The “Total Return” Shell Game

No “Interest Rate Sensitive” Security is an Island…

Just what is this “total return” thing that income portfolio managers like to talk about, and that Wall Street uses as the performance hoop that all investment managers have to jump through? Why is it mostly just smoke and mirrors?

Here’s the formula:

  • Total Income + (or -) Change in Market Value – Expenses = Total Return — and this is supposed to be the ultimate test for any investment portfolio, income or equity.

Applied to Fixed Income Investment Portfolios, it is useless nonsense designed to confuse and to annoy investors.

How many of you remember John Q. Retiree? He was that guy with his chest all puffed up one year, bragging about the 12% “Total Return” on his bond portfolio while he secretly wondered why he only had about 3% in actual spending money.

The next year he’s scratching his head wondering how he’s ever going to make ends meet with a total return that’s quickly approaching zero. Do you think he realizes that his actual spending money may be higher? What’s wrong with this thinking? How would the media compare mutual fund managers without it?

Wall Street doesn’t much care because investor’s have been brainwashed into thinking that income investing and equity investing can be measured with the same ruler. They just can’t, and the “total return” ruler itself would be thrown out with a lot of other investment trash if it were more widely understood.

  • If you want to use a ruler that applies equally well to both classes of investment security, you have to change just one piece of the formula and give the new concept a name that focuses in on what certainly is the most important thing about income investing — the actual spending money.

We’ll identify this new way of looking at things as part of “The Working Capital Model” and the new and improved formulae are:

  • For Fixed Income Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money!
  • For Equity Securities: Total Cash Income + Net Realized Capital Gains – Expenses = Total Spending Money!

Yes, they are the same! The difference is what the investor elects to do with the spending money after it has become available. So if John Q’s Investment pro had taken profits on the bonds held in year one, he could have sent out some bigger income payments and/or taken advantage of the rise in interest rates that happened in year two.

Better for John Q, sure, but the lowered “total return” number could have gotten him fired. What we’ve done is taken those troublesome paper profits and losses out of the equation entirely. “Unrealized” is “un-relevant” in an investment portfolio that is diversified properly and comprised only of investment grade, income producing securities.

Most of you know who Bill Gross is. He’s the fixed Income equivalent of Warren Buffett, and he just happens to manage the world’s largest “open ended” bond mutual fund. How was he investing his own money during other interest rate cycles?

Well, according to an article by Jonathan Fuerbringer in the Money and Business Section of January 11, 2004 New York Times, he’s removed it from the Total Return Mutual Fund he manages and moved it into: Closed End Municipal Bond Funds where he could “realize” 7.0% tax free.

(Must have read “The Brainwashing of the American Investor”.)

He doesn’t mention the taxable variety of Closed End Fund (CEF), now yielding a point or two more than the tax free variety, but they certainly demand a presence in the income security bucket of tax-qualified portfolios (IRAs, 401k(s), etc.).

Similarly, the article explains, Mr. Gross advises against the use of the non investment grade securities (junk bonds, for example) that many open-end bond fund managers are sneaking into their portfolios.

But true to form, and forgive the blasphemy if you will, Mr. Gross is as “Total Return” Brainwashed as the rest of the Wall Street institutional community — totally. He is still giving lip service validity to speculations in commodity futures, foreign currencies, derivatives, and TIPS (Treasury Inflation Protected Securities).

TIPs may be “safer”, but the yields are far too dismal. Inflation is a measure of total buying power, and the only sure way to beat it is with higher income levels, not lower ones. If TIPS rise to 5%, REITS will yield 12%, and preferred stocks 9%, etc.

No interest rate sensitive security is an Island!

As long as the financial community remains mesmerized with their “total return” statistical shell game, investors will be the losers.

  • Total Return goes down when yields on individual securities go up, and vice versa. This is a good thing.
  • Total Return analysis is used to engineer switching decisions between fixed income and equity investment allocations, simply on the basis of statements such as: “The total return on equities is likely to be greater than that on income securities during this period of rising interest rates.”

You have to both understand and commit to the premise that the primary purpose of income securities is income production. You have to focus on the “Income Received” number on your monthly statement and ignore the others… especially NAV.

