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Jason McKersie Summer 2010 Net Worth


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Quaterly Market Letter

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Jason McKersie Summer 2010 Net Worth

  1. 1. In this issue • Case Study: Using an Inheritance to the Best Advantage NetWorth • Registered Education Savings Plans • Take Action To Meet Your Retirement Goals Summer 2010 that offer varying degrees of protection for Is it Wise to Make Gifts property received by gift or inheritance. to Adult Children? This protection may apply to a property claim on marriage breakdown, or to a claim Parents often want their adult children to against the estate of a spouse. However, the benefit from their wealth today rather than statutory protection may not be sufficient having to wait for an inheritance. The because there are many exceptions and they decision to give to children must be made are strictly interpreted. In addition, children carefully after considering all the may move from one province to another, consequences and potential unforeseen making it uncertain what the applicable law events. Consider these factors: will be in the future. Transferring the gifted • Loss of control over the funds or property property to a trust is sometimes once they are gifted recommended. In addition to offering some • Future change to your health or financial protection from spousal claims, it can also situation prevent the child from voluntarily • Exposure of the funds or property to the transferring the property to the spouse. Jason McKersie children’s creditors, spouses or heirs Investment Advisor Alternate Strategies Tel: 416-359-5619 • Effect on the children’s work ethic or lifestyle You may decide to re-examine your intentions • Potential undue influence on you by the to make gifts to your adult children once all Anni Torma children to make the gift the known and potential consequences are Sales Assistant • Effect on the distribution of your estate considered. As previously stated, a good Tel: 416-359-4292 • Income taxes option may be to create a trust so that the Below are some answers to the most frequently property being set aside for the children can 1 First Canadian Place asked questions about gifts to children: still be used for the children’s benefit without 47th Floor, P.O. Box 150 complete loss of control. In addition, the trust How can I help my child purchase a home? Toronto, ON may protect the property from those making You can avoid some of the above pitfalls by M5X 1H3 claims against your children. Professional registering a mortgage against the property. advice is essential if the trust route is chosen The mortgage can be forgiven in your Will to ensure that it provides the appropriate Fax: 416-359-6144 or offset against the child’s inheritance. protection for your circumstances and avoids Toll-free: 1-800-263-1883 Will the gift be taxable? certain tax traps. You should seek independent Web: legal advice if you want to make large gifts to In Canada there is no gift tax but there is your adult children. A safe philosophy for capital gains tax if the gift consists of capital gifting to children is never give away anything property with an unrealized capital gain. that you may need or want back. Remember, Capital gains tax will also apply if the once the gift is made, there is no reversing it. capital property is sold to the child for less than fair market value. Your BMO Nesbitt Burns Investment Advisor can assist you in locating an estate Will my childs' spouse have a right to the planning specialist. gift in the event of marriage breakdown? Each province in Canada has different rules
  2. 2. NetWorth Summer 2010 education for the children and an active retirement. They were then shown how much of their income was going to taxes, servicing debt, savings, daily living expenses and discretionary spending. The review showed them that, although the inheritance would have a significant impact on their current lifestyle, they needed a realistic, long-term wealth management plan to ensure their assets will continue to be sufficient to support their goals. Building the Plan • A number of strategies were explained that would allow the Goodwins to make the best use of their income, as well as various options for their inheritance. These included paying off debt, funding education and retirement savings. The impact that each strategy would have on their short and long-term goals was then reviewed. • The Goodwins decided that the best approach would be to manage their cash flow by using part of the inheritance to pay off high interest rate and non-tax deductible debt and the balance to establish an investment portfolio using their personalized investment strategy. • The Goodwins are maximizing their tax-deferred savings and maximizing RRSP and TFSA contributions. They are also making RESP contributions for their children. • Until now, the Goodwins’ estate plan had simply named Case Study: Using an Inheritance each other as the beneficiary of their respective registered to the Best Advantage plans. The importance of a professionally prepared Will and Powers of Attorney to ensure that their wishes are Managing your wealth isn’t simply a financial exercise. It carried out should anything happen to either of them was requires an appreciation of your unique needs and an in- explained. A meeting was then set up with an estate depth understanding of your goals and dreams and how planning lawyer to prepare their Wills and Powers of these affect the people you care most about. Attorney, to discuss guardianship of their children, choice of executor and reducing