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FAMILY LAW

Same Sex Couples

In family law, the most important case of recent times is undoubtedly M v. H. which used the Charter of Rights to extend the rights of support to same sex couples. The federal government and all of the provincial governments were required to amend a large number of statutes to eliminate distinctions between common law unions between a man and woman and same sex relationships.

To date, legislation which distinguishes between married and unmarried spouses has not been affected. Most important are the laws which restrict the right to marry to a man and a woman and the property and intestacy laws of the provinces which mandate a division of property upon separation and death only between married couples. Many feel that M v. H. was only the beginning and that elimination of all differences between common law unions and married couples cannot be far behind.

Variation of Child Support - Changed Circumstances

Another issue which is currently before the courts in many provinces is whether or not the fact of the passage of the child support guidelines automatically allows a spouse to apply for a variation of an existing child support order or whether there must be a change in circumstances. While the legislation seems entirely clear, some courts have been reluctant to allow such applications, particularly if the result would be a lower payment. Recently Mr. Justice Laskin of the Ontario Court of Appeal, in a most unusual judgment in the case of Bates v. Bates, specifically stated his opinion that a previous decision of that court which required an actual change of circumstances was incorrectly decided and invited a rehearing before a larger panel.

WILLS AND ESTATES

"The Prudent Investor"

In the area of estate planning and administration, the most important development in Ontario is the amendment of Section 27 of the Trustee Act to impose a “prudent investor” standard for trustees. For those of you who are now executors or who are named in wills or trust documents, you may be interested in reading the list of criteria by which your actions and decisions will be judged. Following is a partial reproduction of the section. After reading these requirements, you may wish to reconsider your decision to accept that appointment that you thought would be so easy.

27.(1) In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.

(5) – A trustee must consider the following criteria in planning the investment of trust property in addition to any others that are relevant to the circumstances:

1. General economic conditions.

2. The possible effect of inflation or deflation.

3. The expected tax consequences of investment decisions or strategies

4. The role that each investment or course of action plays within the overall trust portfolio

5. the expected total return from income and the appreciation of capital

6. Needs for liquidity, regularity of income and preservation or appreciation of capital

7. An asset’s special relationship or special value, if any to the purposes of the trust or to one or more of the beneficiaries.

FINANCIAL PLANNING

The 2000 Federal Budget

For financial planners, the recent federal budget is surely one of the most significant events of the past year. Major reforms affect nearly every taxpayer. Some of the most important are the following:

· Reduction in the inclusion rate for capital gains from 75% to 66 2/3%. Since many are fortunate enough to have accumulated significant gains, this is a major tax break

· Elimination of “bracket creep’ by restoring full indexation to amounts which were formally only partially indexed.

· Reduction in the middle tax rate from 26% to 24%

· Raise in the foreign property limit for registered plans from 20% to 25% for 2000 and 30% after 2000

With a federal election on the way and governments running record surpluses, look for even more in the way of tax reduction in the near future. Those with the ability to postpone income or capital gains may wish to do so in the hopes of gaining further relief.

Pension Benefits Act - New Rules for LIRA's

In Ontario, recent amendments to the Pension Benefits Act have significantly changed many of the Rules for locked in pensions (LIRA’s). Upon conversion, instead of being subject to a minimum and maximum withdrawal rules based upon a predetermined formula, the new legislation proposes that the maximum withdrawal be based upon the performance of the fund, similar to the legislation already in existence in the western provinces. New rules also allow access to locked in funds in cases of shortened life expectancy and for small accounts. The new rules also allow access to locked in funds in cases of financial hardship. Determining whether or not you qualify requires an application and completion of an incredibly complicated and detailed form of some 20 pages which some might consider a “hardship” in its own right.

November 7, 2000

FAMILY LAW

One child – two fathers?

For the foreseeable future, family law cases will likely be dominated by the struggle to clarify the child support guidelines as lawyers across the country continue to struggle with the meaning of the individual clauses in this most complicated legislation.

This week’s case of Wright v. Zaver comes from Ontario which involved an application for child support by a mother seeking assistance from the natural father who had had no contact with his child for a period of 15 years. At the time of the separation, the father and mother had signed an agreement whereby the father agreed to pay a lump sum of $4,000.00 in full and final settlement of all future child support obligations. In due course the mother remarried and her new husband assumed the role of father. When the mother and step father separated the step father acknowledged his responsibility and agreed to pay full child support based upon his income in accordance with the guidelines. The court had to decide how much, if anything, the natural father should be required to contribute. The father, of course, argued that he had already settled his obligations by the lump sum payment and, alternatively, that any additional amounts would be “double dipping” as the mother would be the same support from two different sources. After a careful examination of the wording of the legislation, the court decided that it had no jurisdiction under the law to apportion the award and that the father must pay the full amount of child support under the guidelines.

This case is noteworthy for a number of reasons. Firstly, it emphasizes once again that courts will not enforce lump sum child support awards if they cannot be justified on economic terms. Parents who make lump sum settlements can never be certain that an application for child support many years later will not succeed. Secondly, and more importantly, the case points out a curious anomaly in the child support guidelines. Section 5 of the guidelines allows a court to apportion child support between a step parent and a natural parent but only if the application for apportionment is made by the step parent. Step parents faced with an application under the guidelines would be well advised to ensure that the parent has made every effort to obtain the full amount of child support for the child from the natural parent before settling.