If you don’t agree with the next three sentences; if they don’t make complete sense: you need to learn more about Income Investing:

  • Higher interest rates are the income investor’s best friend. They produce higher levels of spending money.
  • Lower interest rates are the income investor’s best friend. They provide the opportunity to add realized capital gains to both the total spending money and total working capital numbers.
  • Changes in the market value of investment grade income securities, Yogi says, are totally and completely irrelevant, 97% of the time.

Take Jerry Seinfeld’s Estate Planning Advice

I did not interview Jerry Seinfeld for this article. But I can share with you what he taught me.

I was watching Jerry, the all-star comedian, on television.  The program host on an entertainment show asked celebrities about their New Year resolutions. Jerry’s answer was short. It was most appropriate. I am paraphrasing his answer.

“If something needs to be addressed,” Jerry said, “I address it right away. I don’t wait for the New Year to do it.”

This is great advice to apply to your estate planning. Let me tell you why.

Many people never find the time to make a will. They may think it is a chore like cleaning the garage or going to the dentist. However, making a will is the corner stone of your estate plan. Think of it as something you prepare for the people you leave behind.

Let me tell you about Beth. She became a victim because her partner Steven died suddenly at the early age of 54. No one, least of all Steven, expected that to happen. Steven never made a will. He always had it on his “I’ll get to it someday list.”

Almost every week I advise people like Beth. Someone close to them or a family member has died unexpectedly without a will or estate plan.

In Beth’s case, she learned the tragic consequences when Steven died without a will. She now had inherited all of Steven’s family and financial problems.

What is normal?

Normally, a surviving spouse needs time to deal with grief and financial issues. With a will, Beth could wrap up or settle Steven’s estate in six months to a year. In many cases, she would not hire a lawyer. No one needs to go to court.

But that did not happen here to Beth. Steven had no plan and no will for her.

Beth was a common law spouse who struggled with Steven’s adult children. She had trouble paying bills. She ran out of patience and money. The stepchildren wanted to know why Beth did not sell their father’s home. They wanted their inheritance. They saw a sale of the house as the quickest way to get it.

Beth and her bad news

I had to give Beth the bad news.

Since Steven had no will, his estate work will take longer. That means more delays and increased costs. It may take 2-3 years or more to wind up his intestate estate.

I had to ask Beth if she could afford to pay the mortgage, insurance and property taxes on the house. If not, how was she going to continue living there?

“Beth, you may need to go to court for financial assistance to pay bills. Steven’s children do not want you to use their father’s money to live in his house. They want you to move out so they can sell it. They do not trust you to do that.”

Beth wanted to know if she could use Steven’s money to pay bills.

“Steven does not have a will. He has no estate executor to handle his affairs. You need to agree with his children who will handle the estate. Since no one is named as Steven’s executor, the court must appoint one. Until someone is appointed you cannot access Steven’s investment accounts.”

I explained that the children and the ex-wife will each hire lawyers. They will all want a piece of Steven’s estate. Even if everyone agrees this could triple the legal costs. There could be a lawyer for each of the 2 children, the ex-wife and for Beth.

Not everyone may then agree. They could argue about who should be in charge of the estate. The legal costs would then increase tenfold. Instead of $10,000, each lawyer could cost the estate $40,000 in extra legal costs. You could see this number multiplied 10 times if everyone went to court more than once.

Who pays for Steven’s failures?

Everyone suffers differently because of estate delays.

And who pays for the legal trouble?

The court would say Steven created these legal problems. He failed to make a will and name an executor. Steven’s estate will bear the legal costs because he did not have an estate plan.

You do not have to be rich

Estate planning is preparation. Everyone needs to prepare for the inevitable.  You have to prepare a plan for the people you leave behind.

Make sure you get legal advice to make the right choices.

Don’t wait for next year to make a will.

The problems Steven created can take years and cost a fortune to resolve.

If you love your family, take Jerry Seinfeld’s advice.

Don’t wait to make your will. Do it now!

