Voice of The O/O: Money Tips You Can Take to the Bank
November 1, 2003
Last month we discussed common sense strategies to make the most of your hard-earned income. These included maximizing RRSP contribution limits (including taking advantage of the income-splitting oppo...
Last month we discussed common sense strategies to make the most of your hard-earned income. These included maximizing RRSP contribution limits (including taking advantage of the income-splitting opportunities available through spousal RRSP’s, particularly if you are in line for a company pension), getting control of non-tax-deductible debt and familiarizing yourself with the basics of investment options. These are all well-known methods for dealing with your income prior to retirement. But when the time comes to finally hang up the keys, you’ll need a plan to disperse those assets.
First, you must recognize that you may very well outlive those resources, so a long-term income guarantor such as an annuity or a registered income fund (RIF) must be put in place. Your trusted financial advisor will be the best source for advice about how best to structure this income. It must be sufficient to meet your monthly needs over several years, ideally using the interest generated on your earnings without compromising the principal, and the dispersal must also be disciplined enough to continue providing an income for as long as you require it.
Second, when you are satisfied that your own immediate needs and the needs of your spouse are taken care of, you will want to be able to dole out the balance of your assets in such a way that other parties’ interests are considered. If you have children they can benefit directly through the establishment of a Registered Education Savings Plan (RESP). It functions the same as an RRSP but is intended for post-secondary education. This can be an enormous advantage for struggling students and encourages them to continue their education when funds might not otherwise be available. You can also set up an RESP for your grandchildren, which takes a huge burden off of the income responsibilities of their parents. (Be sure to enquire about the Canada Education Savings Grant. This is an outright grant which is available from the Canadian Government. Established in 1997, it adds 20 per cent of the first $2,000 contributed to the RESP each year and could mean a potential of an additional $7,200 toward your child’s or grandchild’s post-secondary education.)
Life insurance is another proven instrument that can insulate your asset package. It can protect the business holdings for your heirs and is a reliable way of creating a pool of cash for retirement purposes. In addition, life insurance is protection against creditors since the beneficiary can be someone (your spouse, for example) who isn’t an owner of the business.
The primary legal tool in estate planning which guarantees that there are no misunderstandings is a will. The consequences of not dealing with this simple procedure can be considerable. Without a current legal will in place your assets may be distributed according to the laws of the jurisdiction in which you live and these laws might not necessarily take the interests of your heirs into account. Since we can’t take it with us then we’ll want to make sure that it gets distributed properly. The intended recipients are your choice, of course, but there are mechanisms that will ensure that your wishes are being carried out.
Next, there is the need for a power-of-attorney to be arranged. That way all of your affairs will be managed during your lifetime by someone who is acting in your best interest if for some reason you are unable to do so yourself. Without a power of attorney, the government could step in which is never a desirable option. Their priorities will always be focused toward tax issues on exposed assets. Your intended heirs and beneficiaries could suffer.
For owner/operators and owners of established family ventures, there are tangible assets that need to be dealt with. Perhaps you have decided that the business should continue within the family. The main concern then is how to properly pass the business to the next generation without hobbling them with unresolved legal matters. As usual, tax issues will be the biggest source of irritation since the government will always seize any opportunity to assess tax on a transaction.
If your business isn’t incorporated already then now is the time to consider doing so.
The paperwork burden is admittedly a greater nuisance than for a sole proprietorship but the long term advantages can’t be underestimated. More earnings can be retained in the company through dividends and bonuses if the company is incorporated. In the meantime, consider paying salaries to family members for their contributions to the family business.
An incorporated business is far less likely to be subject to the whims of government taxation if for no other reason than that incorporation involves the services of lawyers, accountants, bankers and other investment professionals, individuals whose interest lies with maximizing your return on investment.
They are crucial to your long-term financial planning strategy and should be consulted ahead of any decision about asset allocation at retirement time.
– A former O/O, Mike Smith is a member of OBAC’s board-of-directors. He can be reached at email@example.com.