Council
Distribution of Dad’s Estate (Cont’d)
Significant implications to the distribution of Dad’s assetsSecond Wife acquires 100% interest in house as the surviving joint tenantDad’s RRSP – does it pass to Second Wife as the designated beneficiary or does it pass to Grandma as contingent designated beneficiary?
Halifax Estate Planning Council
Distribution of Dad’s Estate (Cont’d)
Beneficiaries Designation Act, R.S.N.S. 1989, c.36 permits designation of a beneficiary for a registered plan (section 9) Since Second Wife survived Dad, Dad’s RRSP payable to her However, Act does not apply to designations made pursuant to the Insurance Act, R.S.N.S. 1989, c. 231 (as amended)
Halifax Estate Planning Council
Distribution of Dad’s Estate (Cont’d)
Section 218 provides as follows:“Unless a contract or a declaration otherwise provides, where the person whose life is insured and a beneficiary die at the same time or in circumstances rendering it uncertain which of them survived the other, the insurance money is payable in accordance with subsection (1) of Section 196 as if the beneficiary had predeceased the person whose life is insured.”
Halifax Estate Planning Council
Distribution of Dad’s Estate (Cont’d)
Accordingly, if the RRSP was held by an insurer in insurance products and a declaration pursuant to the Insurance Act had been made, Second Wife would have been treated as predeceasing Dad and the contingent designation to Grandma appliesTax would have been payable by Dad’s estateAssumption: RRSP not an insurance contract
Halifax Estate Planning Council
Distribution of Dad’s Estate (Cont’d)
The remainder of Dad’s assets pass under the Intestate Succession Act, R.S.N.S. 1989, c. 236 (as amended) as follows:
$50,000 to Second Wife as her preferred share (ss.4(2)) – equal to Dad’s bank accountRest of the estate (comprised of freeze preferred shares of Constructco and Realtyco, voting preferred shares of Constructco and Realtyco and four unit rental property) are divided one-third to Second Wife and one-third to each of Dads’ two children, Son and Daughter (ss. 4(5))
Halifax Estate Planning Council
Distribution of Dad’s Estate (Cont’d)
Common shares of Constructco and Realtyco held by Family Trust 1 and Family Trust 2 pass the same way (one-third/ one-third/ one-third)
Halifax Estate Planning Council
Distribution of SecondWife’s Estate
Second Wife is deemed to have died immediately after Dad Second Wife has no spouse at the time of her death but has one child, DaughterUnder Intestate Succession Act, Daughter inherits 100% of Second Wife’s estate (ss. 4(7))
Halifax Estate Planning Council
Distribution of SecondWife’s Estate (Cont’d)
Second Wife’s estate comprises:Matrimonial home Second Wife’s own non-registered portfolio100% of Second Wife’s interest in Dad’s estateProceeds of joint last to die insurance policy – More on this later
Halifax Estate Planning Council
Beneficial Ownership ofAssets After Both Deaths
(Before Probate or Income Tax)
Assets Fair Market Value Ownership
House $ 800,000.00 Daughter
Dad’s RRSP $ 600,000.00 Grandma
Constructco Freeze Preferred Shares $1,000,000.00 2/3 Daughter, 1/3 Son
Realtyco Freeze Preferred Shares $3,300,000.00 2/3 Daughter, 1/3 Son
Constructco Voting Preferred Shares $ 10.00 2/3 Daughter, 1/3 Son
Realtyco Voting Preferred Shares $ 10.00 2/3 Daughter, 1/3 Son
Constructco Common Shares $ 10.00 2/3 Daughter, 1/3 Son
Realtyco Common Shares $ 10.00 2/3 Daughter, 1/3 Son
Four Unit Rental Property $ 500,000.00 2/3 Daughter, 1/3 Son
Second Wife’s Non-Registered Portfolio
$ 350,000.00 Daughter
Grandma’s Non-Registered Portfolio $ 750,000.00 Grandma
Joint Last to Die Insurance Proceeds $1,000,000.00 Daughter
Halifax Estate Planning Council