taxes for the surviving spouse This case study provides an example of BMO Nesbitt Burns’ and children after death. comprehensive and personalized approach to wealth management and highlights just a few of the many ways in Upon receipt of their inheritance, a meeting will be set up to which we can help you to achieve your unique wealth ensure all the necessary paperwork is in order and finalize management goals. the various plans they agreed to put in place. Professionals in their mid-forties, the Goodwins enjoy a At BMO Nesbitt Burns, we can help simplify this very comfortable lifestyle. The investments they’ve made in their complex and important aspect of your life and ensure all own education have clearly paid off and they want the same your financial goals are expertly addressed. When you have opportunities for their children. While their incomes are questions or concerns, or an issue or opportunity that you high, money in the bank always seems to be low. They are want to discuss arises, you have only one call to make. striving to get their finances under control with more to show for their hard work. They are expecting to receive an Our process involves mapping out and managing an inheritance from a parent’s estate and want to make the individualized, comprehensive plan that addresses your most effective use of this money. unique needs, bringing in expert resources when needed and conducting regular reviews of your progress. This Assessing the Needs allows you to relax and enjoy life today, confident that your After conducting a thorough review of the Goodwins’ financial concerns are being fully addressed and financial position, they were provided with a clear picture of opportunities that could enhance your financial picture are their current net worth, the impact of the inheritance and being brought to your attention. where they stand relative to their key goals – university
  3. 3. NetWorth Summer 2010 Registered Education Planning Tips & Considerations: Savings Plans • A child may be the beneficiary of more than one RESP. While a post-secondary education is an invaluable personal If more than one adult is contributing to an RESP for a asset, it can be expensive to fund. Government cutbacks and beneficiary, ensure all of the contributions made to the inflation further undermine your ability to save for your separate plans for that child do not exceed the RESP child’s education. However, the good news is that CRA has lifetime contribution limits. Exceeding the limits will result significantly enhanced the Registered Education Savings in penalties. Plan (RESP) rules over the past few years. In addition to the • Open a family plan when possible in the event one child tax advantages, there are increased contribution limits, decides not to pursue post-secondary education. A family additional termination options and the Canada Education plan allows contributions to be made into one RESP for Savings Grant (CESG). all of the children. The main benefit of a family plan is An RESP is a tax deferral plan designed to help save for a that the RESP income does not have to be paid out student’s post-secondary education. The contributor to the proportionately between the beneficiaries. RESP is called the subscriber and the future student is the If one child does not pursue post-secondary studies, beneficiary. Although contributions to an RESP are not tax the other beneficiaries may use the income and CESG deductible, all of the income in the plan compounds on a tax (within their limits) for their education. deferred basis. In addition, there is also the CESG – a federal program that will deposit grants directly into your child’s RESP based on your contributions. Finally, when the hands as ordinary income (i.e. there are no dividend tax accumulated income and CESG are withdrawn from the credits or reduced capital gain tax rates). Generally, this RESP to pay for education expenses, the beneficiary student income would attract little or no tax if withdrawn over a few pays the taxes, not the subscriber. Withdrawals of CESGs years due to the student’s basic personal exemption and and the accumulated income are taxed in the student’s tuition and education tax credits. While most RESPs are set up by parents for the benefit of a child, anyone who wants to help fund someone’s education may set up an RESP, including grandparents, aunts, uncles, godparents and friends. You may even set up a plan for yourself. There are two types of RESPs: single beneficiary and family plans. As the name implies, with a single beneficiary plan there is only one beneficiary. You may name anyone as the beneficiary – any related or non-related child or adult, even yourself or your spouse. A family plan is one RESP that is set up for the benefit of more than one child within a family. Each beneficiary of a family plan must be related to the subscriber by blood relationship or adoption. RESP Contributions Your RESP contributions are not tax deductible nor are they considered taxable when withdrawn. The main reason for contributing to an RESP is that all of the investment income generated compounds on a tax-deferred basis. The tax- deferred compounding of income can result in substantial growth in the plan. When the income and CESG are paid out for education expenses – called Education Assistance Payments (EAPs) – the funds are taxed in the student’s hands and not the subscriber’s. To obtain the maximum benefit from an RESP and the CESG, it makes sense to start your savings program early. Together we can determine the best way to finance your child’s education and then develop a savings program that ensures you’ll meet your education savings goals.
