A “Perfect” Tax

I suppose that only some have heard of Morton’s Fork. Be aware, a version of it may appear soon.

Archbishop of Canterbury and later Cardinal, John Morton was Chancellor of the Exchequer under King Henry VII. He developed a unique way to determine who should pay taxes. If you had an ostentatious life style, you should pay taxes. If you did not have the lifestyle, you were obviously saving money and so could afford taxes. It seems there were few that did not fit the criteria, and while it may have been unfair, the plan did get the country out of the debt that arose under Richard III.

Modern governments might like that. Do we know, today, of any governments that need to get out of debt? Maybe several.

What they need is a perfect tax. Since income taxes already gather in large amounts from those with the ostentatious lifestyle, we can leave that side alone. But what of the frugal and tax wise. How are we to capture their necessary contributions for the treasury? By a tax on their estates of course.

Why is an estate tax a perfect tax? It meets all of the political requirements of a perfect tax:

  1. It applies to only a few people. Make the threshold $2,000,000 or so and only a tiny minority will need to pay. Even at $1,000,000 it would eliminate a lot of estates.
  2. Rich people can afford it, or so the government will say.
  3. It is imposed while money is moving around. It is like a payroll deduction. You don’t really notice it as much as writing the checks.
  4. It meets the “social justice” sophistry that all the money people make and keep is dependent on society and this is just a way to pay for that infrastructure.
  5. The people who owe the tax are dead and therefore without political influence.
  6. It would raise a lot of money.

How much would it raise?

The income from the Liquor Control Board of Ontario, and the Lottery Corporation together is around $3 billion per year. What would you need to believe to get that much from an estate tax? This is a guess, but if we assume that in Ontario, the Estate Administration Tax (EAT) is around $150,000,000 now then a tax rate averaging 30% would raise $3,000,000. If we believe, as Barry Corbin does that a lot of EAT revenue has been avoided by careful planning, then the rate might be considerably less. See OBA Re EAT. If the base is really 3 times bigger as he suspects, then 10% might do. The estate tax base will be much more difficult to avoid than is the EAT base.

No matter how you look at it, and whether the income is $3 billion or even half of that, it is unlikely the government will leave it alone for long.

The current wisdom is that there is $1 trillion to transfer in the next 20 years or so. It is not hard to imagine that governments, both provincial and federal, will want some, maybe a lot of it. I am reliably informed that the federal government has it on their agenda and my imagination is not good enough to expect that the province does not.

No estate tax ever appears without a complementary gift tax.

As well, estate taxes tend to materially reduce estate liquidity and that can cause forced sales of non-liquid assets. Accordingly, forward defensive thinking will be important.

Bear in mind that it is never good to panic, but if circumstances force you to panic, then panic first.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Gresham’s Law

Gresham’s law is commonly stated as “bad money drives out good money.”

It seems to be a universal truth.  If you have $20 gold coins circulating along side $20 paper bills, you will find the gold coins disappear into a safety deposit box and the paper money is spent.  People believe good money is worth more.  Pretty simple really.

In retirement though, many people lose track of the idea and they sometimes preserve their bad money and spend their good money.  Even in the absence of gold there is still a distinction.  Good money is money that is worth full value.  100 cents per dollar.  Bad money is worth less, maybe much less.  In many cases, you will find that spending a RRIF quicker than mandated by the tax rules is a good idea.

By definition a RRIF is “bad money’ because before you can use the money, you must give up a share to the government.  Same in your estate.  It is reasonable to believe that a RRIF dollar in your estate is worth no more than 52 cents.  While living, it could be as little as 48 cents if OAS clawback is a problem and it may well be for a surviving spouse.

For the majority,  tax on RRIF income is 35% or less.  The dollars taxed at 35% are better than dollars taxed at 48% to the estate or 52% to a surviving spouse.  It would take a long time for the tax deferral advantage to make up the difference.

Consider the case where a couple has income of about $120,000 between them.  If one dies, then RRIF income to the survivor can easily cost 52%  when the OAS Clawback is included.  Income for the survivor will probably be about 25% less (assumes some pensions) than the total before and the tax bill will go up.