Administration IssuesSon to act as administrator of Dad’s estate pursuant to the Probate Act, S.N.S. 2000, c. 31, paragraph. 32(1)(a)Son will require an administrator’s bond equal to 1.5 times the total value of Dad’s estate – extremely expensivePublic Trustee is administrator of Second Wife’s estate, notwithstanding Aunt wishes to be appointed – Probate Act paragraph 32(1)(c)
Halifax Estate Planning Council
Administration Issues(Cont’d)
Public Trustee could be asked to renounce in favor of Aunt, but unlikely to do so given the value of the estate and the fact that sole beneficiary is a minor child While Daughter is a minor, she also needs guardian of the person and a guardian of the property under the Guardianship Act, S.N.S. 2002, c. 8 (as amended)
Halifax Estate Planning Council
Administration Issues(Cont’d)
Because there is no guardianship appointment by Dad and Second Wife, Aunt must apply to Supreme Court to be appointed guardian of Daughter’s person - Grandma fights this but loses Public Trustee is authorized to receive Daughter’s interest in Dad’s estate and, if required, Second Wife’s Estate (section 14)
Halifax Estate Planning Council
Administration Issues(Cont’d)
Daughter becomes adult at age 19 pursuant to the Age of Majority Act, R.S.N.S. 1989, c. 4, section 2, notwithstanding that she will be an adult for purposes of the Income Tax Act at age 18Public Trustee cannot resist transferring all the assets to Daughter at age 19
Halifax Estate Planning Council
Administration Issues(Cont’d)
Public Trustee does not need a bond
Halifax Estate Planning Council
Can Post-Mortem Tax Planning Occur?
Very difficult proposition given role of Public TrusteeSome limited scope to effect tax planning that benefits DaughterPublic Trustee will always act in best interest of DaughterIf tax planning saves Daughter significant tax, may support it
Halifax Estate Planning Council
Can Post-Mortem Tax Planning Occur?
Court application will be required Son, as administrator, must act in best interest of Dad’s estate and cannot pursue actions that favor him over DaughterPrinciples in BC cases O’Hagan v. O’Hagan, [2000] B.C.J. No. 204 (CA) and British Columbia (Public Trustee) v. Bradley Estate [2000] B.C.J. No. 205 (CA) would be applied
Halifax Estate Planning Council
Can Post-Mortem Tax Planning Occur?
Very unclear whether otherwise appropriate post-mortem planning could occur
Halifax Estate Planning Council
What if Dad and Second Wife
Had Planned Properly?Dad’s will would have appointed an alternate executor avoiding bonding costs for Son as administrator of Dad’s estate Second Wife’s will would have appointed an alternate executor and trustee for Daughter avoiding involvement of Public Trustee
Halifax Estate Planning Council
What if Dad and Second Wife
Had Planned Properly? (Cont’d)
Wills would have contemplated joint death and provided an alternative distribution equalizing estate between Son and Daughter Both wills would have provided trust for Daughter until age 25 (or later) for estate planning purposes with Aunt as trusteeWills would have provided for testamentary trust for Son immediately and for Daughter after age 25 (or later) purely for tax planning/income-splitting
Halifax Estate Planning Council
What if Dad and Second Wife
Had Planned Properly? (Cont’d)
Aunt would have been named guardian of the Daughter’s person by guardian appointment, avoiding court applicationThe general manager of Constructco would have been properly addressed – not addressed at all without a will and/or shareholders’ agreement/earn-in agreement
Halifax Estate Planning Council
What if Dad and Second Wife
Had Planned Properly? (Cont’d)
Wills could have provided sufficient powers to the executors to implement post-mortem tax planning that benefited estate as a wholeProfessional fees to deal with this mess and the administration bonding costs greatly outweigh costs to implement the plan recommended to Dad in 2006!