FINANCIAL PLANNING

The mini-budget

My site has only been up and running for a few weeks and already “what’s new” is already old news. In preparation for the coming election the federal finance minister, Mr. Martin released a mini budget in which he made substantial changes to the budget of only a few months ago. For financial planning purposes, the most important is certainly the further reduction in the capital gains inclusion rate from 66 2/3% to 50% for sales which occur after October 18, 2000. Those who have capital gains this year may now have three different rates to declare for capital gains purposes depending upon the date of the sale. Those of you who have sold a part of your holdings of a stock at different periods over the year have a major headache.

Other points of interest in the budget include the following.

· Further reductions in the marginal tax rate commencing in January, 2001

· Complete elimination of the 5% federal surtax on higher income earners

· Improved GST and child tax benefits

· Increased non refundable tax credits for disability, education, and cost of care

ESTATE PLANNING

Real estate transfers to relatives

I have had several occasions recently where clients have come to me with a request that I transfer a property to joint names or outright to various other persons for “tax reasons”. In many cases, these schemes are not fully understood and have a number of unexpected implications.

Following is a short summary of some of the possibilities and some of the considerations for each. Please remember that tax and family law are complex and constantly changing subjects and that no one should complete a transfer without professional advice.

Spousal Transfers

Often spouses have registered the matrimonial home or another recreational property in one of their names for a number of different reasons and now wish to change the title to both names. Where the property is the principal residence, this is generally a good idea as the home is not subject to capital gains taxes when it is eventually sold and the transfer itself is not taxable. The transfer avoids probate taxes upon death if the former sole owner dies before his spouse as the property passes outside of the will. Possible cautions include exposure of the home to potential creditors of the transferee spouse, including our friends at CCRA (formerly Revenue Canada). There can also be a number of adverse consequences of such a transfer under family law in the event of a subsequent separation of the parties.

The transfer of a second recreational property or other assets into joint names involves similar considerations. Registration in joint names will avoid probate tax as the property will pass to the survivor outside the estate, thereby avoiding probate tax. Generally there are no income tax advantages to such a transfer due to the attribution rules which provide that the recipient receives the property at the transferor’s cost base and gains, if any, must be declared by the transferor when the property is sold.

Transfer to Child

Elderly parents often wish to transfer property to a child for the purposes of avoiding probate taxes and simplifying the administration of their estate. Such transfers should be completed only after professional advice. There are a number of very serious pitfalls of which most people are unaware, some of which are as follows.

There are potential capital gains problems. If the home is a principal residence, a possibility exists for a loss of all or part of the exemption upon sale since the child will generally not be able to claim the exemption and one half of the home may be exposed to tax. In the case of a property which is not a principal residence, transfer to a child or other relative constitutes an immediate disposition, with the possibility of immediate and significant tax consequences.

The transfer exposes the home to creditors of the recipient spouse. Any judgment against the child will affect the home.

The home becomes a part of the child’s property and is exposed to claims by the child’s spouse on separation.

The child is legally entitled to occupy the home and even to force a sale of the home, thereby depriving the parent of his or her most valuable asset.

November 28, 2000

FINANCIAL PLANNING

Borrowing to purchase your RRSP

Recently I purchased some extremely powerful software to assist in analyzing a financial situation in order to determine whether a client is on track and to establish alternatives. The financial planning form on this site is developed from the one suggested by the developers.

One of the other features of this software is a number of stand-alone calculators which permit analysis of various different decisions which you may encounter. Over the next few weeks, I thought that I would look at some of these by using some specific examples to reach some conclusions without getting too much into the arithmetic. Hopefully I can develop some rules of thumb which you can use for your own planning. With RRSP season just around the corner, let’s look at the strategy of borrowing to invest in your RRSP compared to regular monthly investment.

Let’s use a typical example of a Bill who is a new visitor to this site and has yet to learn how to pay himself first. He has managed to survive Christmas without abusing his credit cards but has saved nothing. It is the last week of February and, as usual, Bill has just gotten around to thinking about this year’s RRSP contribution. A quick look at last year’s Notice of Assessment confirms that he has $10,000.00 of new contribution room available for this year and some still unused from previous years. Should he take out one of those attractive loans that all of the banks are offering to take advantage of the large tax rebate which he will receive or should he simply contribute the amount of the loan payment monthly to the RRSP?

Not surprisingly, the answer depends largely on what Bill plans to do with the rebate when he receives it and the return which he projects on his RRSP. Since I promised to go easy on the arithmetic, I will provide only a few conclusions for your consideration.

Not surprisingly, the worst of all alternatives is to do nothing. There are no tax savings and no growth in the RRSP.

Borrowing and repaying the loan in full over one year compared with simply investing the payments in the RRSP directly yield almost exactly the same result if the tax rebate is not reinvested in the RRSP. The disadvantage of the loan is the requirement of monthly payments even if emergencies arise which make the monthly payment inconvenient. This “forced saving” may, however, prove to be an advantage if you have difficulty setting aside money on a monthly basis and require the discipline of a required monthly payment.

Borrowing to invest and using the rebate elsewhere compared with applying the tax rebate against the loan obviously results in the same RRSP growth since there is no difference in the contribution. Applying the rebate against the loan has the advantage of paying it off in seven or so payments, leaving the remaining payments (about $875.00 monthly) available for other uses.

For maximum RRSP growth, the best alternative is to make the loan and to invest the tax rebate into the RRSP as soon as it is received.

FAMILY LAW

How long does child support last?

The current child support guidelines apply only until a child becomes 18. After that time, the guideline may or may not apply.

Usually cases litigated under this section also involve an application for a contribution by the parent toward the post secondary costs of the child.