Edward Olkovich (BA, LLB, TEP, and C.S.) is an Ontario lawyer, nationally recognized author and estate expert. He is a Toronto-based Certified Specialist in Estates and Trusts Law. Ed’s law firm website is MrWills.com © 2014

Executors Need Answers to These Questions

Executors are eager to get off to a good start. They dive into estates. However, they need to test the water before jumping in head first. They can avoid grief with proper legal advice. I am an estate lawyer and start by asking executors these ten questions. My advice always depends on the answers I receive.

1. Is there a possible will contest?

Can the will be contested by a disgruntled beneficiary or relative? If the answer is yes, a court can stop you from acting as executor. You then have no legal authority to act if the will is contested.

Lawyers can advise executors if wills meet the formal legal requirements. If they do not satisfy these tests a will is not valid.

Even a will that’s missing a few words can create problems.

Recently a will ended up in court. Chuck, the will maker, gave away cash gifts of $5,000 to each grandchild. But Chuck forgot to state who would get the balance of the estate. Because the will failed to give away the estate residue a court case was started.

These problems can lead to a day in court before a judge. Possible will challenges affect how executors handle their estate work.

Read Bad Legal Advice Costs Executors Plenty

2. Was there a divorce or marriage?

A divorce or marriage can cancel or change certain will terms.

You must know if a marriage or divorce occurred after the will was signed. This can cause an executor to play detective searching for clues. Where is the divorce decree? Who was the divorce lawyer? Was there a court order for support?

3. Are there written agreements affecting the will?

These legal agreements can conflict or change the terms of the will. It is important to review any legal contract including:

• separation agreements,
• prenuptial, cohabitation or domestic contracts
• shareholder or business buy /sell agreements

Wills are often out of date. They may not reflect such agreements made after the will was signed. These agreements can change a person’s legal rights and obligations.

4. Are there other spouses?

Spouses or dependents receiving support have rights to trump a will. They can sue for more than what is in the will. Today, people can have several spouses.

Blended families are common. People cohabit and do not divorce. They can be separated from a legal spouse and also live with a common law partner.

If spouses are not provided for they can sue the estate. They can make claims to property and for support. These claims can override what is in the will.

5. Are all beneficiaries named in the will still alive?

Beneficiaries who were to receive a gift may have passed away. What happens then? Who gets the gift under the will?

Executors will need legal advice to answer these questions. This advice depends on local laws and the wording in the will.

6. Are there alterations on the original will?

Say someone scratched out the words “Janet Smith” on the will. They changed her name to “Janet Jones.” This change may affect the validity of the will and who receives the gift.

7. Did anyone already receive their gifts under the will?

What if Uncle Bob gave Ida a cheque for $20,000 in the hospital before he died? Was this the $20,000 Ida was supposed to get under Bob’s will?

Should you, as executor, give Ida another $20,000? How do you make sure you do not over pay Ida?

8. Were you given conflicting instructions?

Terry told you what he wanted you to do for his family. Terry’s will gave you different instructions. You were told to give all the jewellery to a favourite niece. However, the will does not specifically mention the jewellery or the niece. You can’t decide to do without legal advice.

9. Are any assets no longer in existence?

Uncle Bob also gave Ida his piano. However, the piano was sold with the uncle’s house. What happens when an item has been sold or no longer exists? The piano could have been given away before the will was read.

Does Ida have grounds to complain? Does the executor owe her a new piano?

10. Who owns any jointly owned assets?

What do you do with joint bank accounts or jointly owned property? Joint bank accounts are a nightmare. In many estate cases executors end up suing the other joint owner.

Things are not often as simple as they first appear. Executors may need to claim the property for the estate.

Summary

Executors need lawyers to answer these ten questions. Use an experienced estate lawyer before you make an expensive mistake.

Not all lawyers have estate experience. They may not understand why these questions matter

Executors may not realize what can go wrong. They need answers to such questions to avoid problems. Failing to get answers can derail an estate administration and put executors at risk.

Edward Olkovich (BA, LLB, TEP, and C.S.) is an Ontario lawyer, nationally recognized author and estate expert. He is a Toronto-based Certified Specialist in Estates and Trusts Law. Ed’s law firm website is MrWills.com © 2014

Read Bad Legal Advice Costs Executors Plenty

Use Checklists to Review Wills

The biggest benefit of having a will is peace of mind. You make your will to enjoy the benefits during your lifetime. Your loved ones also benefit from an up-to-date will. As I’ll explain, making a will is not a do-it-yourself project. I’ll also give you a checklist to keep your will current.