Halifax Estate Planning Council
Income Tax IssuesTax on deathFunding of liabilityPost mortem planning for corporationsRRSP
Halifax Estate Planning Council
Husband’s asset distribution
Value Son Daughter Wife
RRSP 600,000 600,000 Constructco shares Special voting 100 33 33 33 Freeze preferred 1,000,000 333,333 333,333 333,333 Realtyco shares Special voting 100 33 33 33 Freeze preferred 3,300,000 1,100,000 1,100,000 1,100,000 Rental Property 500,000 166,667 166,667 166,667
Husband's Estate
Halifax Estate Planning Council
Wife’s asset distribution Value Daughter
RRSP 600,000 600,000 Constructco shares Special voting 33 33 Freeze preferred 333,333 333,333 Realtyco shares Special voting 33 33 Freeze preferred 1,100,000 1,100,000 Rental Property 166,667 166,667 Home 800,000 800,000 Wife's portfolio 350,000 350,000 Life insurance 1,000,000 1,000,000 Total 4,350,067 4,350,067
Halifax Estate Planning Council
Total distributionsSon Daughter
RRSP - 600,000 Constructco shares Special voting 33 67 Freeze preferred 333,333 666,667 Realtyco shares Special voting 33 67 Freeze preferred 1,100,000 2,200,000 Rental Property 166,667 333,333 Home - 800,000 Wife's portfolio - 350,000 Life insurance - 1,000,000 Total 1,600,067 5,950,133
Halifax Estate Planning Council
Husband’s TaxFacts and Assumptions:
RRSP goes to wife’s estateCapital cost for recapture on rental property assumed to be $30,000Husband used capital gains deduction on Constructo estate freeze, therefore ACB of 2/3 of the shares is $333,333. All income taxed at highest tax rateRealco shares worth $3,300,000
Halifax Estate Planning Council
Husband’s assets subject to tax
Value Taxable Tax Constructo
Voting p/s $ 67 $ 0 0 Freeze p/s $ 666,667 $ 166,667 $ 80,417Realco Voting p/s $ 67 $ 0 0 Freeze p/s $2,200,000 $1,100,000 $530,750Rental ppty $ 333,333 $ 150,000 $ 72,375 Recapture $ 20,000 $ 9,650
$4,800,200 $3,200,133 $693,192Probate tax $ 65,918Total tax liability $759,110
Halifax Estate Planning Council
Wife’s TaxFacts and Assumptions:
Principal residence exemption used on homeCapital cost for recapture on rental property assumed to be $30,000 – 1/3 owned by wife’s estateWife is able to use capital gains deduction on her 1/3 interest in ConstructcoAll income taxed at highest tax rate
Halifax Estate Planning Council
Wife’s taxValue Taxable Tax
Constructo Voting p/s $ 33 $ 33 0 Freeze p/s $ 333,333 $ 0 0Realco Voting p/s $ 33 $ 33 0 Freeze p/s $1,100,000 $ 550,000 $265,375Rental ppty $ 166,667 $ 75,000 $ 36,188
Recapture $ 10,000 $ 4,825Portfolio $ 350,000 $ 37,500 $ 18,094RRSP $ 600,000 $ 600,000 $289,500Probate tax $ 59,683Total taxes $673,665
Halifax Estate Planning Council
Post Mortem planningConstructco:
Use life insurance to redeem freeze sharesLoss on redemption can be used to offset ½ of capital gain on death
Tax savings in Husband’s estate: $40,200
Provides liquidity in estates
Halifax Estate Planning Council
Post Mortem planningRealco:
Double tax issue if no post mortem planningConsider wind-up and 164(6) electionConsider 88(1)(d) bump planning
Halifax Estate Planning Council
Realco Post Mortem Tax Planning
Shareholders' Equity as at February 2007 (200,000) Unrealized gains
FMV 5,000,000 NBV (800,000) 4,200,000
Corporate tax on liquidation (1,092,000) RDTOH 400,000 Cash available for distribution 3,308,000
Rounded 3,300,000 Distributed as:Paid Up Capital - Capital dividend 2,100,000 Taxable dividend 1,200,000