I recently argued case on behalf of a mother who was supporting a 23 year old daughter who was living at home while attending a local college. The daughter had obtained a university degree and was following her original plan of upgrading for a career in the health field. The father and mother both had an income, the father about $70,000.00 and the mother about $50,000.00. The daughter herself had an income of about $5,500 from various sources.

Researching the question in preparation allowed me to draw some tentative conclusions about the current state of the law.

Post secondary education is to be supported and encouraged and a court will generally require the parents to make a reasonable contribution. There is no rule of law which will end child support at any predetermined age or after one post secondary degree regardless of whether or not the parents signed an agreement to this effect.

The earnings of the child, both actual and potential, are important factors. In most cases, the child will be expected to contribute a significant part of the cost. In extreme cases, a court may find that the child’s earnings from employment are sufficient to fully fund the costs of education and that no additional contribution is required.

The result in any individual case is very subjective and fact driven. Whether or not a continuation of the full amount of child support under the guidelines is “inappropriate” is very much in the hands of the judge hearing the application and the result is unpredictable.

TRUSTS AND ESTATES

Alter ego and joint spousal trusts

I am not a great fan of inter vivos trusts. Transfer of assets to a trust while the transferor is still alive is a complex and costly process which can often lead to unwanted and immediate tax consequences. On an ongoing basis the trust requires regular record keeping and reporting. Generally there are few tax advantages as income in the trust is taxed at the highest marginal rate.

One interesting exception is the proposed new alter ego trust which permits a qualifying transferor (settlor) to transfer assets to a trust without the usual deemed disposition on the transfer to a trust. To qualify, a settlor must meet all of the following conditions:

the trust must be established after 1999
the settlor of the trust must be over 64 years of age
the settlor must be entitled to receive all of the income from the trust arising before the settlor's death.

The alter ego trust can be a useful tool for estate planning if the sole purpose is to avoid probate. As we have previously emphasized, however, the emphasis on avoidance of probate taxes can often lead to unexpected and unwanted results from other tax planning perspectives.

December 12, 2000

WILLS AND ESTATES

Multiple Wills

Many readers probably are still getting around to making that first will or updating the old one that they have not reviewed in many years and have little idea of its contents. Why then think of making more than one will?

At first blush, the idea of more than one will seems to be a contradiction. Do we not make our “last will and testament”? How then can we have more than one “last Will”? Furthermore, why would anyone want more than one will?

The answer, as most of you can probably guess, is tax-related; specifically our old friend the EAT (Estate Administration Tax). You will recall that Ontario imposes a tax of just under 1.5% on all property passing under the will of the deceased. Under our existing rules, there is no way to avoid probate if even one asset passing under the will requires probate. In most cases, this is not a problem as nearly all assets passing under a will require probate in any event. Most real estate, bank accounts over a particular amount, stocks, bonds and other financial assets all require probate.

There is one very important exception to the rules about probate. The exception is shares in a private company. If the board of directors is prepared to recognize the provisions in the will for the disposition of the shares, it is free to do so without probate. This can be very important in cases where a significant part of the assets are in this form.

In order to avoid bringing the shares into the estate, the solution is the preparation of two wills, the one dealing with the shares in the private company and the other dealing with all of the other assets. On the basis of the existing law, only the will dealing with the rest of the assets and not the one dealing with the private company need be submitted for probate.

Multiple wills may very well be appropriate for those owning shares in a private company. Preparation of such documents should, however, only be done by a skilled professional as the drafter must exercise extreme caution in ensuring that the separate wills work together in such a way that one does not revoke the other, leaving an intestacy.

FINANCIAL PLANNING

Asset Allocation Part 1 – the basics

Most financial planners agree that the proportion of your assets that you allocate to various sectors of the marketplace is much more important in determining overall performance than individual selections within each group. For most people, then, the focus should be on selecting an allocation which is appropriate for that individual rather than a dissection of the top 10 holdings of a specific fund or last year’s quartile rating.

What portion of assets should be allocated to each sector of the marketplace? The answer is almost as varied as the number of investors. Among other things, the financial planner will consider the following factors:

Current Situation

Only by fully understanding all of your current investments, pension plans, available insurance, current expenditures, obligations to dependants, etc. can a financial planner determine how to allocate existing resources. That lengthy questionnaire may seem like overkill but the information is essential for a planner in understanding all of the factors that go into an analysis of your current and proposed situation

Objectives

Having a clear and defined objective is essential to the process. In the case of retirement planning, for instance, the planner will want to know the age at which you (and your spouse) wish to retire and your planned expenditures during retirement. There is no use planning to pursue a hobby or take regular vacations unless the costs of these expenditures are built into your plan.

Risk tolerance

This is possibly the single most important factor in determining how assets should be allocated. It is also the most subjective and difficult to assess. In my view, most people, particularly those with limited experience, are not able to self-assess. It is one thing to tell yourself or your planner that you have a long term objective and that you will not worry about short term drops in the market. It is quite another thing to open your broker’s statement at the end of the month and find that your entire RRSP contribution from last year has disappeared into thin air and no relief is in sight. While losing part of one’s investment is never pleasant, only those who can actually restrain themselves from calling their broker or advisor in a panic can actually and truly participate in higher risk types of investments.

Age

The age of the investor is a crucial factor in allocation of assets. Reliance upon historical ten year average returns is of little relevance to a person whose retirement is only a few years off. Such a person does not have the luxury of allowing long term average returns to work in his favour and must be more conservative in his approach to investing. Capital preservation must take precedence over higher return but riskier investments. Younger investors do not have the same restraints and can afford a more aggressive portfolio.