Everyone needs a will. It’s not just something you do when you get married or retire. There’s no reward in waiting to make a will.

Do wills and estate plans make a difference?

Ask a family member who suffered where there was no will. These families inherited problems because a relative did not make a will. They are the ones who will not understand why you don’t bother to make a will.

Benefits from Wills

• Income taxes can be deferred and not paid immediately
• Income-splitting devices can be used to minimize taxes
• You can postpone when beneficiaries inherit
• You can protect your assets from creditors
• Trusts can shelter and protect infants and grandchildren
• Wills can capitalize on new tax-saving strategies

Wills don’t cost money. They save it.

DIY Wills: Who Pays For Your Mistakes?

You may think making a will is not a big deal. You’re not a lawyer, so you believe you don’t have to get things perfect. But, unfortunately, the laws relating to wills are strict.

Judges often have no right to rewrite your will or correct it. Some jurisdictions do not allow a court to ignore even minor technical breaches in your will.

Here is what happened to Christy. Victor, her uncle, made his will from a computer program. Victor asked Christy to read a draft copy. She was surprised to read she was left a bank account and stock portfolio.

Uncle Victor was glad Christy approved of his will. He told her he would print out another revised copy and sign it before his surgery. Unfortunately, the surgery was not successful. When Victor’s will was read, Christy had another surprise. Victor had signed the will, but two lines were missing—the ones that included her gift. Had he not noticed there was a printer malfunction?

Christy thought she could use the draft will to prove Victor’s gift. Unfortunately, the courts have strict rules about repairing wills. Christy saw it only as a minor problem that needed to be fixed. The other beneficiaries who stood to inherit those assets disagreed. They said Victor’s omission was deliberate. The result was an expensive court case.

Everyone hired a lawyer and took sides. The results of the case vary depending on the jurisdiction where Victor lived. Christy may have been disappointed. She could face the cost of losing the case to boot.

What if Victor had seen the mistake before he signed the will?

Let’s say he did sign it—but in front of only one witness, not the two witnesses that the local law requires. Victor’s will would not be valid and no court could rectify that error. Getting only fifty percent (one out of two witnesses) is still one hundred percent wrong.

Use a lawyer to make your will. Lawyers can satisfy all the legal requirements for your will. When you spread the cost of your will over the years, it can be pennies a day. A court fight over your estate costs thousands of dollars a day in court.

Lawyers keep learning about constant changes to the tax and estate system. Why pretend you can get it right by yourself?

Do you already have a will? Use this checklist to make sure you are covered.

Your Will Checklist

Use this will checklist as your review.
I did confirm who will be my estate executors Yes / No
I did provide for my spouse in my will. Yes / No
I did name guardians for my minor children. Yes / No
I did a new will when my marital status changed. Yes / No
I did protect disadvantaged children and adults. Yes / No
I did prepare for the succession or sale of my business.
I did provide care for my pets and animals. Yes / No
I did support my charitable causes. Yes / No
I did keep a promise. Yes / No
I did consider my grandchildren. Yes / No
I did tell my estate executors where to find my original will, inventory of assets and liabilities and details for my digital estate. Yes / No

Yes is the correct answer to every question.

Read about digital assets at money.ca and mrwills.com.

The Simple Truth about Wills

• Wills transfer what you leave behind for your heirs.
• You have a duty to make your will.
• You should keep your will up to date.

About Ed

Edward Olkovich (BA, LLB, TEP, and C.S.) is an Ontario lawyer, nationally recognized author and estate expert. He is a Toronto-based Certified Specialist in Estates and Trusts Law. Ed’s law firm website is MrWills.com © 2014

Every Estate Plan Needs One

Making your will is the foundation for all estate planning. You may think making a will is not important. But your loved ones certainly suffer if you don’t have a will. Let’s look at some tricks and truths about making your will.

Perhaps you haven’t made your will because you are:

  • confused by all your options;
  • need more information to make better decisions; and
  • do not know how to ask for help.