3,300,000
Personal tax on dividends @ 33% 396,000
Halifax Estate Planning Council
Realco Post Mortem Tax Planning
Tax in Husband’s estate $530,750Tax in Wife’s estate 265,375Total taxes paid by estates 796,125Corporate tax on wind-up 1,092,000RDTOH recovered (400,000)Personal tax on wind-up 396,000Total taxes if no planning 1,884,125
Halifax Estate Planning Council
Realco - 164(6) electionConsider winding up within Estates’ first taxation yearEstates will realize a loss on Realco shares on wind-upLoss can be used to offset gain on final tax returns of Husband and Wife
164(6) election
In this scenario, the full loss cannot be carried back – stop loss rules apply
Most tax on death can be offsetCorporate tax paidTax on wind-up dividend paid
Halifax Estate Planning Council
Realco Post Mortem 88(1)(d) bump
Facts and Assumptions:FMV Land and buildings = $5,000,000
FMV of land = $2,000,000FMV of building = $3,000,000
ACB Land and buildings = $800,000No recapture as ACB = UCC
Halifax Estate Planning Council
Realco Post Mortem 88(1)(d) bump
Both Estates would transfer Realco shares to Newco in exchange for shares of Newco having PUC = Estates’ ACB ($3,300,000)
Realco wound up into NewcoIncrease ACB of land using 88(1)(d) bump88(1)(d) bump not available on depreciable property (building)
Halifax Estate Planning Council
Realco Post Mortem 88(1)(d) bump
Newco sells assets and pays tax on capital gain on buildingWind-up Newco and distribute cash as return of capital to Estates
Halifax Estate Planning Council
Realco Post Mortem 88(1)(d) bump
Shareholders' Equity as at February 2007 (200,000) 88(1)(d) bump:
FMV Land 2,000,000 ACB land 320,000 1,680,000
FMV of land and building 5,000,000 Original ACB (800,000) 88(1)(d) bump (1,680,000) Capital gain realized on liquidation 2,520,000
Corporate tax on liquidation (655,200) Cash available for distribution 3,344,800
Rounded 3,300,000
Distributed as Paid Up Capital 3,300,000
Halifax Estate Planning Council
Realco Post Mortem planning
Do nothing 164(6) 88(1)(d)
Tax on death 796,125 108,563 796,125
Tax on wind-up of RealcoCorporate tax 1,092,000 1,092,000 655,200 Recovery of RDTOH (400,000) (400,000) - Personal tax on distributions from Realco 396,000 396,000
1,088,000 1,088,000 655,200
Total taxes paid 1,884,125 1,196,563 1,451,325
Halifax Estate Planning Council
RRSPLeft to minor daughter through Wife’s estateAdministrator and daughter’s guardian (Public Trustee is both) can jointly elect to transfer to daughter on a tax deferred basisMust buy an annuity payable until daughter is 18Annuity taxed in daughter’s hands
Halifax Estate Planning Council
RRSPVery little tax deferral, given that daughter is 17Could use daughter’s marginal tax brackets for two yearsAdministratively, an insurance company not likely to sell a 2 year annuity
Halifax Estate Planning Council
Life Insurance Considerations
After last year’s meetings …Additional coverage on Dad in Constructco to fund buy-out by son.Joint Life, Last-to-die coverage on Dad and Second Wife, to fund overall estate tax liabilityEstate Equalization issues discussed, but no action taken
Halifax Estate Planning Council
(1) Constructco buy-out
Dad wants his son to ultimately take over the business.
Son is interested – but no assets
Life insurance increased to $1 million to finance the buy-out. Term insurance used as the need is not permanent.
