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Financial planning tips

August 20, 2018

A guide to making your money last for generations

Careful tax and estate planning can ensure your legacy helps your children – and their children, too.

While many people are happy to save just enough money to fund their retirement and leave a little something to their grown kids, a growing number of Canadians, especially wealthy ones, want their money to last for more than one generation.

Maybe they have businesses that they’d like their grandchildren to run, or they’ve amassed enough wealth that, if managed properly, can help future generations get by, no matter what life throws at them.

“What we’ve observed over the last two decades or so is the amazing number of people who have come from modest backgrounds who have built up businesses. Some have sold them for $100-million,” says Ron Walsh, a partner with Walsh King, a chartered professional accountant firm in Vancouver.

Those successful entrepreneurs, he says, are now setting up legacies for their children – and beyond.

Canadians who want to make their money last for generations will need to plan carefully. Money must be protected from taxes, litigation, inflation and potential estate problems – and it’s important to keep assets growing, too. Here are some strategies for ensuring your money will last for generations. 

Set goals

Outlining investment goals is key, says Jennifer Poon, director of tax and estate planning at Sun Life Financial. Your plans are based on the returns you require and the risks you are prepared to accept.

If you want the money to last for several generations,  you will need to invest it differently from methods you would normally use when transferring money to your immediate children, she says.

Create a framework

One way you can make your money last is by putting assets into a trust. The trustee, an individual or firm you choose, can then direct how the money is invested, according to your wishes. This can help safeguard the money from heirs who might make investing mistakes, Poon says.

“If you put money in someone’s name and that person makes a bad decision, you could lose it all,” she says.

One type of trust is a bloodline trust, where money or assets pass down to blood relatives only, and trust assets can be protected from creditors or divorce. Assets in trust that are not created as part of a will can also bypass probate.

You can also establish careful parameters around payouts. For instance, trust beneficiaries may get different sums at different ages, such as 18 and 25, or they may be required to complete university or reach other milestones intended to protect them and their money. An experienced lawyer should draft the trust to make sure that any requirements in it can be enforced, she adds.

“[Benefactors] don’t want that large sum causing more harm than good,” says Poon.

Consider segregated fund products

Many benefactors with a moderate-sized nest egg find that segregated fund products can also offer the security they want, says Poon.

Segregated fund contracts are sold by insurance companies. They resemble mutual funds in that they offer market-based investments, but they come with added guarantees. These guarantees can provide a guaranteed amount to your beneficiary or to the contract holder at maturity.

As well, because these are insurance contracts, they offer potential creditor protection that you can’t receive with typical non-registered investment products.

Segregated fund contracts also offer estate planning benefits. If you name a beneficiary, then at your death the segregated fund’s “death benefit” will be paid directly to that beneficiary, similar to life insurance. The money will not pass through your estate, so it will not be subject to probate. The settlement then stays private, the wealth transfer process is quick, and additional legal and accounting fees are not incurred. 

Invest widely

In terms of where and how to invest, Walsh suggests opting for variety.

“The more diverse the asset mix, the better,” he says.

Those with more capital and longer time horizons have more choices, and can consider more hedge fund strategies or real estate development projects.

Most investors, he says, should put money in stocks or funds that cross all sectors – tech, natural resources and global markets.

“You’re trying to make sure you catch the things that are doing well and try to mix up where you take a big [loss],” Walsh says.                             

To build your legacy, consider a more growth-oriented investing approach, perhaps in emerging markets or in smaller companies that are poised to grow. Income-producing investments such as bonds are effective for retirement savings, but may have limited value for building a legacy – at least until you start withdrawing funds.

Keep fine-tuning the structure of the estate and the asset mix and be sure to talk to your heirs about money, including how to share and protect it.

“When we see the second or even third generation successfully manage significant capital,” says Walsh, “that’s due in large part to the fact that the family has put effort into maintaining family harmony.”

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