The foregoing are some of the basics of asset allocation. In the following weeks we will look at some specific examples. Stay tuned.

FAMILY LAW

Same-sex marriages

Well, the day has finally arrived. As predicted earlier on this site, a minister in Toronto has launched a very public attack on our traditional views of marriage. He is using the archaic method of marriage banns rather that the more common procedure of obtaining a marriage licence in order to perform a legal “marriage” of a same-sex couple. Several cases are now before the courts challenging the current bars to such unions. The Ontario government has already stated that it will refuse to register same sex marriages, citing the provisions of the current Marriage Act. On the current state of the law, the government is undoubtedly correct.

This cases now before the courts will almost certainly reach the Supreme Court of Canada where Canada’s highest court will ultimately be called upon to decide whether the provisions of the federal and provincial statutes which require that only persons of the opposite sex may marry contravene the Charter.

From a family law perspective, the recognition of same-sex marriages will probably have little effect as the numbers will likely be small, at least for the next few years. Legal recognition of same sex marriages will affect only those who are prepared to make the same lifetime commitment to each other that heterosexuals now make. Presumably those persons will understand and recognize that they will then become subject to the same provincial property laws which apply, for the most part, only to married couples. You will recall that it is open to any couple to opt out of all or part of these laws by way of a marriage contract.

Is this the tip of the iceberg? Probably. In coming years, look for a move to extend property rights to common law situations. The impact of such a move either through legislation or through the courts would have a dramatic effect upon our society. Unlike the same sex marriage situation which involves a decision between the partners, legislation would apply across the board to all common law situations. In our next segment we will examine some of the implications and the ways in which common law spouses might start to prepare for what is likely coming.

January 17, 2001

FAMILY LAW

Common Law Relationships and Property

In our previous segment we looked at the possibility that the government or the courts may in the future extend property rights to common law relationships. If a government decides to embark upon such a drastic revision, there will likely be years of debate and comment before any change in the law. In view of the reluctance with which the current government complied with the decree of the Supreme Court on same sex rights, it is a safe bet that Ontarians have no fear of change under the current regime.

More likely is a case under the charter by which a litigant might successfully challenge the existing legislation on the basis that it unfairly discriminates against common law spouses. In such an event, there would be little warning or opportunity for planning. Even if the courts do not go this far, a long line of cases has steadily eroded the clear intention of the legislature to extend property rights only to married spouses by the imposition of trusts which the parties never contemplated and this trend is likely to continue.

Are there any ways of planning for the future? Most definitely! Those of you who have faithfully read the previous portions of this site devoted to property rights should already know the answer which is, of course, the domestic contract or “pre-nup”.

By the use of a contract, any couple, married, engaged, or common law may define most of their legal relationship and opt out of nearly all of the existing provisions of the various statutes which affect property. Needless to say, this is a rather delicate subject and is best approached near the beginning of a serious relationship. It is much easier to negotiate a reasonable and fair agreement before a final commitment than it is to approach a partner of many years and delicately suggest that perhaps a visit to the lawyer might be in order. In practice, I have encountered situations where negotiations continued to the night before the wedding and even situations where couples called off their plans after negotiations were unsuccessful.

The most common type of domestic contract is often called the “What’s mine is mine, what’s yours is yours and what’s ours is ours” contract. This type of contract provides that the partners will keep their respective assets completely separate and that neither will have any right to share in the asset or any increase in the value of the asset over the term of the relationship or upon death. It is generally most appropriate for middle aged couples and second marriage situations where both parties have accumulated substantial assets which they wish to preserve and to pass to their respective children upon death.

Like all domestic contracts, the asset preservation agreement requires full and honest disclosure of all assets and liabilities. Only if both parties are fully informed can a binding agreement between them be expected to withstand any future challenge. Lawyers drafting domestic contracts will generally insist that one of the parties obtain independent legal advice in order to ensure that there can be no question at a future date of undue influence or a failure by one of the parties to fully comprehend all of the implications of the agreement.

In our next segment we will examine some variations to the “pre-nup” Keep in mind that all types of domestic contracts are important legal documents and no one should attempt to complete one without legal advice from an experienced family law practitioner.

WILLS AND ESTATES

Life Insurance Beneficiaries – Common Mistakes

In discussing estate planning with individuals, I am constantly surprised by how little attention is paid to what is potentially the most significant asset – the life insurance policy. Most clients have little idea of how much insurance they have on their lives or what type of beneficiary designations they have made.

Those who do know the amount of their life insurance have rarely given adequate consideration to the designation of a beneficiary. Most couples simply name the spouse, if any, and leave it at that. In itself, this is generally not fatal, as the proceeds will go to the estate if the spouse predeceases and will then be distributed under the will (assuming that there is one).

Two very common mistakes are possible if one is not extremely careful. The most common error for two parent families is to name the spouse as beneficiary and then to provide that the infant children are to be the beneficiaries if the spouse predeceases. For single parents, the same mistake would occur by naming children under the age of majority as direct beneficiaries. This type of provision achieves the worst possible result if the spouse does in fact predecease, since the proceeds will not be available to the children until they reach the age of majority (18 in Ontario) and are then paid out in full together with accumulated interest when the child turns 18. Naming a trustee of the funds does not assist as the trustee has no power to use the funds for the children during their infancy and must turn over all of the proceeds when the children turn 18. Only by the use of a properly drawn trust document which provides the trustee with the necessary powers to administer the funds for the children’s benefit can a parent properly provide for infant children. The trust document can stand alone or it can be incorporated with the trust provisions in a will to provide for the children.

