As you accumulate wealth and financial assets, it’s essential to protect what you have earned and saved. Putting a financial strategy in place that reflects your legacy goals can help protect your assets from unnecessary loss through taxation or misfortune. Here are some strategies that may be beneficial to you and your legacy:
1. Power of Attorney (POA) for Property
A POA for Property is a legal document, signed by you, giving one or more persons the authority to manage your financial affairs for you, if you cannot do so yourself. In Quebec, this document is called Protection Mandate (formerly Mandate for Incapacity). POAs can give your assigned representative access to funds in your bank accounts and the authority to sell your property. For obvious reasons, it’s important to choose someone who is highly trustworthy to play this role on your behalf.
2. Family Loans
Properly structured family loans are an efficient way of lending money to a family member. If you want to help one of your children with purchasing a home, for example, consider putting a lien on the property’s mortgage. This will give you a claim on the property in the event that your child has a marriage breakdown. Alternatively, you can forgive the loan at the time of your death without any tax consequences for anyone.
3. Discretionary Trusts
A trust allows individuals to separate the use and enjoyment of the trust assets from their legal ownership. A trust is created when an individual (e.g., a parent) transfers assets to the trust. The trustees (e.g., family members) then administer these assets on behalf of the beneficiary (usually the heirs). Assets can include investments, shares of private companies, vacation property, and other family assets. Trusts are an excellent way to transfer wealth to family members while maintaining influence/control over the assets through use of the trustees. For some family business owners, trusts can play an important role in managing business succession planning, as they can provide an efficient means to transfer wealth to the next generation.
4. Use of Beneficiary Designation (not applicable in Quebec)
One of the unique benefits of a registered savings plan (i.e., RRSP, RRIF, LRIF, or LIF) is its ability to designate how your investments are transferred to your beneficiaries upon your death. Specifically, the assets held within such accounts can be transferred directly to the beneficiary you designate, bypassing your estate. If your beneficiary is your spouse, the registered plan’s assets will automatically roll over to your spouse. The value of the assets are still to be included in your final tax return, but your estate legal representative will jointly elect to defer taxation, until your surviving spouse ultimately passes away. That deferral can mean significant savings if your spouse outlives you by a number of years.
5. Domestic Contracts or Prenups
Creating a marriage contract or a co-habitation agreement can help protect assets from a breakdown in relationships. People are becoming increasingly pragmatic about prenuptial agreements, realizing that having one in place doesn’t necessarily take anything away from the romantic nature of a relationship. You’ll want to find a neutral third party provider, such as a legal advisor, to make sure both people’s interests are well represented. The legislation around these asset protection strategies is always evolving, so it’s a good idea to work with an accredited financial expert to guarantee you’ve got the correct documents in place. And remember that it’s ideal to update your plan every three to five years in case anything has changed in your life situation.
Note that Quebec legislation differs in most cases. If you are a resident of Quebec, please call our Montreal office for province-specific information about asset protection strategies.
Emerita Mercado, CFP, TEP specializes in trust and estate planning issues. She helps clients protect their assets by setting up family holding companies, private foundations and family trusts as a means of intergenerational wealth transfers. Emerita also collaborates with families and executives to create dynamic total wealth management solutions.
These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.