Halifax Estate Planning Council
(2) Estate Tax Liability
With proper planning, the estate tax liability can reduce over time, but right
now it’s significant.
The choice is whether to pay the tax using 100-cent dollars, or shift the burden to an
insurance company.
Insurance makes sense …
Halifax Estate Planning Council
Life insurance – Dollars at a Discount
1/2 cent on the dollar each year1/2 cent on the dollar each year, , at our clients’ blended age, if approved at our clients’ blended age, if approved
medically.medically.
$5,000 yearly insurance cost = $1 million tax-$5,000 yearly insurance cost = $1 million tax-free.free.
Insurance costInsurance cost
Male 58 + Female 45 Male 58 + Female 45 = Joint 39= Joint 39
Halifax Estate Planning Council
What type of insurance?
The tax liability may be around for 20 years or more. It’s a long-term issue.
Typical considerations would be Term to 100 or Universal Life.
Halifax Estate Planning Council
Term to 100 vs Universal Life
For clients where assets or cash flow are modest, Term 100 coverage provide a
very effective means of creating or conserving an estate.
Dollars at a discount.
Using Universal Life, more affluent clients can sometimes cut the insurance cost in
half.
Halifax Estate Planning Council
Term to 100 vs Universal Life
The cost of Term 100 is paid with after-tax dollars.A $5,000 yearly premium may actually cost $10,000
pre-tax.
Using Universal Life, our clients - in just 2 years - can create a tax-sheltered investment where pre-tax
investment earnings can pay the yearly insurance cost.
Halifax Estate Planning Council
Aggressively-funded Universal Life
Investment earnings can pay the insurance cost each year, with the fund returned tax-free at death.
The death benefit option is called “Face Amount + Fund”.
High levels of funding can qualify the client for substantial cost discounts and/or investment bonuses.
Many ULs allow clients to use brand-name mutual funds as the underlying investments in their contracts – at
no additional management fee.
Halifax Estate Planning Council
Joint Last – Beneficiary Provisions
Contract wording – one major insurer:
Simultaneous deaths. Unless the beneficiary designation specifies otherwise or prohibited by law, if two or more Lives Insured under the policy:
• die at the same time or in circumstances in which it is uncertain in what order they died, and
• if the sequence of those deaths affects the determination of a Designated Life Insured and/or the calculation of a death benefit payable
we will use the following criteria to determine and pay the death benefit(s) resulting from those deaths:
• if the sequence of the deaths would otherwise determine which of the Lives Insured is a Designated Life Insured for a coverage, the death benefit otherwise payable with respect to that coverage will be divided into equal portions and each of those Lives Insured will be deemed to be a Designated Life Insured and to have survived the other(s) to determine each beneficiary's entitlement to each portion of the divided death benefit
Halifax Estate Planning Council
(3) Estate Equalization issues
Dad and Second Wife never got “a round tuit”,
but life insurance – especially at ½ cent on the dollar – is a very effective way of
equalizing inheritances for family members where some children will
remain outside the business
Halifax Estate Planning Council
(4) Estate Multiplication
Worthy of mention is the idea of using life insurance to multiply an estate for the
beneficiaries …
Halifax Estate Planning Council
$1 Million - $5,000/year
If $5,000 is invested yearly, how long will it take the investment to reach $1 million?
At 6% growth 43 yearsAt 8% growth 36 yearsAt 10% growth 31 yearsAt 12% growth 27 years
These are after-tax growth rates!
Halifax Estate Planning Council
Estate Multiplication
Policies originally placed to fund immediate tax liabilities can become “estate
multipliers” when clients live long enough to enjoy the tax minimization
recommendations they’ve actioned.
Halifax Estate Planning Council
Concluding RemarksRole of Trust Company – Executor/Trustee and agent for executorComplex planning should be presented and phased in gradual steps to ensure client understanding and acceptanceBegins and ends with the WillVarious elements and needs should be coordinated during each stage of implementation
Recommended