Let’s clear some of these things up. Postponing making a will does not make things easier. So let me tell you the best trick to know about wills.

The Trick to Wills is Having One

Here is what I have learned and why you should listen to me.

Years ago I wrote a couple of Complete Idiots’ Guides for Canadians. I wrote about wills, estates and estate planning. I did media interviews and spoke to audiences across Canada.

I was also the founding chair of Ontario’s Make-a-Will Campaign. The campaign explained the importance of estate planning and charitable gifts. We explained the benefits of a lawyer prepared will.

I sponsored radio shows and answered callers’ will questions. I even named my law firm website mrwills.com.

I am frequently interviewed as a will and estate expert.

I know the difficulties people have understanding wills. Here are the three most common questions I am asked:

  • Why do I need a lawyer to make a will?
  • Why are wills so important?
  • Why do I need to change my will?

Find a Will Lawyer

You want to invest in a lawyer prepared will. You can find lawyers in every price range. When you spread the cost over 5-10 years, it is reasonable. Compare it to your monthly cable TV bill to prove it.

But make sure you do a little homework. You want to find the right will lawyer. You need to prepare before you meet with your lawyer. Ask the lawyer what you must bring to the meeting.

Do you really need to prepare for such a meeting? Wouldn’t you prepare for any important business meeting or presentation?

Preparation will save you time and money. You can then get the right advice.

Making a Will Is Important

Even if you postpone more extensive estate planning, you should make a will. It is the most cost effective way to protect your loved ones. Read more about what happens if you die without a will at mrwills.com. Look up intestate and intestacy problems.

Your will can later be revised. A full estate plan may include trusts for minor children or beneficiaries with special needs. You need to consider insurance, powers of attorney and planning to reduce taxes.

A will is the best way to protect your family and heirs. When you make a will you can:

  • reduce taxes your family must pay
  • arrange for the smooth transfer of property (a family business, summer home) from one generation to another
  • arrange for the orderly transfer of your assets in an inexpensive way
  • avoid unnecessary delays
  • reduce legal costs

Don’t Leave Things to Chance

Many people think their spouses or children will automatically receive all their property. This is not true.

What happens if you die without a will? Honestly, you leave your loved ones with more pain. I have seen it add years of extra legal work in an estate.

Think of the added problems you create by not having a will. No one can sign your tax returns or confirm your funeral arrangements. How does anyone get access to your private information?

Unless you have a will and name an executor or estate trustee, no one is in charge.

In some cases, almost half of your estate can be eaten up by taxes. Unnecessary costs and delays can eat up even more.
All of these problems can be avoided. You can do it by investing in a will today.

What You Need to Know

Wills are not cut in stone so they are easy to change. You’ll want to update your will whenever you experience changes like:

  • you move to a new jurisdiction (provincial laws are different)
  • your relationships change (you marry, separate or divorce)
  • your assets change (you inherit or start a business)
  • the law changes your tax or financial obligations
  • you need new guardians, beneficiaries or executors

Wills are the cornerstone of your estate plan. If you do nothing else to protect your family, at least make a will.

A professional will is always your best investment.

You can’t afford to have an amateur make your will.

I hope this information helps you make your will.

You can get started right now.

The truth is it’s never too soon to make your will.

The truth is that simple.

Ed Olkovich

Edward Olkovich (BA, LLB, TEP, C.S.) is a Toronto estate lawyer and nationally recognized author. Ed is a Toronto based Certified Specialist in Estates and Trusts. He can be reached through his web site, MrWills.com © 2014.

 

When does not spending $150.00 cost you more than $6,000.00?

Six years ago, Al went to see his lawyer. A widower in his late 70s, Al had been advised to update his Will after his wife Gloria had passed away. He thought this made sense and off he went. The lawyer did his job properly and professionally and the new Will has duly prepared and signed.

