Strategies

Ten strategies to build and protect your familys wealth

Most Canadian millionaires take a modest view of their financial status, viewing themselves as financially secure rather than rich or wealthy.

Regardless of how you view your financial status, if you are responsible for $1 million or more in household financial assets, you have specific concerns not shared by the average Canadian family. You have a higher tax burden and a larger investment portfolio to manage. You may also have unique concerns such as:

• Dealing with multiple real estate properties, possibly located in different countries
• Maximizing a complex executive compensation package
• Raising financially responsible children in a privileged environment
• Selling or transitioning your business
• Transferring family assets to the next generation while keeping taxes to a minimum
• Making the most of your philanthropic legacy

To help you address these unique concerns, there are certain strategies that usually dont apply to the average Canadian family, such as:

• Income-splitting strategies that can save a family of four up to $45,000 in taxes annually
• Donating securities with significant capital gains to qualified charities without paying capital gains tax
• Insurance-based strategies to cover large tax liabilities your estate would otherwise have to cover out of pocket

To help wealthy families address the unique issues they face, we recently published a comprehensive guidebook, Family Wealth Management: Ten Strategies to Build and Protect Your Familys Wealth. This special issue of Portfolio Advisor summarizes the key strategies discussed in this guide. For a complete copy, please contact us today.

Wealthy families have unique concerns, but they also have unique opportunities. Following are 10 key strategies to help wealthy families stay wealthy.

Strategy 1: Comprehensive financial planning

When you have above-average financial assets, you also need an above-average financial plan. With your familys more complex financial situation, you have a wider range of concerns than the average Canadian family, such as coping with your higher tax burden, managing a larger investment portfolio, dealing with multiple properties, or addressing your philanthropic desires. With a comprehensive financial plan, you can address these various concerns, and identify strategies to protect and enhance your familys wealth. This type of plan goes beyond the simple retirement savings and income projections provided by your standard financial plan. It encompasses all aspects of your financial affairs, including: cash and debt management; investment planning; tax, retirement and estate planning; and risk management. The steps usually include:

• An in-depth discovery discussion to learn about your personal and family goals
• Financial projections based on your current financial situation
• Key recommendations
• Financial projections based on implementing those recommendations
• An action plan

Strategy 2: Consolidation of assets

Wealthy investors sometimes open multiple investment accounts of the same type with different financial institutions, believing it to be an effective way to diversify their investments. By diversifying your investments, you can reduce risk. However, diversification is really about how you invest your money not where you keep it. Investing through multiple accounts, rather than helping you diversify, can actually have the opposite effect because its more difficult to get a clear idea of how youre investing your assets.

Contact us to find out how a comprehensive financial plan can benefit you and your family. There are many other reasons to consider consolidating your assets with one trusted advisor instead. These include:

• Reduced costs. With many investment programs, fees are on a sliding scale. The more assets you have in the program, the lower the fee.
• Simplified administration. Its easier to keep track of your investments with fewer account statements and tax forms.
• Easier estate settlement process. Your executor has one point of contact, making things easier for them during a difficult time.
• More efficient retirement income planning. With an understanding of all your different income sources, its easier for your advisor to determine how you can maximize your after-tax retirement income.

Strategy 3: Teaching your children financial responsibility

Many people who have built substantial wealth have done so through hard work. Because of this, they appreciate the value of money. However, they may be concerned that their children or grandchildren, being raised in a more privileged environment, may not share their values. If youre concerned about raising financially responsible children, there are a few strategies that can help. One strategy is to provide a reasonable allowance for spending, saving and sharing with charities. This helps children learn valuable budgeting skills, understand the value of saving for the future and develop a social conscience. A reasonable allowance might be one dollar per week for each year of age. Another idea is to set a family monthly or semi-annual budget that accommodates reasonable activities and purchases for the entire family. If your child asks for something thats not in the budget, you can say that it will be considered for next time.

We can help you determine if you can benefit from a consolidation strategy.

Strategy 4: Effective use of surplus assets

Like many people with above-average financial resources, you may have surplus assets that you will never need during your lifetime. Instead of continuing to expose these assets to your high tax rate, consider ways you can protect them. Three options include:

1. Making lifetime gifts to low-income family members. If the family member is under 18, they will be taxed on any capital gains at their lower tax rate. If they are over 18, they will be taxed on any income generated by the assets, again at their lower rate.

