Tax & Estate Planning for HNW Clients October 11, 2012 Wood Gundy National Business Conference Jamie Golombek Managing Director CIBC Private Wealth Management
High Net Worth Integrated Advisory Offer Bringing together experts from CIBC Private Wealth Management and CIBC Wood Gundy
Agenda 1. Retirement Planning - How much is really enough? 2. Tax Planning Strategies 3. Risk / Insurance Planning 4. Charitable giving 5. Vacation property strategies 6. Estate Planning (including US estate tax planning)
Retirement: How much is enough? What percentage of pre-retirement income? 50% to 90%? Sources: CPP (2012 - $11,840) OAS (2012 - $6,480 clawback range $69k to $112k) RRSPs TFSAs Non-registered accounts
Scenario Current age: 45 Maximize RRSP, existing balance $300,000 2012 - $22,970, etc. Save for 15 years until age 60 Rate of return 5% Inflation = 2% Need $300,000 after-tax each year upon retirement When do you run out of money?
Non-registered Savings How much should I be saving? $150,000 $250,000 $350,000
Scenario 1 Save $150,000
Scenario 2 Save $250,000
Scenario 3 Save $350,000
Education Funding $50,000 per child, no annual maximum Maximize Canada Education Savings Grants 20% on first $2,500/annually = $500 Catch-up CESGs back to 1998 Max of $1,000 of CESGs per year $7,200 per child maximum Contributions come out tax-free Income/growth/grants taxable to child: ACTION PLAN Establish RESPs Using ages of children, optimize contributions Maximize CESGs (retroactive to 1998) Lump sum fund difference Basic ($11k), tuition($6k), education ($3K), textbook ($1k) $21k/child/year tax-free
Tax Preferred Investing 2012 Canadian dividends (dividend tax credit) Capital gains (50% taxable) Example Ontario 2012: Interest income 46.4% * Capital gains 23.2% Canadian (eligible) dividends 29.5% Canadian (non-eligible) dividends 32.6% * The high-income surtax for Ontario in 2012 would increase the top marginal tax rate to 49.5% in 2013 when taxable income exceeds $500,000.
Income Splitting Loan to Spouse/Kids Spouse or partner gifts/transfers funds FULL attribution of income / gains to transfer Exceptions Pay FMV or prescribed rate loan Rate for Q3/Q4 2012 1% Lowest ever!
Spousal Loan at 1% (Example) Jack loans Diane $500,000 Investment earns 5% annually Interest Expense 1% Jack Income $5,000 $500,000 Diane Income $25,000 Interest expense (5,000) Net income $ 20,000 Income splitting opportunity: $20,000 - Tax Savings (ONT): $20,000 X (46.41% - 20%) = $5,000+ annually
Income splitting Kids Action Plan If kids < 18, set up family trust (through lawyer) Loan to trust at 1% (promissory note) Investment income earned in trust paid out to kids (or used for their benefit) Kids pay zero (minimal) tax Tax-free (public company) dividends to kids - $47,800 (Ontario 2012)
Risk Management Insurance Disability insurance Life insurance Term how much is enough? Permanent UL vs. Whole Life Tax sheltering opportunities Inheritance
Why Insurance? Protect beneficiaries Pay taxes, probate, etc. Leave an inheritance
Non-registered investments Accumulation: Distribution: Tax on investment income Tax on accrued gains on investments Probate fees on investment value After-tax income Taxable investments Taxes Probate Fees Taxes Net to beneficiaries
Personal investment shelter using UL policy Accumulation: Distribution: No tax on investment income in policy No tax on accrued gains No probate fees when policy beneficiary named Income reinvested Taxable investments Net to beneficiaries
Example of tax savings with investment shelter Example: Marie (61) and Louis (63) Want to maximize their estate for children/grandchildren Have accumulated $1 million non-registered investments not needed for their own retirement Investment Allocation: 60% bonds @ 4.25%, 40% equities @ 6.25% Strategy Shift $50,000 annually for 10 years from non-registered investments to a $1,000,000 universal life policy
How much is the tax savings worth over time? Estate value increases $800,000 to $1 million with insurance $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Projected Estate Value Comparison 65 70 75 80 85 90 95 100 Age With UL insurance Without UL insurance
Participating insurance (Whole Life) Portfolio diversification Fixed income / mortgages Lower standard deviation Guaranteed minimum policy values Tax-free death benefit