The other common mistake is to name a relative as beneficiary, trusting that this person will use the funds for the children as he or she deems appropriate. This can cause all sorts of problems. The relative may be untrustworthy and deny any obligation to the children or have creditors who could assert a claim. In the event of a separation, all or part of the funds could be vulnerable to claims by the relative’s spouse.

Now is a good time to examine all of your existing insurance policies and make sure that you have understand all of the designations of beneficiary which you have made. Pay particular attention to the policies which you have through your employer where you have probably had little or no advice or assistance.

In our next segment we will look at other types of designations such as those commonly made in RRSP’s and RRIF’s.

FINANCIAL PLANNING

Asset allocation

For the next few segments we will look at a few typical situations and examine some of the basic factors that a financial planner will consider in formulating a specific plan.

For our first example, let’s look at Phil and Linda. Both are 55 and are steadily employed, Phil earning $55,000.00 and Linda $32,000.00. Neither of them have a penson through their employer. They have accumulated about $100,000 in RRSP’s, having used most of their excess funds in educating their three children who have (finally!) completed their schooling. The RRSP’s are invested almost completely in short term GIC’s yielding an average of 5.5%. They are prepared to accept a moderate amount of risk but have little knowledge of or interest in alternate types of investments. The couple’s home will be paid off in ten years to coincide with their retirement. They hope to retire at 65 with an annual combined income of $42,000.00 in today’s dollars after tax. Phil and Linda are optimistic and assume that both Canada Pension and old age security will be available to them.

As a financial planner, the first thing that I do is to determine in a general way whether or not the objective is realistic. There is little point in spending a great deal of time on asset allocation if the plan itself cannot work without major revision. Similarly, if the couple is already on the right track with their conservative approach, there is little need to make any major changes.

Analysis of the couple’s current cash flow shows about $5,000.00 per year available for investment. Although that is favourable, it comes nowhere near the maximum available RRSP contributions and is unlikely to meet their plan. A quick first run through the computer projects that the couple will have a significant if they maintain the current course and invest only the excess cash flow in RRSP’s for retirement.

A careful review of the financial statement locates an additional amount of $3,000.00 available for allocation to saving for retirement without too much pain. Increasing the RRSP contribution cuts the shortfall to about $400.00 per month. If Phil and Linda are to achieve their objectives, they must do so by increasing the return on their investments. Here is where the financial planner and investment advisor come in. The financial planner’s role is to analyze the couple’s needs, determine the required return, and suggest an allocation of assets which is appropriate. As a financial planner, I am very careful not to lose sight of my Rule Number 1 which to ensure that any suggestions are consistent with the client’s risk tolerance. No plan is worth sleepless nights.

Having considered all of Phil and Linda’s objectives and financial situation, I determine that they will need to continue RRSP contributions of $8,000.00 per year with a return of about 8% to achieve their goals. If history is a guide, this type of return should be achievable with a tolerable risk. A suggested allocation and overall return might look somewhat like this:

% of portfolio	Investment	Expected return

10%	GIC	4.0%	0.4%
30%	domestic bonds	6.0%	1.8%
20%	foreign currency bonds	7.0%	1.4%
20%	domestic stock	10.0%	2.0%
20%	foreign stock	12.0%	2.4%
Total Return			8.0%

The above allocation maintains a fairly conservative ratio of 60:40 between bonds and stock. The required return from the stock portion is below historic levels and will not, therefore, require investing in a high risk portfolio. Because Phil and Linda are approaching retirement, it is important that their situation be monitored on a regular basis to ensure that it is on track.

Next segment we will examine the situation of a younger couple with pre school age children and different priorities.

April 22, 2001

FAMILY LAW

Domestic Contracts – Variations

In the last segment we looked at the basic domestic contract for cohabitation or marriage. Unlike the separation agreement which tends to follow a somewhat standard form, there is a great deal of opportunity for innovation in this type of domestic contract. These documents can be structured to meet the exact needs of individual couples and need not follow a “boilerplate” form. In this segment we will look at some of the variations.

Keep in mind that as of the present time, property rights which we will be discussing below apply only upon marriage, not in common law relationships. Since most domestic contracts contemplate marriage and the possibility exists of extension of rights to unmarried cohabitees, (see previous segment), the following discussion is relevant to all couples, married or not.

One of the most common variations in a domestic contract is to provide that the “what’s mine is mine” provisions will not apply to household items purchased during the marriage. In most relationships it is almost impossible to determine or recall who actually made any given household purchase. In these days of direct debit, plastic, and Internet, the true purchaser will often be lost in cyberspace. Many couples simply agree that household items purchased during marriage or cohabitation will be divided equally if there is a separation in the future.

Some couples wish to except only certain assets from inclusion in their net property should there be a separation. The most common example is a business owned by one of the spouses. Under the Family Law Act a judge can order a transfer of assets to satisfy a claim by the other spouse. Such an order could cause the collapse of a business or the addition of an unwanted and adversarial “partner”. Even if there is not an order for share transfer, an order for an equalizing lump sum payment could be fatal to a business which is asset rich but cash poor. To avoid such situations, the contract might provide that all of the assets which the parties accumulate together will be divisible except for the company. The non owning spouse’s interests can be protected through spousal support or a transfer of non business assets.

Another common provision covers the situation where one of the spouses owns a home at the time of the marriage. You may recall that this is the one exception to the rule that spouses receive a credit for assets which they bring into the marriage. In nearly all cases the spouse who brings a home into the marriage will wish to have a contract whereby the other spouse agrees that upon separation that spouse who entered the marriage owning a home will retain his or her home free of any claim by the other. A further variation where the spouses share the costs of the home is to provide that only the increase in the value of the home over the term of the marriage will be divided.