2. If there is an insurance need, put assets into a tax-exempt life insurance policy, where the income they produce grows on a taxfree basis. When your estate is settled, this income is paid to your beneficiaries as a tax-free death benefit.

3. Donate publicly listed securities that have appreciated in value to qualified charities without paying any capital gains tax.

Strategy 5: Risk management

You have worked hard to accumulate your wealth, so its important to protect it from the various risks that are a part of life.

1. Risk of lawsuit

Above and beyond purchasing liability insurance, you can protect your surplus assets in several ways. These include: giving them to a family member, transferring them to a trust, sheltering them within a creditor-protected life insurance policy or, if you own a business, within a holding company.

2. Risk of market downturns

Diversifying your investment assets is the main way to reduce this risk. In addition to the traditional diversification techniques (by asset class, geographic area and industry sector), some families with $1 million-plus investment portfolios diversify with alternative investments such as hedge funds.

Contact us for more information on how you can protect your surplus assets.

3. Risk of income loss

Ensure that you have adequate disability, critical illness and long-term care insurance to protect you and your family against the risk of temporary or permanent income loss.

Strategy 6: Vacation home planning

If you own a vacation property, there are many issues to consider, especially when theres family involved. One issue that can often be a source of family conflict is how to pass along the vacation property to your children. By planning ahead, you can maintain family harmony, while potentially reducing taxes. Here are some strategies to consider:

• Give the property to your children through an inter-vivos family trust to defer future capital gains tax and avoid probate tax.
• Take out an insurance policy to cover capital gains taxes triggered by the disposition of the property when your estate is settled.
• Create a co-ownership agreement establishing the ground rules when more than one child will own the property.

Strategy 7: Charitable giving

Here are a few ways to make the most of your charitable gifts:

• When you donate publicly traded securities that have appreciated in value to a qualified charity, you no longer pay any capital gains tax. Plus, you receive a donation receipt equal to the fair market value of the donated security.
• Establish a charitable foundation to create an enduring philanthropic legacy. A private foundation gives you a high level of control and flexibility, but there are ongoing costs and administrative requirements. A public foundation is a more convenient alternative for those who prefer less day-to-day involvement.
• Donate a life insurance policy that funds a very large payment to your chosen charity for a relatively small outlay of cash.

Contact us for assistance with risk-management strategies.

Ask us for for more information on how you can create an enduring charitable legacy.

 

Strategy 8: Testamentary trusts

A testamentary trust created through your Will enables you to provide your beneficiaries with income tax advantages they wouldnt receive with an outright inheritance. The income your beneficiaries earn from a testamentary trust is taxed on a separate tax return at graduated tax rates. On the other hand,the income from an outright inheritance is taxed as part of their regular income, potentially bumping them to a higher tax rate, which can result in less after-tax income. In addition to the potential tax advantages, there are other reasons to consider a testamentary trust. For example, you may set up a testamentary trust for a disabled family member or minor child specifying certain conditions, or to ensure children from a previous marriage receive their inheritances.

Strategy 9: Family income splitting

Income splitting is an effective way to reduce your familys overall tax burden for two key reasons:

1. With Canadas graduated tax rates, you pay a higher tax rate as your income increases.

2. Every Canadian resident can earn about $9,000 tax-free due to the basic personal tax credit. By shifting income from a high-income parent to a low-income spouse or child, a family can realize tax savings of up to $15,000 per year (varies by province). If there are four members in a family,the potential tax savings could be as much as $45,000 annually.

 

Strategy 10: Business succession planning

If you are planning to pass along your business to the next generation, here are some strategies that can help:

• Determine which child is most interested and most capable to lead your business. Once youve made your decision, have your chosen successor gradually take on more responsibility and meet key business contacts at least five to 10 years before you transition out. Let your chosen successor lead the succession plan, as this often results in a more successful transition.
• Create a financial plan incorporating strategies such as Individual Pension Plans, an estate freeze to minimize taxes, a shareholders agreement, and insurance to cover unforeseen events or fund buy-sell arrangements.

Ask us for for more information on business succession planning.

_{This newsletter is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member CIPF. Insurance products are offered through RBC DS Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. When providing life insurance products in all provinces except Quebec, Investment Advisors are acting as Insurance Representatives of RBC DS Financial Services Inc. In Quebec, Investment Advisors are acting as Financial Security Advisors of RBC DS Financial Services Inc. RBC DS Financial Services Inc. is licensed as a  financial services firm in the province of Quebec. Registered trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under licence. Copyright 2007. All rights reserved. VPS40597}