Spring 2011 Newsletter

This newsletter will address the topic of Estate Planning in general as well as uses of life insurance in Retirement Income Planning. However, I feel I must first address the earthquake and tsunami which recently occurred in Japan and has so dominated the headlines. The impact of this natural disaster will be felt for a long time and many of you may be wondering how it will affect your investments.

We must always remember in the midst of discussing economics that the deadly combination of a powerful earthquake and tsunami that hit the north-east area of Japan is first of all an enormous human tragedy. Secondly, that the Japanese people are extremely resilient and comprise a remarkable nation. Other commentators have written they will likely rise from this tragedy a stronger and more united country.

The Japanese economy makes up roughly 9% of the world economy which ranks it 3rdin the world China is in 2nd place and the U.S. is still ranked 1st. The area in Japan affected by the earthquake and tsunami comprises roughly 8% of the Japanese economy (TD Economics, “Observation” March 14th, 2011). They are currently dealing with the immediate devastation, disruption to electricity as well as the supply-chains to businesses and individuals for goods and services. Recovering from such disasters is not without precedent in Japan and the Kobe earthquake of 1996 is a good illustration of the nation’s ability to rebuild and the economic spin offs that resulted from the massive infrastructure spending that occurred. In the final analysis, according to Craig Alexander, Chief Economist TD Bank, the following impacts can be anticipated:

• The disaster has led TD Economics to cut Japan’s real GDP forecast for 2011 from 1.90% to 1.40%.
• Rebuilding will add to economic growth, lifting the real GDP forecast for 2012 from 1.60% to 2.00%.
• The financial impact of the natural disaster has proven limited, outside of Japanese equities.
• The fiscal cost of rebuilding will not create a sovereign debt problem for Japan.
• The near-term weakness in Japan will have a limited impact on the world economy, or the economies of Canada and the United States.

In summary, presuming that your asset allocation is appropriate and that you own high quality investments there is little to be gained from leaping in and out of the market in an attempt to avoid short-term losses. Stay invested and let time in the market increase the value of your assets.

Estate Planning
WAs you know accumulating sufficient assets to fund your family and business needs is only part of the overall cycle. Planning on how these assets will be distributed to the next generation is an important next step in this process. Hopefully you have structured your affairs so that this eventual distribution will be done in a tax-efficient and equitable manner with a minimum of delays. There are various costs associated with settling an estate and probate fees can be significant. In British Columbia probate fees are approximately 1.4% and are applied on the value of all your assets that are governed by your will.

On an estate of approximately $ 1,500,000 they can amount to $21,000, not an inconsiderable sum. Many people try to circumvent paying probate fees by placing their various assets in joint ownership, and while this can make perfect sense when structuring affairs between spouses, it can be problematic when doing so between children and a surviving spouse.

When assets are placed in joint ownership with rights of survivorship between two people the asset passes directly to the surviving person in the event of death. This passage is by operation of law and as a consequence the asset bypasses estate settlement and no probate fees are required to be paid. Any income tax owing on the deceased person’s share of the asset is triggered at this time and is the responsibility of the deceased’s estate. While this strategy has the advantage of saving on probate fees, several complications can arise.

The first problem is that having a second owner attached to the primary owner’s asset can compromise the latter’s ability to make decisions concerning that asset. Horror stories abound of aged single parents placing their house in joint name with a child only to be prevented from selling the house at a later date when the child doesn’t agree. There is also some question regarding the status of the exemption from income tax that a principal residence enjoys when a joint owner is named who already owns a principal residence.
The second issue that can arise is that the transfer of the asset to the surviving owner is not necessarily transparent or evident to the other siblings. While in some instances this can be desirable, in many instances it is not. This is one advantage of having an estate go through probate where the beneficiaries of the estate all receive a copy of the will and the executor is responsible for fully accounting for the value of the assets and the expenses in settling the estate. This complete transparency keeps “everyone honest” and is a good check and balance. Remember that even in very healthy families settling the estate of the last surviving parent can be very stressful and money and stress can cause strange behaviour at times. Having assets pass through probate also equalizes the estate’s tax burden since all of the taxes are imposed on the assets before they are distributed to the heirs. Contrast this with having assets in joint ownership where the asset passes directly to the surviving joint owner while the tax liability in the deceased owner passes to their estate which often results in an unequal distribution of assets to the heirs.

In summary, joint ownership of assets is not a panacea for addressing probate fees. Many heirs have rued the decision their parent(s) made to avoid probate fees via joint ownership of assets instead of simply leaving all their assets to pass through probate and pay the fees. Having made a strong case for having assets pass through the estate settlement process and pay probate fees, permit me to now outline where it may be preferable to have an asset pass outside the estate settlement process.

In today’s age of blended families and otherwise more complicated domestic arrangements, there can be instances where a person wants to have an asset go directly to an heir without anyone else knowing about it. If it passes through the estate it will become public knowledge as well as being subject to the Wills Variation Act. The Wills Variation Act allows wills to be challenged in court and overturned if they are deemed to not treat the heirs in an appropriate and equitable manner. Under this Act wills have been re-written by the courts overturning charitable donations and other wishes of the deceased. If there are any complicating factors or issues in your situation you may want to carefully consider the likelihood of there being a challenge to your will. If it is at all likely then you may be further ahead structuring either part or all of your estate to bypass the estate settlement process so as to avoid this costly and potentially divisive outcome.

