The Valued Advisor Program Sheffar Potter Muchan Inc. February 28, 2007 EFFECTIVE ESTATE PLANNING TECHNIQUES A CASE STUDY AND OPEN DISCUSSION Presented by: Susan Fincher-Stoll, Partner Harrison Pensa LLP London, Ontario

FACTS: Jane and Michael are ages 48 and 52, married, both citizens and residents of Canada and in good health Jane is a medical doctor Michael is a professional engineer and is sole shareholder/director of a consulting company called Integrated Design Inc. Three children, Tom age 27, Mary age 25 and Sally age 16 Tom is a professional engineer, married, two children, works at Integrated Design Inc.

FACTS CONTINUED: Mary has just finished university and is a teacher living common law, one child, currently staying at home to care for child Sally is in grade 11 Assets are as follows: Cash $20,000 in a joint bank account RRSPs Jane - $550,000 – Michael is beneficiary Michael - $500,000 – Sally is beneficiary

FACTS CONTINUED: Non-registered investments: FMV ACB Jane $600,000 $450,000 Michael 250, ,000 Joint Account 100,000 75,000 RESPs for Sally - $75,000. Shares in Integrated Design Inc. (“IDI”)– 100% owned by Michael – value of $2,500,000 ACB of zero

FACTS CONTINUED: House – registered in Michael’s and Jane’s names as joint tenants; purchased in 1985 for $175,000 –FMV of $375,000 Cottage – registered in Jane’s name alone; received from her mother’s estate in 1988 –FMV of $950,000 –ACB $150,000

FACTS CONTINUED: Life Insurance –Jane $1,000,000 – Michael is beneficiary –Michael $600,000 – Jane is beneficiary Jane and Michael also own a joint last to die policy in the amount of $2,000,000 Personal Effects – estimated value of $75,000 all jointly held

FACTS CONTINUED: MICHAEL’S AND JANE’S OBJECTIVES: During lifetime, consider bringing Tom in as a shareholder of IDI Consider whether an estate freeze of Michael’s interest in IDI should be undertaken On death, generally wish to distribute assets amongst children equally Financial security for children Consider how shares of IDI will be dealt with upon Michael’s death Consider tax minimization, both during lifetime, upon death and beyond

ESTATE PLANNING INVOLVES: Overall review of clients’ assets and liabilities Determination of clients’ needs and objectives, including: –Securing financial and personal affairs –Financial obligations to dependants –Business succession planning –Wealth transfer –Tax minimization –Charitable giving

ESTATE PLANNING INVOLVES (cont’d): Steps needed to be taken to meet objectives, including: –review of ownership of assets and any necessary changes (eg. sole, joint ownership) –Review whether estate freeze should be undertaken and other business succession issues –review beneficiary designations on insurance policies, registered plans, etc. –preparation of wills with consideration given to use of trusts in wills –preparation of powers of attorney for property and personal care

ESTATE PLANNING INVOLVES (cont’d): Estate Planning is looking at the whole picture and making sure all of the pieces fit together to meet the objectives of the client.

SHARES OF INTEGRATED DESIGNS INC.: Consider whether an estate freeze is appropriate at this time Use Capital Gains Deduction Future growth passes to non-freeze shares Create new classes of shares and consider whether one of the classes of shares should go to Tom

SHARES OF INTEGRATED DESIGNS INC.: Consider establishing family trust and have common shares purchased by trust – provides some income splitting potential eg. once Sally turns 18 Family trust also allows decision as to where common shares ultimately go to be deferred

PROFESSIONAL CORPORATION FOR JANE: Provides ability to income split with adult children (perhaps Mary currently and eventually Sally once she turns 18) Also allows Jane to retain income in corporation to get benefit of lower tax rate

WILL PLANNING: Primary and Supplementary Wills for both Michael and Jane so that interest in private corporations (eg. IDI and the medical corporation not subject to Estate Administration Taxes (EATs) Include RRSP designations in both Wills: name each other as beneficiary of RRSP and then payable to estate trustees to be held on same basis as residue of estate This ensures that RRSPs do not form part of the estate and thus subject to EATs and still are distributed on same basis as residue of estate

INSURANCE TRUSTS: Include Life Insurance Trusts An insurance trust is a trust established to receive and hold insurance proceeds An insurance trust can be used to ensure that insurance proceeds pass outside the estate (and, therefore, are not subject to EATS or estate creditors) and at the same time fall into a testamentary trust.

