In this article, Heather Rennie discusses how financial, retirement and estate planning can help preserve clients’ wealth for future generations.
Many Canadians might be happy to save just enough money to pay for their retirement and leave something for their children. A growing number of Canadians, especially wealthy ones, may want their money to last longer than one generation.
They could have businesses that they want their grandchildren to run or they’ve accumulated enough wealth that, if managed properly, could help several future generations of family members or charitable organizations.
The odds, however, are against them. Wealth erosion affects 90% of family fortunes because of these main culprits:
- bad investment decisions
- natural reduction of assets
- young family members who aren’t prepared to handle the responsibilities of taking care of wealth.1
Canadians who want to make their money last for generations will need to plan carefully. They must protect their money from taxes, fees, inflation and potential estate problems — and it’s important to keep assets growing.
Over the next 10 years, $750 billion will move from baby boomers to the next generations in Canada’s largest ever transfer of wealth.2
As your clients become wealthier, their focus changes from wealth generation to wealth preservation. Tax and estate planning, as well as family legacy discussions, can protect that wealth from rolling from one generation to the next. Those who don’t plan ahead and create a clear road map could lose a lot of money in the transfer.
Here are some strategies for helping ensure clients’ money will last for generations.
1. Set goals
Outlining clients’ investment goals is key. The returns they require set the stage for their plans and the risks they’re prepared to accept.
If clients want their money to last for several generations and for the many branches of the family tree who will have their own children, they’ll need to invest differently from methods they’d normally use when transferring money to their immediate children.
2. Create a framework
One way clients can make their money last is by putting assets into a trust. The trustee, an individual or firm chosen by clients, can then direct how to invest the money according to clients’ wishes. This can help safeguard the money from heirs who might make investing mistakes.
One type of trust is a bloodline trust, where money or assets pass down to blood relatives only, and trust assets can be protected from creditors or divorce. Assets in trust that are not created as part of a will can also bypass probate.
The trust holder can establish careful parameters around payouts. For instance, trust beneficiaries may get different sums at different ages, such as 18 and 25, or they may be required to complete university or reach other milestones intended to protect them and their money. An experienced lawyer should draft the trust to make sure that any requirements in it can be enforced. Benefactors don’t want that large sum causing more harm than good.
3. Diversify investments
Diversity is a key consideration for the asset mix in the investments that are part of clients’ legacies. Suggest clients put money in a diversified portfolio that crosses different geographical and industry sectors.
Income-producing investments such as bonds can be effective for retirement income, but may have limited value for building a legacy — at least until funds start being withdrawn.
Keep fine-tuning the structure of the estate and the asset mix and make sure clients talk to their heirs about money, including how to share and protect it.
4. Guaranteed products
Many benefactors with a moderate-sized nest egg find that guaranteed investment funds (GIFs) — also called segregated fund products — can offer the security they want.
Insurance companies manufacture and sell GIFs. They resemble mutual funds in that they offer market-based investments, but as an insurance contract, they come with added guarantees. These guarantees can provide guaranteed income and a guaranteed amount to beneficiaries or to the contract holder at maturity or death.
Risk-averse investors — clients who don’t want to lose their money — may want GIFs in their portfolio. With GIFs, the market value of their investment can go up or down, but a portion of the principal is guaranteed, usually at maturity and death.
As well, because these are insurance contracts, they offer potential creditor protection that clients can’t receive with typical non-registered investment products.
GIFs also offer estate planning benefits. If clients have a named beneficiary, then at their death, the contract’s death benefit will be paid directly to that beneficiary, similar to life insurance. The money will not pass through the estate, so it will not be subject to probate. The settlement then stays private, the wealth transfer process is quick, and additional legal and accounting fees aren’t incurred.
5. Tax efficiency
The income certain GIFs contracts provide can help clients pay less tax. And the less tax clients pay, the more money that’s available for their legacy.
Each income payment for non-registered contracts is considered a withdrawal from the contract, so it’s taxed partly as a return of capital and partly as a capital gain.3 Capital gains are taxed at a lower rate than ordinary income. For people who receive Old Age Security (OAS), the income payment can also help by minimizing the “clawback.” The government reduces OAS payments if clients’ incomes exceeds a certain amount.
GIFs can also be structured to create a do-it-yourself pension. Defined benefit pensions enjoyed by earlier generations are becoming more and more rare. A smart retirement savings strategy may be to hold a GIF contract with a deferred guaranteed income option in a TFSA. Most working families focus on company pensions or RRSPs; withdrawals from these are fully taxable and may trigger significant tax liabilities during retirement and at death. Receiving a portion of guaranteed income from a TFSA provides tax-sheltered growth as well as tax-free withdrawals.
6. Wealth transfer
Talking about the products and strategies available for legacy planning is one thing; talking about family relationships is another. Initiating sensitive and difficult conversations with clients and their families about money and inheritances isn’t easy, but it’s your opportunity to be their legacy advisor. Cultivating relationships with multiple generations is the key to creating lasting client loyalty and deepened trust.
Helping families remain whole and harmonious after clients pass away will help you become the trusted family wealth advisor. One expert says you should spend as much time preparing heirs to receive wealth as you put into investing and giving advice about their parents’ wealth.4
The following four-step approach can cultivate multi-generational conversations and lasting legacy plans:
- Understand family dynamics.
- Meet the children.
- Transform heirs into clients.
- Set the legacy plan in motion.
With so much money transferring from one generation to the next, now’s the time for you to enter the legacy discussions. Help your clients make their money last for generations by setting goals, creating a legacy plan, choosing diverse investments, providing products with guarantees and looking for ways to increase tax efficiency.
To learn more about intergenerational wealth transfers, legacy and tax planning, retirement planning, and financial planning, contact a member of your Sun Life wealth sales support team.
Contact your Sun Life relationship manager to get started on Sun Life Financial’s exclusive intergenerational wealth planning program.
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1 Augusta Dwyer, “Why wealthy families lose their fortunes in three generations,” Globe and Mail, May 17, 2018.
2 “The Looming Bequest Boom – What Should We Expect?” CIBC Capital Markets. June 6, 2016.
3 Note that when units run out, we treat the whole part as a capital gain.
4 Dwyer, Globe and Mail, May 17, 2018.