Your reasonable strategy then is to spend bad dollars before good dollars.  RRIF first, usually spread out to about age 80 to 85, then other investments, while being sensitive to tax, then the TFSA, and finally assets held inside life insurance plans.

Under this method the assets left in your estate will be worth closer to 100 cents per dollar and your spending while alive will be after a tax rate you can manage.  You will need to a long term income projection to get the time and the mix right.

An easy estate optimization plan.  Plus it will give you greater flexibility should you live a very long time.  The dollars left for you to use later are close to 100 cent dollars.  If you need to spend money at an advanced age taking $1,000 from a TFSA is about the same deal as taking $1,900 form a RRIF, so you don’t need so many dollars working for you.

Work it out, it can easily matter.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Insurance Poor??

Somebody is always insurance poor.

It could be your future self or estate who is insurance poor because the claim received for your death or disability is too small.   Alternatively, it could be your present self who has to come up with the premium each month.

People tend to get his wrong because they don’t analyze the problem very well.  The present self uses hyperbolic discounting to estimate the value of the future benefit.  The current premium seems to be worth more, so the present self feels hard done by if they pay.

There are many excuses that help justify the behaviour.

My favourite, “Every morning I get up and say, ‘Good thing I didn’t buy insurance yesterday, because I didn’t need it,’  I have been right way more often than I have been wrong”  The future self is going to lose big while the present self wins small.

I would be willing to wager that the Harvard Business School does not teach their MBA students that win small / lose big is a good strategy.

Some people don’t like life insurance because, “It is like betting against the home team.”

True in a way, but again the present self is putting their feelings in opposition to the needs of the future self.  The reality is that the present self could afford the loss of the premiums and the future self cannot afford the absence of the claim.  Clearly one or the other is going to lose.  Support the one with the bigger loss.

You can be insurance poor but only if you have covered risks that don’t exist, have failed to cover risks that do exist, have mismatched the product and the problem, or if you have covered things that are certain to happen.

In the last case, you are paying the claim plus the insurer’s overhead.  Think $0 deductible dental plans.  The claim is certain, the premium will be more than the claim because the insurer has overhead to recover and a profit to make.  For a single person, a deductible results in a premium reduction that is greater than the amount of a small deductible.

Talk to a professional, they can help you sort out the real issues.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

The Soft Side of Estate Plans

There are several types of assets people deal with when they build their “estate plan.”  It is a mistake to deal with all of them in the same way.

In the beginning, you can simplify the process by separating the assets into two types – ones that are fungible and ones that are not.  Fungible means that they are replaceable with an identical example.  $100,000 is money.  Money is fungible.  A bank account, a GIC and a marketable bond are all the same thing.

Fungible assets are easy to deal with.  Add them up and divide.  Nobody really cares where money comes from.

Non-fungible assets are more difficult.  They are not replaceable, and they frequently have an emotional component.  We see it with the family cottage.  A cottage worth $750,000 after taxes does not “mean” the same thing as $750,000 in bonds.  There are problems when all of the children want it.  There are approaches to that.  The approaches work better if they done early rather than after you are gone.

Parents need to spend time working on this part of their estate.  Non-replaceable assets fall into two types.  Monuments like the family business or family farm, and heirlooms like the cottage, the art, the piano, the jewelry.  Who gets grandpa’s family photo album or the family bible?

Your purpose is to enhance the family as a whole.  To provide intergenerational emotional content to what you and your forebears have built.  To preserve important memories.

There are multimillion-dollar estates that have led to bitterness because no one worked through the emotional assets.  Most of these were inconsequential in the financial sense.  Try to deal with a monument or heirloom so that the eventual owner will be the one who will derive the most satisfaction from possessing it.

Trust your children to help find the solution on these things.

You need to do so because you probably do not know how they think about the heirlooms and monuments.  You definitely do not know how they relate to their siblings about them.  Chat with each.  Invite them to meet with their siblings.  Later host a family meeting to clarify preferences and wishes for you and to present you with the disagreements that have arisen.

