Financial Planning, Investment Counselling, Tax and Accounting

Contents

Powers of Attorney
Income splitting using a spousal-loan
Insuring your early retirement plans

Powers of Attorney

by Thomas Ryan, CFP

I am often asked by clients about the need to draft Powers of Attorney, and the relative importance of these documents in terms of their overall financial plan. My answer is generally two-fold: properly drafted Powers of Attorney are a critical component of your estate plan; however, you are not likely going to suffer any adverse consequences as a result of inadequate planning, but your surviving loved ones may suffer immensely.

The recent tragic and very public case of Terry Schiavo, the Florida woman who had been in a prolonged vegetative state after heart failure, underscores both the need for a Power of Attorney as well as the adverse consequences that can result in the absence of clear instructions.

A Power of Attorney is a tool with which we can manage our affairs, through others, while we are still alive. A Power of Attorney is a written legal document in which an individual appoints an agent to manage his or her affairs under specific circumstances. A person who creates a Power of Attorney appointing someone to act on his or her behalf is referred to as the “grantor”. A person who is appointed to act on behalf of the grantor is called the “attorney”. This person is not the grantor’s lawyer but rather the person appointed to act for him or her under the specific circumstances you have laid out in writing.

There are two basic types of Powers of Attorney. The first is a Power of Attorney that deals with your personal property and financial assets, and appropriately referred to as a “Power of Attorney for property”. A Power of Attorney for property can be drafted to deal with a specific situation, such as the purchase or sale of a property while an individual is out of the country. Alternatively, the Power of Attorney can be drafted as an enduring Power of Attorney, which implies that the Power of Attorney would continue in full force during any period of physical or mental incapacity. In Ontario, this is referred to as a “Continuing Power of Attorney for Property”.

The second form of Power of Attorney is “the continuing Power of Attorney for personal care” also referred to as a living will. This document addresses personal care decisions including decisions about health care, residency, safety, hygiene and nutrition. By its very nature the Power of Attorney for personal care would only be relied upon where an individual is no longer capable of making personal care decisions for himself or herself. For this reason it is important that the document be clear on the issues of medical care and life sustaining therapy.

While the discussion and creation of Powers of Attorney may make us feel uncomfortable, they are extremely important instruments that will facilitate many unforeseen and critical issues if and when a crisis arises. Powers of Attorney are an important component to your personal and financial well being. They will help to safeguard your property and ensure that your personal wishes are carried out.

Income splitting using a spousal-loan

by David Burnie, CFP

Many years ago, high tax individuals were able to give money to spouses and children in order to allow them to generate investment income at lower tax rates. This included gifts made directly to individuals and gifts to family trusts.

The Income Tax Act now contains a number of anti-avoidance rules, generally referred to as the Income Attribution Rules. The purpose of these rules is to prevent higher rate taxpayers from shifting investment income to lower rate taxpayers, usually spouses or minor children. In 1985 the attribution rules were changed to attribute income from gifted funds as well. If the gifted proceeds are used to buy property, say shares of a public company or a mutual fund, the attribution rules would apply and the gift would be subject to taxation.

There is an exception to the attribution of income generated on borrowed funds, where the borrower is obligated to pay interest at a rate at least equal to the rate prescribed for income tax purposes (currently 3%). The interest must not only be payable, but must actually be paid, on or before January 30th with respect to the previous taxation year. No matter how insignificant, this interest must be paid by January 30th and a paper trail should be kept.

The prescribed rate for income tax purposes can change on a quarterly basis. This means that a high income individual can shift or lend investment capital to his or her spouse or minor children so that all income in excess of 3% is taxed in the hands of the lower rate individuals. The best part about the current low rates of interest is that the rate that must be set and paid, is fixed at the time into which the loan is entered. If a loan is entered into today and next quarter, or next year, the prescribed rate suddenly rises to the 1990 rate of 14%, the rate for the purposes of the loan will remain at 3%. This “Loan for Value” strategy will also be effective for shifting income by means of a loan to a family trust.

Insuring your early retirement plans

by Marc Lamontagne, CFP, R.F.P., FMA

Picture your golden years….now imagine if you fell ill or were in an accident before reaching your early retirement goal. A serious enough incident that could keep you off work for a least few years, or perhaps permanently.

Hopefully you would be covered financially because you most likely have disability insurance that will pay you an income of 60% to 70% of your pre-disability salary – enough to live on, at least until age 65 when the disability insurance stops. But what about those early retirement plans? Disability insurance is designed to give you enough income to live on, but it is not enough to continue to save for retirement. The reason is the insurance company doesn’t want you to be as well off as you were while you were working, because apparently that would be a disincentive to your return to work. Therefore if and when you do go back to work, you will have to push back that retirement date while you top up your retirement nest egg.

It doesn’t have to be that way. There are a couple of insurance products that you can buy to supplement your disability insurance, and insure your early retirement plans.

Critical Illness Insurance is similar to life insurance in that it pays you a lump sum benefit once you have been diagnosed with a critical illness. The difference is that you don’t have to die from this illness in order to collect. Most policies cover the big three: life threatening cancer, heart attack, and stroke. The good news is we're constantly on the threshold of medical breakthroughs. These advances in medical technology mean you're more likely to survive a critical illness that would have been considered fatal in the past.

As you recover from an illness, you will most likely be off work for an extended period time before returning to work. Critical Illness Insurance will pay you a lump sum amount of money on diagnosis, to spend as you wish. You can supplement your retirement savings, pay off your debts, or seek medical care out of country.

Either way the real advantage to this policy is you don’t have any immediate financial worries while recovering from a major illness. The downside is that it can be expensive the closer you are to retirement.

Retirement Protector, also know as Pension Guard, is similar to disability insurance in that it pays an income in case of disability, but with two distinct differences. The first is that the income from this policy and your existing disability insurance is not restricted to just 70% of your current gross income. The second is that you don’t actually get the income. It is deposited to a non-registered account and held there until age 65. At which point you gain access to the full amount.

The benefit to this type of policy is that it is relatively inexpensive, the downside of course is that it is of no use to you, no matter how significant your disability is, until you reach age 65.

If you’re going to work towards and plan for early retirement, it can make sense to insure those plans.