Al and Gloria had 3 children – 2 daughters and a son. The eldest daughter (a single parent) Tracey had a daughter named Cheryl. Tracey sadly had passed away shortly after her mother from cancer and Cheryl was left on her own, is now living on the fringes of society and is rarely in touch with other members of the family. Al’s other daughter is Tess and she ended up leading a very challenging life filled with drugs, alcohol, one abusive husband and a series of less-than-ideal boyfriends and live-in partners. She also has had to deal with significant emotional and intellectual challenges and her only source of legitimate income is a tax-free disability pension from the government. She currently lives (rent free) in Al’s residence because Al is no longer legally competent and is in an extended care facility. She says she stays there so she can be close to Al but the reality is she is sponging off Al since he can’t do anything about it and Tess, challenges aside, knows a good deal when she finds one. Her boyfriend-du-jour spends his time dealing soft-drugs and working part-time as a mechanic.

The son, Bruce, got involved off-the-grid very early in life and now in his mid-50s, is a hard-drug addict, has AIDS and lives and feeds his own habits by stealing (including from Al) and selling drugs. He disappeared in mid-2013 and hasn’t been seen or heard from since that time but he did take Al’s debit card and emptied Al’s account to the tune of over $8,000 over 4 weeks. He was living with Al before he went into care for the onset of dementia and Al trusted him with his card – and unsurprisingly, this trust was betrayed.

And NO, I am not making up his situation – just the names – the circumstances are exactly as described – unfortunately.

When Al had his Will re-done, the lawyer and Al’s financial advisor told him he needed to establish an Enduring Power of Attorney for personal care, property management and healthcare. Al agreed, but he never took this step because he didn’t feel he could name either of his surviving children – Tess and Bruce – or his grand-daughter Cheryl, and with good reason. But now…

Since Al is no longer legally competent the problem rises. Who makes his decisions and manages his property? What about his investments, his pension income, his personal assets, the level of care that can be afforded? Bruce can’t be found, Tess is not capable and the Office of the Public Guardian and Trustee would fight any attempt by her to be named a guardian. Cheryl is not appropriate either, even if we could locate her. So now what? Fortunately Al’s financial advisor is also a friend and stepped up to apply to be appointed as his Committee in court, with Al’s and Tess’ agreement and the support of the OPGT.

Once the Committee process started, a cousin of Al’s (named Jeff) was located and has joined the application as a co-Committee to act jointly with the advisor. Al is very lucky to have two people willing to take on this task of managing his personal, financial and health care affairs – but the cost of applying for Committeeship has now exceeded $6,000.00 and is not finalised yet – and this cost will come from Al’s assets as part of standard Court rulings in cases such as this.

Al knew his advisor and friend and cousin Jeff would have agreed to be joint-attorneys and guardians if he had only asked and redone the rest of the documents. But Al didn’t want to impose and didn’t want to burden them with the unique circumstances of his family. Admirable thoughts of course, but now the reality of avoiding that decision has hit home, all for the sake of about $150.00 six-years ago.

Are your plans for personal, financial and healthcare up-to-date AND properly documented?

You Need to Answer These Estate Planning Questions

Why do you invest your money? My guess is so you don’t have to stay up at night worrying about it. Money makes a difference in your life. You need it to protect yourself and your loved ones.

But who will protect your family and your money when you are gone?

Everyone can remember when an uncle or aunt died without a will.  You saw what happened to your relatives.  It was a costly learning experience that may still have painful memories.

Your money and your family may also be at risk. All it takes is a bad estate plan.

Sure, you may think a bad estate plan is better than no plan. A bad estate plan is good for the tax department and court lawyers. It is never good for your family. It is a bad investment that too many people make. Only your family really suffers and regrets your failure to make a proper estate plan.

You work hard for your money. So invest in professional estate advice to create a proper estate plan.  If you think you don’t need help, see if you can answer these 12 estate planning questions.

Estate Planning Quiz

Answer either Yes or No to each question. Count the “Yes” answers.

Are you sure you don’t need professional advice to get the right answers?

12 Estate Planning Questions You Need to Answer

  1. Do you know who should be the beneficiary of your RRSP, RRIF, annuities, life insurance policies, and tax-free savings accounts?
  2. Is putting assets into joint ownership with your relatives a good idea?
  3. Should you make bank accounts or your family home jointly-owned?
  4. Do you have a simple probate tax saving plan you can follow?
  5. Are you sure you have the best succession plan for your business?
  6. Is your will up to date with the right executors and backups?
  7. Have you set up a trust in your will for minor children?
  8. Did you set up a trust for beneficiaries with special needs?
  9. Have you provided for ex-spouses and your common law spouses?
  10. Is your cohabitation or prenuptial agreement still valid?
  11. Have you got the right kind of life insurance?
  12. Is your will up to date and can you find the original?