In coming segments: More variations on property division, discussion of inclusion of support provisions in a domestic contract.

ESTATE PLANNING

Beneficiary Designations in RRSP’s and RRIF’s

Whether you know it or not you have probably made a beneficiary designation on all of your RRSP’s. It is most important that you verify the beneficiary with the carrier of the plan. Failure to do so could result in the memories of your dearly departed self being somewhat less fond than you would like.

The majority of the designations in RRSP’s have important tax implications. (What else is new?). Most people know that an RRSP can be rolled over without tax to the RRSP of the spouse. (the same is true of RRIF’s). If the entire estate is not to go to the spouse, however, it is important to provide that the spouse’s share include the RRSP to avoid the unpleasant imposition of tax on the whole RRSP at the time of death. Remember that you do not have to be married to be a “spouse” within the meaning of the Income Tax Act for the purposes of the rollover. Twelve months of cohabitation will suffice.

It is equally important to ensure that the RRSP not be left to one individual who is not a spouse with an “equivalent” asset being left to another individual. Since the RRSP is a tax advantaged investment, no tax has yet been paid and this tax becomes payable by the estate in full upon death. Without very careful drafting the result will be that the individual will receive the entire RRSP with the unfortunate recipient of the other asset being responsible for the tax on the RRSP.

Recent revisions to the Income Tax Act permit the RRSP owner to designate infant children as the beneficiaries of this asset. The RRSP can then be paid out to the child according to a formula based upon the difference between the child’s age at the date of death and 18. The income can then be taxed at the child’s much lower tax rate rather than incurring the very heavy tax imposed upon death.

Next segment: A look spousal trusts – are they for you?

FINANCIAL PLANNING

Asset allocation – the younger couple

The older couple tends to focus primarily upon retirement planning. Allocation of assets for a younger couple with a large number of competing priorities is far more difficult. For the young couple, retirement planning is not yet a major consideration. Far higher priorities may be saving for a home and starting a fund for infant children’s education. At this stage of a couple’s life, asset allocation may involve a completely different approach. A planner will probably choose to break the plan down into segments and perhaps recommend a different type of allocation for each.

For those projects which have a fixed time frame, safety of principal is the most important consideration. If the couple is determined to buy a home in three years and to accumulate a down payment of $20,000.00, this will be the highest priority for savings. Because safety of principal takes precedence and the time frame is short, they cannot employ a high risk strategy and will have to stick to lower yield debt instruments such as CSB’s or money market funds which are liquid or bonds with a maturity coinciding with the required date.

Education of the young children is probably the second priority for the young couple. Here the time frame is longer and the couple may be prepared to employ a strategy which seeks a greater return while involving some measure of risk. The planner will estimate as near as possible what the education costs will be in the future after accounting for inflation and rapidly rising tuition fees. Having established the required amount and the time frame, the planner will then map out a savings plan calculated to meet the objectives. The planner will determine what level of return is required to achieve the goals and allocate the savings accordingly to achieve the objective. A simple plan might look like this:

House Savings

Current House savings $5,000.00

Interest Rate 4.5%

Value in three years $19,950.00

Monthly contribution $371.20

Education Savings*

Age of child 4

Years to post-secondary 14

Estimated yearly costs $9,700.00

Available Savings $2,000.00

Contribution of child after 18 $1,500.00

Anticipated return 9.0%

Monthly contribution $107.43

Allocation:	% of Investment	Return

Bonds	30%	5.5%	1.65%
Domestic equities	35%	10%	3.5%
Foreign equities	35%	11%	3.85%
Total Return			9.0%

*This assumes that all savings will be invested tax free in an RESP and that the Canada Education Savings grant will be available each year. Tuition costs are indexed at 8% with contributions and other costs being indexed at 3.5%.

June 31, 2001

FAMILY LAW

Domestic Contracts and Support

One of the most contentious issues in negotiating a domestic contract is the matter of spousal support should the marriage or cohabitation terminate in the future. Clearly it is impossible for a couple to anticipate all of the possible scenarios which might affect their relationship over a period together which could last for decades. With both parties anticipating a long, if not lifetime, commitment and neither able to predict when, if ever, a separation would occur, the types of possible support provisions are endless. The discussion below focuses primarily upon marriage contracts but most of the comments would apply equally to common law situations.

The subject of spousal support will often arise when one of the spouses wants the other to agree that if they separate in the future there will be no support payable by either. When both parties are young, gainfully employed, and earning the same income and both have the same opportunities for career advancement, this may seem to be a reasonable way of dealing with the issue.

Despite the apparent fairness and equality of an agreement on waiver of support claims, most lawyers will advise against the inclusion of support clauses in most agreements. There are simply too many factors which can drastically change the relationship to the financial advantage of one of the parties and the detriment of the other. The most obvious, of course, is the decision to begin a family. Many couples will agree that the wife will put her career on hold for a period of time in order to stay at home with young children. In most cases these lost years can never be recovered. Other drastic changes in the finances of the couple include such events as job loss or disability from illness or accident.

The simplest situation is that of the middle-aged couple, often marrying for the second time, and each with a steady job and substantial assets or secure pensions. In these cases, both parties are usually anxious to commit to a regime where each will remain financially independent of the other regardless of what may happen. Their futures are secure and they are able to anticipate that they will be able to successfully weather any storm. Their contract will probably include a provision that neither party will assert a claim against the other or the estate of the other regardless of what may happen in the future.

