The Royals: Putting together the final plan

In this, the last of a three-part series based on the IAFP Symposium Case Study, AER concludes what must be addressed with the Royal Family, in relation to a comprehensive financial plan. In this, PART 3, we mention all remaining considerations of their plan and include options, ideas and solutions submitted by readers for the case study.

If you are interested in commenting on any of the suggestions provided, or offering an alternative solution to the Royals’ financial plan dilemma, please email: editor@advisorsedgereport.com.

PART 3: FINAL CONSIDERATIONS CHARITABLE GIVING After a great deal of discussion with their financial advisor, the Royals are much clearer on what they would like to happen to their estate after they are gone. They appreciate that certain trusts and intentions must be set up and communicated while they are still alive to ensure that their desires and legacy are carried out.

However, there is a final aspect of their plan to be addressed: how will they choose to distribute their wealth, given the charitable intentions they have expressed to their financial advisor?

“The Royals need to be told that should they want their children, or a particular charity, to benefit from their estate there are a few ways to go about this,” says Jamie Golombek, managing director, Tax & Estate Planning, CIBC Private Wealth Management.

The first is to simply gift a sum of money, a property, or a portion of shares. “Gifts are tax-free,” says Golombek “There is no gift tax and the Royals can give as much as they want with no obligation to record the gift on the tax record.”

However, a snag to this approach is that accrued gains are taxable, says Golombek. “For example, if the Royals had a cottage and decided to gift to a child, the Royals would be subject to the capital gains tax on the appreciation of that gifted property. The capital gains would need to be paid for the tax year in which the gift was made.”

In relation to the U.S. property and shares, various RFPs attending the symposium suggested that the Royals could opt to gift the U.S. portion of the company, thereby mitigating any taxable gains on the corporation’s shares. Other suggestions included gifting the Arizona condo – an option that would trigger U.S. gift tax, one that is significantly less than U.S. estate tax. However, these considerations need to be thoroughly examined by the financial advisor and must be viewed in context with the Royals’ overall financial plan.

Golombek also strongly recommends that all clients give shares or mutual fund holdings to charity, rather than writing cheques, to save the capital gains tax on appreciated securities donated to charity.

Finally, Gregory Swanson, a Regina- based lawyer with McKercher LLP, suggests the Royals offer their antique tractor collection and the quarter section of farm to their municipality. “By donating to a municipality, the Royals exempt themselves from the tax on the accrued gains of the donation. If they were to make the same donation to charity, they would be responsible for those taxes.”

If, however, the Royals decide to make these gifts while they are still alive, Swanson suggests that first they execute Enduring Powers of Attorney that include specific provisions regarding the gifting of part of their assets to charities.

Swanson concedes certain court rulings have enabled a POA to act upon the past practice of the grantor in relation to donations, but this practice has run into diffi- culty in court on more than a few occasions.

“It is now recognized that while a power of attorney is important to ensure a grantor’s wishes are carried out, a POA cannot offer gifts unless specifically instructed to do so in the Power of Attorney, which is a separate and distinct document from the will. That requires Liz and Phil to include specific clauses in their POAs – specific clauses for the POA to follow.”

THE PAPER TRAIL While a great deal of discussion has taken place in relation to Phil and Liz’s desires and goals, in the end it all has to boil down to action. One method of establishing a list of financial planning action steps is to start by compiling basic paperwork, such as the will, Powers of Attorney, a list of assets and health-care directives.

“Before taking instructions, it must be clear to the lawyer that Liz and Phil are competent to complete these estate planning documents. Phil needs to identify: the nature and size of the property he owns, the people who expect to benefit from his estate, the actual beneficiaries and their bequests and the types of claims – legal or moral – that might be made against the will,” says Swanson.

By doing this legwork, Phil will establish his capacity to make informed decisions and will lay the groundwork for completing these estate planning documents. In order to do so, Kim S. Korven, a colleague of Swanson’s at McKercher LLP, suggests the financial advisor meet with Phil alone.

