Tax-efficient strategies for high-net-worth families

04 November 2018 by National Bank

Planning is essential for HNW investors. Here’s how tax and insurance strategies can ensure your wealth is preserved for future generations.

High-net-worth (HNW) individuals face a different set of financial challenges and opportunities than most other Canadians. Typically, their concerns are less about funding their lifestyle in retirement and more about about how to protect and grow their wealth and pass it on to the next generation.

“Questions we commonly deal with are, ‘What’s next? What’s the end game?’” says Patrick Gervais, principal director of National Bank’s Private Banking 1859 division. “‘Where are the kids going to school? Are we putting in a family trust? Is there a sibling that needs to be taken care of?’ The big advantage these people have compared to the vast majority of us is that they have options.”

With a goal of estate and wealth planning rather than financial planning, the focus for HNW families is on utilizing tax strategies and insurance products to ensure the wealth is efficiently passed on to family members, says Mr. Gervais.

“It is figuring out, ‘What is the estate plan? What is my succession plan? How am I going to transfer these assets and who am I going to transfer them to?’” he says. “The key is working through the trusts and holding companies and using these corporate structures to minimize the fiscal impact and transfer as much money as possible in a structured and planned way.”

Mr. Gervais says that one issue facing some HNW investors is the hit to their investment income because of historically low interest rates, which has dramatically lowered their returns from fixed-income investments. Options to alleviate this problem would be to look at alternative wealth strategies including insurance and annuities to complement the existing portfolio.

“That can be a very interesting strategy because with an insured annuity, we manage longevity risk and generate guaranteed income,” says Mr. Gervais. “If you have a $3-million fixed-income investment portfolio, you can use $500,000 of that when you are 70 years old and buy an annuity and make it estate-neutral with life insurance. It diversifies your fixed-income portfolio and levels off your income in a very tax-efficient manner.”

Insurance can also be a tax-efficient way to ensure wealth is passed from the estate to heirs. That’s why HNW individuals often rely on insurance to pass on wealth far more than average Canadians, notes Mr. Gervais.

“When a modestly-wealthy individual passes [assets] on to the next generation, there is often estate depletion because of taxes and other factors. With high-net-worth families, when they make that inter-generational transfer, their actual net worth will pick up,” he says.

“It is not magic, it is just that they purchased a significant amount of insurance to cover taxes and figured out that getting a six to eight per cent equivalent return [using an estate bond] with no risk is not a bad trade.”

Mark Goodfield, an accountant and partner with BDO Canada LLP, says that a key difference between HNW Canadians and the general public is the time frame they work under.

“They don’t have any worries about working through their money, it is what is going to happen with all the money that they do have when they pass away,” he notes.

Mr. Goodfield, who also writes the Blunt Bean Counter Blog and is author of the book Let’s Get Blunt About Your Financial Affairs, says that the HNW group often has the ability to use corporate-funded insurance (either universal life or whole life policies) to insure the lives of the owners of the corporation. It’s a tax-efficient way to pass on wealth to heirs when compared with leaving that money in regular investment portfolios.

“They are often getting significantly more funds to their estate because of that,” he says.

However, Mr. Goodfield points out that the Canada Revenue Agency (CRA) intends to pare back the advantages of this strategy next year, just the latest change as the CRA and HNW wealth advisers engage in a long-running taxation tug of war.

To ensure they get the best advice and a holistic approach to estate planning, Mr. Gervais notes that most wealthy individuals and their families typically assemble of team of experts in fields such as accounting, law and insurance. It is the job of wealth planning experts like those at Private Banking 1859 to orchestrate the efforts of this team to provide the best result for the client and extended family.

“It is a much more complete service,” says Mr. Gervais. “We work with and integrate with these professionals, figure out and quarterback the plan and then work with these people on execution.”

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