Estate planning is a process that allows one to determine how their assets will be distributed upon death. As we prepare to pass our lifetime assets to our heirs, there are key components of an estate plan that should be given careful consideration.
The fundamental component of any estate plan is the Last Will and Testament commonly referred to as the Will. It is also important that an individual maintains and updates their will and two powers of attorney documents: 1) for property such as real estate, bank accounts, and investment assets, and 2) a power of attorney for personal health care.
Review your estate planning documents Life changes can affect the integration of each of the above strategic solutions. Therefore, it is important to review the above aspects of an estate plan every three to five years. For example, there may be a change in family structure, so beneficiaries may need to be reviewed. Or, if you remarry, your existing Will may automatically become nullified.
Your net assets can change Keep an eye on your net worth. Other life changes that require updating your estate plan include changes in your net worth, or if the value of your residence or investment changed. If you have significant changes in net worth, have your accountant make sure that the best tax arrangements are in place.
Business strategies to protect your net assets If you are the shareholder of business assets, make sure that a buy-sell agreement is in place in the event of your death or disability, assuring that every owner is covered with life and disability (income replacement) insurance.
Personal estate plans An estate plan may benefit from using formal trusts to reduce taxes. Life insurance products such as segregated funds and term funds can also be used to circumvent or minimize probate or government estate administration taxes (EAT) or attending legal fees. In most cases when a beneficiary is named in a life insurance policy, proceeds will pass and the capital in most cases will transfer on a tax-free basis to beneficiaries, thus avoiding probate or EAT scrutiny. Generally the taxes will be due in the estate’s final taxes.
For an estate plan seeking to transfer large capital assets to named heirs, it would be wise to discuss these capital-transfer techniques with an accountant and/or tax lawyer.
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Risk of Borrowing to Invest
Here are some risks and factors that you should consider before borrowing to invest:
Is it Right for You?
Borrowing money to invest is risky. You should only consider borrowing to invest if:
You are comfortable with taking high risk.
You are comfortable taking on debt to buy investments that may go up or down in value.
You are investing for the long-term.
You have a stable income.
You should not borrow to invest if:
You have a low tolerance for risk
You are investing for a short period of time.
You intend to rely on fund distributions / income from the investments
to pay living expenses.
You intend to rely on fund distributions / income from the investments to
repay the loan. If this income stops or decreases you may not be able to
pay back the loan.
You Can End Up Losing Money
If the investments go down in value and you have borrowed money, your
losses would be larger than had you invested using your own money.
Whether your investments make money or not you will still have to pay back
the loan plus interest. You may have to sell other assets or use money you
had set aside for other purposes to pay back the loan.
If you used your home as security for the loan, you may lose your home.
If the investments go up in value, you may still not make enough money to
cover the costs of borrowing.
Tax Considerations
You should not borrow to invest just to receive a tax deduction.
Interest costs are not always tax deductible. You may not be entitled to a
tax deduction and may be reassessed for past deductions. You may want to
consult a tax professional to determine whether your interest costs will be
deductible before borrowing to invest. Your advisor should discuss with you
the risks of borrowing to invest.