“By meeting with him alone you can ensure that Liz is not answering for him, and assess whether he is competent. You can also discuss his relationship with his doctor, to solicit whether or not a medical consultation regarding competency is required, as a lack of competency can arise from different reasons that a doctor can comment on,” says Korven. During this private meeting, it’s important the advisor obtains consent from Phil to communicate with his doctor. Once the advisor has this consent, the advisor may contact the doctor. “There are benefits of involving the doctor,” explains Korven. “You learn the underlying reasons for Phil’s forgetfulness,” a concern Liz expressed during discussions with the Royals. “And you may learn if there are certain times of the day when Phil is more lucid. As long as a person is lucid at the time he or she gives instructions and signs the will, the person is deemed competent.” Also, by involving the doctor, and understanding more about your client, there will be less chance of someone successfully contesting the will, explains Swanson.

Once it is concluded that Phil is competent, a meeting needs to be set up to discuss and take instructions regarding wills, Powers of Attorney and health-care directives.

CHOOSING POAS In addition to their wills, Phil and Liz also need to turn their attention to Powers of Attorney, says Swanson. In choosing who will be able to make decisions regarding their assets and person while they are still living, Swanson advises Phil and Liz to opt for a person who knows their values and who can understand information relevant to making decisions regarding property and financial affairs (or personal affairs, if the case warrants).

Given the complexity of the estate, Swanson also suggests not relying upon general POAs, but to use specific POAs instead. By using specific POAs, the chosen attorneys can “deal with their areas of expertise.” For example, Chuck could be named the POA for the Canadian portion of the business, Andy the POA for the American portion of the business and Billy, Chuck’s eldest son, could be the POA for all other estate matters. To ensure that not one person has complete control of any one portion of the estate, Swanson suggests that Eddie, or a non-family member, could be named as a joint attorney to any or all of the POAs above.

HEALTH-CARE DIRECTIVES If the Royals decide to complete “living wills” (otherwise known as Health Care Directives), the Royals have two choices regarding format. They can either sign a statement of their intentions, or they can appoint another person to act as a proxy in making health-care decisions. The benefit of a statement of intention is that it “makes it easier for family members to make difficult decisions and prevent family fights.” On the other hand, the benefit of a proxy is that the document is much more flexible and can continue to reflect the benefactor’s changing wishes. If Liz and Phil do decide on a proxy, Swanson suggests naming one another, while offering an alternate, in case of incapacity or death of the proxy. Either way, both the statement of intention and the proxy are documents requiring Phil and Liz to state “one’s wishes regarding medical treatment,” and will only be used if or when a person is unable to communicate or lacks capacity.

• For example, in Saskatchewan a Health Care Directive is effective when the person who has made it: Cannot understand information relevant to healthcare decisions (even in relation to proposed treatments that may arise);

• Cannot appreciate the reasonably foreseeable consequences of his/her decisions; or

• Cannot communicate a healthcare decision on a proposed treatment.

In Saskatchewan, a doctor is not bound to follow a Health Care Directive. If the Royals want to ensure that their wishes are followed, it will be prudent for them to provide their family doctors with a copy of the document and to discuss their wishes with these professionals.

OVERALL PLAN POINTS • Develop discretionary trust and put all estate assets into this trust. This will protect the Royals’ estate from spouses or other claimants other than their children. • Roll the U.S. company into the Canadian company in order to avoid U.S. estate tax. • Include a hotchpot clause to take into consideration advances of the estate made to heirs while the parents are still alive. • Bequest the estate fairly, not equally, taking into consideration the sweat equity invested by family members. • Avoid splitting the business up equally among the heirs and creating a shareholder board. This could jeopardize the continued operation of the company and could, potentially, erupt into difficulties if heirs do not agree on business decisions. • Need to focus on how to obtain the retained earnings from the business in order to pay for Liz and Phil’s retirement, while ensuring their desire (to leave the business as a legacy to their children) is achievable. • Use charitable donations to the advantage of the Royals, taking into consideration the lack of tax owing to land donations made to a municipality and the tax benefits of in-kind charitable donations. • Need to address the U.S. holdings, including the condominium in Phoenix, AZ. If not, the Royals will be subject to U.S. estate tax, which could be substantial. • Try to convince Liz and Phil to openly communicate their intentions with their children – explaining the rationale for their bequests. This may reduce or eliminate heirs contesting the will. • Call in the expertise of a family therapist or professional trustee if family dynamics create problems for clear, informative communication during the financial planning process. • Use separate and specific Powers of Attorney when deciding who should have authority to make decisions regarding the estate if Phil and Liz become incapacitated.