The opposite type of situation is the younger couple where the man is the owner of a successful company with a high current income and unlimited upside potential. The wife may be just commencing a career in an unrelated field. As a part of the negotiations, the husband may well request that his wife give up any future claims to the company. The wife, quite rightly points out that the prospect of marriage and raising a family would severely and possibly permanently limit her future career development. With the future being unknown, it is unlikely that any sort of realistic support provision could be negotiated and this couple’s contract would not contain a periodic support section. The parties would leave this decision to future negotiation or, if necessary, the courts.

Most situations fall somewhere in the middle between these two extremes. Many involve couples where both have relatively equal incomes and future potential. The prospects of the wife may, however, drastically change if there is a family and she quits her job or takes a leave to raise the family. One possibility is to negotiate an agreement whereby the parties agree that they will be financially independent of each other unless a child is born during their cohabitation. Other contracts provide that no support will be payable if separation occurs within a specified period of years, after which the parties would agree to leave the decision to negotiation or to the courts, if necessary.

Most lawyers will be extremely reluctant to deal with the issue of support in any sort of marriage contract or cohabitation agreement, except in the clearest of cases. Anticipating the future course of the relationship is impossible. The general feeling is that the matter of support is one which should be dealt with at the time of the marriage breakdown, whether it is by separation or death of one of the parties, when all of the factors which exist at the time can be properly assessed.

Next segment: Will the courts enforce your contract?

ESTATE PLANNING

Spousal Trusts

Lately I have received several inquiries from clients about the possibility of establishing a testamentary spousal trust as an alternative to a direct bequest to the spouse on death. Under a spousal trust, the testator leaves all of a portion of his or her estate in trust for his or her spouse. The trustee is instructed to use the income solely for the benefit of the spouse during the spouse’s lifetime. Usually the trustee is also given a wide discretion to use the capital of the fund for the spouse should such use be considered necessary or desirable. During the spouse’s lifetime, no one other than the spouse can share in the trust in any way and it is considered “tainted”, causing adverse tax consequences. Upon the death of the spouse, the estate is distributed according to the trust provisions, usually to children.

Why consider a spousal trust? If you don’t know by now, you haven’t been paying attention. The answer, of course, is …… taxes! If the spouse is already in the highest marginal tax rate, he or she will pay close to 50% tax on any additional income. Instead, if there is no immediate need for the funds, the income can remain in the trust where it is taxed at a much lower rate. For example, if the spouse has an existing income of $60,000.00 per annum before any income from the estate and if the additional income amounts to $20,000.00, the tax savings could be as much as $2,500.00 if the funds remain in the trust.

If spousal trusts are such a great idea, why doesn’t everyone use them? There are many reasons. Firstly, most spouses, particularly those who are retired, simply do not have an income which is taxed at a high marginal rate. If the existing income for the surviving spouse is modest, the savings will be relatively minimal or non-existent. In addition, trusts can be expensive to set up and administer. Most Trustees will charge an annual fee for managing and investing the trust assets and separate annual returns are required for the trust. Most people do not have the ability to prepare and file these returns and must hire a professional.

Perhaps the most important consideration is the personal one. A direct bequest to a spouse leaves that person in complete control of the asset and all of the decisions. The imposition of a trust allows another person, the Trustee, a say in the management of the funds and of the spouse’s use of them. Many spouses would rather sacrifice a tax saving for the right of complete control over the funds.

Whatever the decision, no one should consider a spousal trust without competent legal and tax advice. There are very specific rules to be followed in order to ensure that a spousal trust is established in strict accordance with the provisions of the Income Tax Act. Tax savings must include an analysis not only of the savings based upon reduced marginal tax rate but such additional considerations as clawback of OAS payments and possible loss of the age exemption.

Next segment: Trusts for special needs individuals.

FINANCIAL PLANNING

Insurance

With this segment, I commence an examination of whether or not you have sufficient insurance to cover yourself and your family in the event of unforeseen problems in the future. In this segment, I will look at basic life insurance. Coming segments will examine disability and long term health care, and home insurance.

Life Insurance – Are you underinsured?

The majority of adults have some form of life insurance. Most employers of any size provide employees with group insurance, generally for a multiple of salary. Many plans allow the employee to purchase additional insurance. These types of plans provide a basic level of protection in the case of premature death. They do not, however, provide sufficient funds to provide full protection for a spouse and family in the case of the premature death of the primary income earner. They have added risks in that the coverage is available only during employment with the particular company and is generally not portable. In addition, neither continuation of coverage or rates are guaranteed.

In my experience, very few individuals have made any serious attempt to relate the amount of insurance which they carry to their family’s actual needs. With the assistance of an insurance agent or financial planner, this is a figure which can be determined with a fair degree of precision.

Take the example of a couple in their mid 30’s with two young children. Both are employed, with the husband earning about $60,000.00 and the wife, $35,000.00. They have a mortgage of $90,000 which they would want to pay off. The couple wishes to maintain their existing lifestyle should the husband die prematurely and to ensure sufficient saving to allow for four years of education for each of the children.

The well developed plan will first determine the costs of future education and make allowance for regular contributions on a monthly basis. The plan will take into account general inflation, the availability of survivor benefits for the wife and children, education savings, and a number of other factors. The plan will then determine the monthly cash flow required to maintain the family and the shortfall after accounting for all sources of income. Using fairly conservative assumptions throughout, I have calculated that this family would require about $230,000.00 to provide complete protection in the event of the premature death of the larger wage earner.