SOME SPECIFIC BENEFITS: Non-Tax Benefits to follow settlor’s wishes, including controlling distribution of proceeds –e.g. controlling flow of funds to minor or disabled beneficiaries Family law issues Creditor protection

SOME SPECIFIC BENEFITS (cont’d) Tax Benefits Insurance Trust is treated as a testamentary trust for income tax purposes. Tax paid on income of testamentary trust at graduated rates.

For Jane’s $1,000,000 policy and Michael’s $600,000 policy: consider whether some or all of life insurance should pass to surviving spouse or a spousal trust with provision to pass to estate trustee(s) to be held on same basis as residue of estate when both Jane and Michael are gone.

JOINT INSURANCE DECLARATION: For joint last to die policy, consider joint declaration to be signed by Jane and Michael with funds being used to pay all tax liability on death of surviving spouse and balance to go to estate trustee(s) to hold on same basis as residue of estate of surviving spouse.

REAL ESTATE: Need to consider principal residence exemption on disposition/deemed disposition of either properties; likely will use against cottage. Consider use of cottage trust in Jane’s Will to give Michael use of cottage during his lifetime if he survives Jane and then when both gone, hold cottage until youngest living child turns 25 at which point children put to election as to whether to take an interest in cottage as part of their share of estate.

TESTAMENTARY TRUSTS: Consider Use of Testamentary Trusts in Wills What is a Testamentary Trust? –Testamentary trusts provide an excellent income splitting opportunity for the heirs of a deceased individual –A testamentary trust is a trust created on the death of an individual, usually through a will –Income earned by a testamentary trust can be taxed in the hands of the trust or in the hands of the beneficiary(ies) –If there are a number of beneficiaries of the estate, the terms of the will can provide for a separate testamentary trust for each individual

As an example, if the testator/testatrix has three children who are to share the residue of the estate equally and the residue of the estate available for distribution after all taxes are paid by the estate is $3,000,000, the chart below compares the income tax payable on the annual income earned if the amount is distributed outright to each child versus if the amount for each child is held in a testamentary trust. Direct InheritanceTestamentary Trust Amount available for each beneficiary $1,000,000 Annual rate of Return at 6%$60,000 Taxes payable (approximately) $30,000$20,000

TESTAMENTARY TRUSTS (cont.): Consider establishing testamentary trusts in both Michael’s and Jane’s Wills Spousal trust –For insurance proceeds for both Jane and Michael? –For Michael’s shares in IDI –For non-registered investments

TESTAMENTARY TRUSTS (cont.): Trusts for children/grandchildren –Separate ongoing trusts for Tom, Mary and Sally

WHO SHOULD BE A BENEFICIARY? In addition to naming each child of Jane and Michael as a beneficiary of the testamentary trust, that child’s spouse and/or issue could be included as beneficiaries to allow further income splitting amongst family members. Testamentary trusts are not only useful in estate planning involving beneficiaries who are children of the testator/testatrix, but should also be considered when providing for a spouse or nieces/nephews, etc.

OTHER USES OF TESTAMENTARY TRUSTS: A testamentary trust can also be beneficial where there are disabled beneficiaries (Henson Trust) and for creditor protection. A testamentary trust can also be used to hold certain assets (eg. cottage trust).

ADMINISTERING A TESTAMENTARY TRUST: When considering a testamentary trust, it is necessary to consider the administrative costs of the ongoing management of the trust (eg., accounting costs and costs to prepare tax returns). Broad discretion can be provided to the trustee to use as much or as little of the income for the beneficiaries and, in addition, to allow for the encroachment upon capital for the beneficiaries, even to the extent of the whole of the capital. One of the beneficiaries of the testamentary trust may be the trustee of the testamentary trust. Consideration should be given to naming an alternate trustee or, in certain situations, the testator/testatrix may wish to name two or more co- trustees (individual and/or corporate trustees) to act together.

Care must be taken to obtain tax advice for the jurisdiction involved if the testator/testatrix or any of the beneficiaries of the estate are subject to taxes in any jurisdiction other than Canada. In summary, testamentary trusts are effective both with respect to preserving wealth and managing the assets for the beneficiaries and should be considered more often in estate planning.