If this were a game, 7/10 correct answers may be a good score. In real life, however, one mistake can be a tragedy for your family.

It’s never too early to write your will. Get a professionally prepared will and help avoid real tragedies for your loved ones.

Keep Your Promises

Didn’t you promise this was the year you would get around to:

  • making a will;
  • getting powers of attorney; and
  • figuring out what happens to your business when you are gone?

Learn more about estate planning by reading my free ebook, Estate Planning: 7 Keys to Success. Visit www.EstateTherapy.com.

About Ed

Edward Olkovich (BA, LLB, TEP, and C.S.) is an Ontario lawyer, nationally recognized author and estate expert. He is a Toronto based Certified Specialist in Estates and Trusts. Edward has practiced law since 1978 and is the author of Executor Kung Fu: Master Any Estates in Three Easy Steps. Visit www.ExecutorSchool.com. © 2013

 

The Real Reasons not to do any Estate Planning

Honestly, I know you have good reasons for not making an estate plan. Some reasons raise legitimate questions of strategy and importance. Let me give you the answers you need to take action.

I’ve heard plenty of excuses over 30 years as an estate lawyer. Procrastinating tops the list. I’ve prepared a list of excuses that may ring a bell with you. But I have gone a step further. I’ve countered each excuse with tips to help you.

Look at this list and check off how many of these excuses you have used.

Excuse 1. I don’t know how to get started to make an estate plan.

“What is an estate plan after all? How much is it going to cost me? Where am I to go to begin? Is it really necessary to see a lawyer?”

Answer: It does not matter how you start. Everyone needs a basic plan. You need a will and powers of attorney. These will protect your family and money. Start with creating these documents as your first goal. Then you can adapt and build from that foundation.

Making a will is simple. The government has a will for you if you fail to make your own. The government rules are inflexible. You can find your brother, who you haven’t spoken to in years, gets everything. Is that your choice? Is that where your life savings should go?

Do you want to decide who gets your money and when? Make a will.

You can put the right person in control of your money. You get to name your executor when you make your will.

Excuse 2. I don’t know the best way to give all my stuff away.

“I expect to spend all my money before I go. Why should I bother making a plan? My family gets along. Everyone should just be able to work things out without me.”

Answer: Once you are out of the picture all bets are off. Family members can stop talking to one another when they fight over the contents of your home. Who is to get the piano, mom’s rings or dad’s medals?

You do estate planning for the people you leave behind. They need your instructions to be set out in your will.

Excuse 3. I don’t have a clue how to reduce taxes.

“The whole tax idea is too hard for me to figure out. There are probate taxes, income taxes and more. I don’t want to see an accountant to figure this all out.”

Answer: It is true. Your largest tax bill is due when you die. It only makes sense to try to lower that bill if you can. A good estate lawyer can explain the best ways to save taxes. This is part of any estate plan.

You can make sure you pay less in taxes. You then leave more of your money for people and charities. I’ll continue this in the next post.

Related Post:

The 7 Biggest Estate Planning Blunders to Avoid

Edward Olkovich (BA, LLB, TEP, and C.S.) is an Ontario lawyer, nationally recognized author and estate expert. He is a Toronto based Certified Specialist in Estates and Trusts. Edward has practiced law since 1978 and is the author of seven estate books. © 2013

Everyone Has A Will

Here’s why.

There may be 56% who have no signed will but there are 0% who have no will at all.  In Ontario, the succession law reform act provides a will for you and there are similar acts in every other jurisdiction.

There is our government working on our behalf again.  If you need it, they provide it.

The will they provide for you may not be exactly the same as the one you would draw up for yourself.  In fact I would estimate that the probability of your creating their will, by choice, is about 1 in a million.  Maybe even less than that.  Their idea of fair is a little more aimed at pleasing everyone possible.  And, of course, it will cost more and take longer.