You should make the final decisions.  Please do so.  It does not work as well when you abdicate that responsibility.  Even the ones that do not agree with your decision, will go along more readily if they think you did your best to make things work out for everyone.

Being fair does not necessarily mean equality of money.  Being fair means the result is equitable.  It is “equal enough” and heirs have the things they value the most.

Guaranteeing the preservation of family history is an important part of your responsibility.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.  don.s@protectorsgroup.com

Your Estate Planning Obligations: Key #5

Jack worked hard to earn his money as the owner of a small printing business.  He had a common estate planning misconception. Jack said, “I can do whatever I want with my money!”

Do you think Jack is right?

You may not realize that people can challenge what you do in your will.

In some jurisdictions, judges can basically rewrite your will. This can happen, for example, if Jack fails to honour his legal and even moral obligations.

Normally, such obligations extend to his:

  • married partner
  • dependents
  • children or
  • common-law spouse

Marg was Jack’s common-law wife for 12 years before he died. She was financially dependent on him. After Jack passed away, she had to raise their children.

“Jack promised me I would never have to worry about money,” she said.

Don’t forget your legal and formal obligations when you write your will.

Marg was not provided for in Jack’s will. She had to sue Jack’s children from his first marriage to get support.

Can you guess who paid for all the lawyers?

Provide for Your Beneficiaries and Dependents

Ignoring your legal obligations will waste your money on court cases, lawyers, and delays. It can lead to Executor’s Disease,™ where your executor gets caught in an estate lawsuit. Read more about this in my free eBook Executor’s Disease™ .

You need professional advice to avoid conflict, grief, and trips to the courthouse. Click to tweet this.

In some cases, an inheritance must be held in trust to protect minors or those who are vulnerable. Your executor keeps assets safe for their benefit.

Successful estate planning also includes taking care of yourself.

Next I’ll unravel the secrets to powers of attorney.

See my related blog posts:

Successful Estate Planning Key #1

Estate Planning Key #2 Major Tax Traps

How to Prepare a Proper Will Quickly: Key #3

About Ed

Edward Olkovich (BA, LLB, TEP, C.S.) is a nationally recognized author and estate expert. He is a Toronto estate lawyer and Certified Specialist in Estates and Trusts. Edward has practiced law since 1978 and is the author of seven books. Visit his website, mrwills.com, for more free valuable information.

© Edward Olkovich 2012


Easy to Use Estate Planning Solutions

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Have you used these excuses to put off protecting your family?

1. I don’t want to think about death

It may be frightening, but it’s inevitable. So why wait? It never gets easier if you get sick or older.

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A quick read can save you a lot in legal fees. Finish reading in the time it takes to drink a coffee. Then you can find the right lawyer.

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Don’t know when to make changes? Yes, I’ve got clear answers for that, too.

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Cheap quick fixes never work in the long run. Your estate legacy lasts forever. Click to Tweet

 8. I’m too busy

Don’t keep waiting for the time to be right. Not having a will is like driving the family car on a flat tire. You put loved ones at risk. So fix it now and don’t ignore estate planning.

 9. Everything in my life keeps changing

You buy a home and have a family and business. Would you not get insurance to protect both? Estate planning does that. It insures everything that is valuable to you.

 10. It can be expensive

Prevention is always cheaper than making an expensive mistake. Planning is the best and cheapest treatment.

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 Feel free to share these valuable tips with your family and friends.


Peace of mind is a great joy, not an expense.

 See my Related Posts:

 1. Target Your Estate Planning Resolutions

2. Estate Planning Extras to Consider

3. Estate Planning Questions Lawyers Ask In Private

 About Ed

Edward Olkovich (BA, LLB, TEP, C.S.) is a nationally recognized estate expert. He is a Toronto estate lawyer and Certified Specialist in Estates and Trusts. Edward has practiced law since 1978 and is the author of seven books. Visit his blog, mrwills.com, for more free valuable information.

© Edward Olkovich 2012