Summary of key benefits of personal investment shelter Investment flexibility is available with UL policy Investments are not taxed annually, allowing increased wealth accumulation Death benefits are tax-free to beneficiaries Simplified, private estate administration No delays to settle estate No public probate process No probate fees
Charitable Giving Strategies Donations of publicly listed securities NO capital gains tax Public vs. private foundations Immediate tax savings Source of annual giving (e.g. donor advised funds) CIBC Wood Gundy Giving Back
Vacation Property Planning: The Tax Issue Upon transfer/gifting/death, deemed disposition at FMV Exception: spouse/partner Proceeds = FMV Adjusted cost base (ACB) = cost + renovations/improvements Proceeds ACB = capital gain (loss) Loss personal use property not available Gain
Principal Residence Exemption (PRE) Housing unit house, condominium, cottage, mobile home, trailer, houseboat Can be outside of Canada Ordinarily inhabited by: Individual, spouse/partner, unmarried child < 18 Incidental rental - OK
Principal Residence Exemption (cont d) Property must be designated upon disposition Form T2091 Annual designation After 1981, one property / year / family If individual designates, no other property may be designated by family unit
Principal Residence Exemption (cont d) Dilemma: Use the exemption on gift of cottage vs. Save if for sale of city home Factors: Average annual gain / year / property Potential for future increases Anticipated holding period of unsold property
Solution #1: Life Insurance Insurability Affordability How much? Cost? Example: Drew, 50, owns Muskoka cottage Tax rate 48% FMV = $900,000 ACB = $400,000
Solution #2: Use of a Trust Type of relationship Legal ownership vs. beneficial enjoyment Settlor entrusts legal ownership of asset to another trustee Trustee manages property according to the trust deed for the benefit of another beneficiary
Use of a Trust (cont d) Settlor Trust Trustee Beneficiaries
Use of a Trust: Transfer vs. Purchase Transfer into trust disposition Exceptions for: Spousal trusts Alter-ego & joint partner trusts Purchase through trust Enjoy use during lifetime Defer taxation on death
Use of a Trust: Issues (cont d) Rolled out to kids at ACB Defers tax until ultimate sale Use of principal residence exemption by kids Deemed disposition of trust property every 21 years Distribute to kids Trust s ability to claim principal residence exemption
Estate Planning Ensuring that the right people get your stuff Ensuring that people you care about are looked after Tools: Powers of Attorney Wills Testamentary trusts Probate planning U.S. Estate Tax issues
Die Without a Will? Spouse Only Common-Law Spouse + 1 Kid Spouse + Kids Ontario All to spouse Married only First $200,000 to spouse Remainder: Split equally First $200,000 to spouse Remainder: 1/3 to spouse 2/3 to kids
Testamentary Trusts Created through will Uses: Protection of assets for kids / grandkids Post-mortem income splitting
Inheritance Protection Using a Trust Spouse A Spouse B Test. Trust Kids Second Family
Post-mortem Income Splitting Leave ALL to spouse / partner / kids in high bracket Annual taxation of investment income at high rates Solution: Testamentary trust for spouse / each kid Access additional set of marginal tax rates Federal Brackets Rate $42,707 or less 15% $42,708 to $85,414 22% $85,415 to $132,406 26% Over $132,406 29%
Post-mortem Income Splitting 2012 Tax savings of having income taxed in trust vs. at highest bracket Ontario Top Rate Tax on $132,406 at 46.4%: $ 61,450 Tax on $132,406: 43,350 Annual Tax Savings: $18,100 ACTION PLAN Visit lawyer Set up through will Establish multiple trusts one for spouse, each kid CIBC Trust as a trustee
U.S. Estate Tax Update Assume non-resident, non-u.s. citizen ( ALIEN ) U.S. situs property: U.S. real estate U.S. stocks NOT Cdn mutual funds that own U.S. stocks
Example Unified Credit - $5,000,000 (2012) Assume worldwide estate of $10,000,000 Arizona condo worth $1,000,000 U.S. estate tax U.S. situs asset $1,000,000 Tax = 350,000 (@35%) Before credit Unified credit = $5,000,000 $1,000,000 $10,000,000 $500,000 Net estate tax owing: $1,000,000 $500,000 $ 500,000 X 35% = $175,000
U.S. Estate Tax Action Plan Consider Canadian holdco to own U.S. shares Consider using Canadian trust to purchase property Possible to use partnership as well Visit US tax specialist
Tax & Estate Planning for HNW Clients October 11, 2012 Wood Gundy National Business Conference Jamie Golombek Managing Director CIBC Private Wealth Management