Life Insurance in Retirement
Paying attention to your before and after-tax yield can make a big difference to your standard of living and this becomes particularly evident at tax time. Selecting investments that produce regular income such as dividends, interest, and income trust payments can significantly increase your spendable income and protect you from inflation. There is now a fairly good selection of investment funds with internal net yields (after all management fees have been deducted) ranging from 4% to 6%*. These are very effective at producing regular income and have proven more stable than investments that are solely focused on producing capital gains. I liken owning these investments to owning an apartment building; you keep collecting the rent from your tenants regardless of the market value fluctuations of the apartment building. Similarly, when you own income generating investments, their income is largely unaffected by short-term market volatility. Throughout 2008 when the markets experienced extreme volatility, high quality income producing investments kept paying their monthly distributions. Retirees that owned these investments continued to receive more income than they would have from GIC's and they now have more capital than they would have had they put all their money in GIC's. In addition, they would have paid less tax on their income than they would have on their GIC or Bond investments. *PalTrak as of January 31, 2011. **Please note that results are not guarantees of future performances.

Tax Season is around the corner
A little pre-planning can allow you to maximize your deductions and minimize your tax bill. Make sure you take advantage of the Medical credit deduction and claim all eligible medical expenses. If your mobility is an issue and you require improvements to your car and home remember that many of these costs are eligible to be deducted.

Income Splitting is a wonderful way to reduce your tax bill so make sure you split eligible pension income and Canada Pension Plan benefits with a spouse to ensure you minimize your overall taxes. If you are 65 or older and do not have a work pension and have not yet converted your RRSPs into a RRIF then you need to buy a small annuity or RRIF to generate $2,000 of annual income to be eligible for the Pension Income Credit.

RRSP contributions can significantly reduce taxes and even if you are no longer eligible for RRSP's, if you have a spouse age 71 or younger and have unused deduction room then you can make contributions to a spousal RRSP and claim a deduction.

Make sure you are taking maximum advantage of Tax-Free Savings Accounts. These are a wonderful vehicle for permanently removing tax from your investment income, but don't forget to pay attention to the return you are earning on your money. Too many people are earning savings account rates with their TFSA's when they could be earning much higher investment returnsAs most people approach retirement, they assume that the need for life insurance diminishes significantly. Interestingly, however, the largest purchasers of life insurance are people over the age of 60 who use it for estate planning reasons. Insurance can be useful for funding the income taxes that arise on RRSP’s, RRIF’s and pension funds when the last spouse dies; these taxes can be significant and can amount to roughly 42% of the total value of the plan. Another use is to fund the income taxes that arise from the capital gains on capital property; like a family vacation property, or other capital investments that have appreciated in value.

*Source: TD Mutual Funds Tax & Retirement Planning Guide 526982(1110.)

Although traditional family needs may no longer be a concern in retirement, many survivors are faced with significantly less income due to increased taxation and pension income reductions when their spouse or partner dies. Life insurance can provide an important source of income to offset this income decline. Other retirees use life insurance to guarantee an inheritance for their heirs or a charity so that they feel free to spend their assets during retirement. This is likely to become more popular as the projected rise in health care costs is anticipated to force governments to download more of the costs onto individuals further eroding their retirement assets. Finally, many retirees use life insurance in conjunction with a life annuity to increase their guaranteed after-tax income without diminishing their estate. This can be particularly effective if you are trying to significantly reduce reportable income to eliminate the claw-back of OAS benefits or increase the government subsidy for long-term care facilities.

Over the short and medium-term using insurance to fund these costs can result in very significant tax savings. Over the very long-term the costs of the insurance can approach the actual tax costs, but other estate planning advantages can still make this approach beneficial. Unfortunately insurance is one product you “buy with your health and pay for with your money” to quote my dad. This means that at some point all of us become uninsurable or highly rated. Practically this means that if you are over the age of 80 it likely won’t be a feasible solution unless you have a spouse much younger than you and the policy is a joint-last-to-die. Depending on the application, life insurance is usually feasible up to 75 depending on health, and perhaps to 80 depending on its use and the health of the individual. If you feel some of the situations outlined above apply to you let us know and we can arrange an appointment to discuss this aspect of your retirement planning.

Jeanne Bryden’s retirement
By now most of you will know that Jeanne retired this past September. It is difficult to put into words how special Jeanne is, but as clients you know. After almost 16 years with HFG she decided to join Murray in retirement so the two of them can enjoy it together. Keep an eye out - you may see them on a cruise like David, one of our clients, did over in Europe. Best wishes Jeanne for an awesome retirement and thanks for all the great years of first class service to our clients!

Welcome to Laurie Shumanski
It took a while, but we think we found a real keeper in Laurie. She comes to us with a background in banks and credit unions and is working hard to get up to speed on the administrative side of things. Her familiarity with financial institutions is evident and this is a great asset for our clients. When calling our office don’t be shy in asking for her help with your administrative questions.

Retirement Income Table:
The following figures are based on $100,000 and are paid monthly





This newsletter is provided with the understanding that it does not render legal, accounting or other professional advice. This information is provided for general education purposes and should not be considered as advice with regard to the purchase or sale of securities, which the members of Halsey Financial Group Ltd. and Assante Financial Management Ltd. are not licensed to sell. The information and opinions contained in this newsletter are obtained from various sources believed to be reliable, but their accuracy cannot be guaranteed. Readers are urged to consult their professional advisors before acting on the basis of the material contained in this newsletter. Commission, trailing commissions, management fees and expenses all may be associated with mutual fund investing; please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual funds, sales and advice provided through Assante Financial Management Ltd. . Financial planning and other services provided by Halsey Financial Group Ltd.

202-4450 Chatterton Way, Victoria, BC, V8X 5J2 Phone: 250-475-6700 Fax: 250-475-6777 Email: roda@halseyfinancial.com
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