Most jurisdictions have their own rules so you you should ask a lawyer what your particular rules are.  In Ontario your will looks roughly like this:

I require the court to appoint an administrator for my estate

I require the administrator to post a bond of two times the value of my estate

I require that the administrator make no effort to reduce any income taxes that I may owe as the result of my death.

I instruct my administrator to take no care to keep assets in specie even though my family may prefer that treatment.

I instruct my administrator to make no effort to consider what the heirs want of my assets in settling the estate.

I instruct my administrator to make no effort to complete their task expeditiously.  Certainly not in less than one year.

I instruct my administrator to be very cautious about interim distributions

I instruct my administrator to pay all liabilities including taxes and to sell whatever assets will sell easiest to provide any cash my estate may need.

As to distributions of what remains, I instruct my administrator to:

  1. Transfer $200,000 to my spouse.
  2. Divide the remaining 2/3  as follows.  If one child 50-50 with spouse.  If more than one child then 1/3 to spouse the remainder equally to the children.
  3. In the event any child is less than 18, I instruct the public trustee to hold the assets for that child until their 18th birthday and then to deliver the assets to them intact.
    1. An illegitimate child is a child for purposes of distribution.
    2. A predeceased child provides complications too.

It is not impossible that this will would work out, but that is not the way to bet.  Many people who own complex assets do not have wills.  They are looking at higher than needed tax and other costs and will likely have no described plan that suits their own ideas.

If you have assets are even slightly  more complicated than a home in joint tenancy, a small RRSP, and a bank account, seek the services of a knowledgeable attorney.

Oh, why restrict it!!  Talk to any attorney.  Even an attorney who won their law degree in a poker game two weeks ago could draft a more appropriate will.  And while there, notice that 71% of Canadians have no powers of attorney.  Address that too.

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.

Suddenly you are an Executor!

After his sister’s death, Andrew suddenly realized he was the Executor of her Will. He figured she must have asked him about it at some time, but he’d forgotten about it. Now he had to find out what Executors are supposed to do. Their responsibilities and duties scared him at first, because he found he has to:

• Find his sister’s original Will and establish that it’s her “last Will and Testament”;
• Determine the provisions of her Will;
• Learn about his sister’s financial affairs;
• Locate all of her assets, both personal and business;
• Arrange for the continuation or sale of her business;
• Make sure that all assets are safe from loss or damage;
• Arrange to have the assets valued;
• Arrange for the sale of assets, if necessary;
• Pay all debts and claims;
• Make the most advantageous income tax elections to benefit the estate and its beneficiaries;
• File the necessary Income Tax and GST returns;
• Obtain clearances from the tax departments;
• Establish any trusts dictated by the will; and
• Distribute the remaining assets to the beneficiaries.

At first this looked overwhelming, and he thought of resigning. But he discovered he could hire professionals to assist him with the legal, tax and investment aspects of the estate to make sure that it is handled properly. After all, he may be held personally responsible for his actions if he makes a mistake.

So if a relative or friend asks you to be her or his Executor, take it seriously, and discuss with them beforehand the various things that should be done to make your job as easy as possible, such as:

• Having the Will professionally prepared. Do-it-yourself Wills have disclaimers stating that the publisher of the Will kit is not responsible for the validity of the Will you prepare from it. An improperly prepared Will can cause more grief, delays and expenses than not having a Will at all.
• Getting a copy of the Will, and knowing where to find the original. This lets you know its terms and conditions, and allows you to discuss any problem areas with the Testator (the person whose Will it is) while he or she is there to explain it. Advance knowledge minimizes surprises and costly delays.
• Getting a list of the details of the estate. Finding out about ALL its assets, and their locations; and all certificates, identification documents, bank accounts, safety deposit boxes, key locations, credit cards, loans, mortgages, leases; life, disability, group, property and casualty insurance; securities and investments; real estate holdings; business agreements; medical and professional advisors, etc.

As you discover the amount of work that you, as Executor, have to do you may want to suggest that the Testator name some additional Executors to spread the load and responsibilities.

You should review your Estate Plans before discussing it with your Executors!