  4. 4. NetWorth Summer 2010 Structure your portfolio asset allocation in a tax-efficient Take Action To Meet Your manner. If you have investment assets in both registered and Retirement Goals non-registered accounts, tax-efficiency planning is essential. Interest income, dividend income and capital gains are all As a result of the market turbulence in the past few years, taxed differently in Canada, so it makes sense to place the most many Canadians, especially those who are nearing retirement, heavily taxed assets inside tax-sheltered accounts (i.e. the are questioning whether they can afford to retire as originally RRSP and the TFSA) while leaving those that are more planned. To get back on track to ensure a financially secure favorably taxed in your non-registered accounts. retirement, here are a numbers of strategies you can consider: Extend your work life Save more, save smarter Canadians are living longer and healthier lives, and many of Saving more will certainly help, but getting the most out of them plan to work in some capacity after reaching traditional your investments is equally important. One sure way to grow retirement age to stay “mentally active”. Delaying retirement or your savings faster is to minimize taxes on your investment taking up part-time work during retirement can also be income. Here are some strategies you can consider: healthy for your pocket book, because: Maximize RRSP savings. The RRSP is the primary retirement savings vehicle for Canadians who do not have a pension plan • You continue to receive an income stream, which enables at work. Yet a recent study indicates that only one-third of you to delay withdrawing from your retirement savings. As a eligible Canadians make RRSP contributions; and of these, result, you can accumulate a larger retirement nest-egg; plus only 22% contribute the maximum allowable amount. If you you shorten the period during which you need to make have so far underused the RRSP, it is time to catch up! Because withdrawals from those savings. of tax-free compounding, even a small increase in your savings • If your investments have suffered during the recent market can make a big difference over an extended period. turmoil, the ability to leave them intact allows Make full use of the TFSA. Like the RRSP, the TFSA allows you to “sit it out” for market recovery. you to accumulate retirement savings tax-free. Even better, • If you belong to a pension plan at work, working the TFSA allows you to make withdrawals tax-free, and longer may result in a larger pension income when gives you complete freedom to decide when and how much you fully retire. to withdraw. These unique characteristics make the TFSA a valuable and effective tax planning tool in retirement, so To review your retirement plan and help you decide maximizing your TFSA savings should be a key part of your which of these strategies are most appropriate for you, M27050 02/10-472 retirement savings strategy. let's discuss. If you are already a client of BMO Nesbitt Burns, please contact your Investment Advisor for more information. The comments included in the publication are not intended to be a definitive analysis of tax law: The comments contained herein are general in nature and professional advice regarding an individual’s particular tax position should be attained in respect of any person’s specific circumstances. BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée provide this commentary to clients for informational purposes only. The information contained herein is based on sources that we believe to be reliable, but is not guaranteed by us, may be incomplete or may change without notice. The comments included in this document are general in nature, and professional advice regarding an individual’s particular position should be obtained. BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée are indirect subsidiaries of Bank of Montreal. “BMO (M-bar Roundel symbol)” is a registered trademark of Bank of Montreal, used under licence. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under licence. TM/® Trade-marks/registered trade-marks of Bank of Montreal, used under licence. Member-Canadian Investor Protection Fund