Of course, every situation is different and many of the assumptions are my own. Hopefully, all of you will take the time to sit down and examine the amount of insurance which you are now carrying and whether it is sufficient to provide for your loved ones if you are no longer able to do so. With your planner, you can use your own assumptions to determine the proper amount of insurance for you. If you do not do so, you leave your spouse and children at extreme financial risk if you die.

Next segment: What is the cost of basic life insurance?

TRUSTS

Special Needs Individuals

In my practice, I encounter many persons who are the parents of disabled children who do not have the mental abilities to care for themselves and will require a lifetime of care. Most of these children qualify for various government support programmes under provincial or federal legislation. The legislation provides that the individual cannot own more that a stated amount of assets in his or her own name and cannot have a separate income or the entitlement to support will be suspended or terminated. Currently the limits in Ontario are under the Ontario Disability Support Program.

The challenge for the planner is to provide the highest possible lifestyle for the individual while taking into account the government programmes and avoiding the loss of eligibility.

The first job for the planner is to determine whether or not it is worth while to provide for continuation of the programmes in the first place. The skilled planner will look at the entire estate plan, particularly the existence and number of alternate beneficiaries. For estates of modest means with a number of children as potential beneficiaries, it makes good sense to continue the existing lifestyle of the needy child while providing a trust to supplement those needs within the limits of the legislation. Conversely, high net worth individuals, particularly those with few alternate beneficiaries will probably be in a position to provide a much higher quality of life than is available through government programmes through the use of a conventional trust.

For the individuals wishing to opt for the special trust, the planner must draft a clause which provides for complete discretion in the trustee as to whether or not any amount of income or capital will be paid to the individual and, if so, how much and when. An alternative must exist so that the Trustee may choose another person or person to the exclusion of the needy individual. Clauses drawn in this manner do not offend the legislation as they do not provide any right to income except in the discretion of the Trustee.

August 14, 2001

FAMILY LAW

Spousal Support in a Separation Agreement – is it final?

Recently the Ontario Court of Appeal released its reasons for judgment in what is probably the most important decision of the year in family law. The case of Miglin drastically lowered the standards for the variation of spousal support provisions contained in a separation agreement.

Prior to Miglin, the law was clear that freely negotiated provisions for support could only be varied if there was a drastic and unforeseen change in circumstances. In Miglin, Justice Abella, writing for a unanimous court ruled that Mrs. Miglin need only demonstrate a material change in circumstances since the date that her agreement with her husband was negotiated in order to have the agreement reviewed by the court even though she had agreed to waive all spousal support claims.

The facts are fairly straightforward and need only be summarized briefly. Mr. and Mrs. Miglin were married for over 20 years, during which they had four children. Together they successfully operated Killarney Lodge in northern Ontario. When the couple separated, they negotiated an agreement whereby Mr. Miglin signed over his interest in the matrimonial home to his wife and Mrs. Miglin transferred her interest in the business to her husband. The husband agreed to keep Mrs. Miglin on the payroll as a “consultant” for a period of five years at an annual salary of $15,000.00. In addition, he agreed to pay child support of $60,000.00 per year. Mrs. Miglin waived all claims present and future to spousal support.

At trial, the judge chose to disregard the waiver of support in the agreement and awarded Mrs. Miglin support of $4,400.00 per month for a period of five years. Justice Abella, writing for a unanimous court, conducted a lengthy review of the history and philosophy of previously decided case law and the objectives of the Divorce Act. The judge reached the conclusion that previously decided cases which set an extremely high standard for variation were no longer good law and that a spouse need only demonstrate a change in circumstances in order to have a previous separation agreement reviewed. The court upheld the trial judge’s ruling on the amount of support and removed the time limit of five years which the trial judge had imposed.

The implications for separation agreements both for those which have already been negotiated and those to come are dramatic. Most family lawyers agree that this decision makes it impossible to negotiate an agreement which provides absolute certainty for the future. The dramatically lowered standard for revising agreements means that neither party will be able to structure a life after separation with the assurance that their obligations to a previous spouse are clearly and finally determined. All existing separation agreements are now vulnerable in any situation in which one of the spouses can show a material change in circumstances.

The case is now being appealed to the Supreme Court of Canada which will have the final say. If the court upholds the ruling the courts could be bogged down for the next several years while they struggle to define exactly what constitutes a material change. Stay tuned.

FINANCIAL PLANNING

Life Insurance – What does it cost?

In order to understand the cost of life insurance it is necessary first to have a basic understanding of the different types of insurance. In its simplest form, there are two types of life insurance with many variations.

The most familiar kind of life insurance is term insurance which provides a fixed amount of coverage at a pre-determined rate for a stated term. You may or may not have the right to renew the policy at the end of the term. Generally the rates will increase with age as the likelihood of your death increases. Most standard term policies will not extend past a stated age, usually around 75. Term policies have no cash value. Nearly all insurance which is available as an employee benefit is of the term variety.

To determine its premium, the life insurance company uses its own statistics to calculate the likelihood of your death during the year (mortality cost). For example, the company may determine that the mortality cost for a 40 year old female is .2%. For a policy of $100,000 the cost would be $100,000 x .2% or $200.00. To this figure the company would add a fixed administration charge of about $75.00 and a charge which would cover costs of administration and profit. The total would then constitute the annual premium. Since the fixed charge applies to each policy, it is usually cheaper to purchase one larger policy than a number of smaller ones.

The other type of insurance is whole life. This type of insurance provides coverage for the lifetime of the insured at a level rate. Rates higher than mortality costs in the earlier years allow the insurance company to accumulate a surplus in order to allow for the lower than cost rates in later years. Whole life may be either participating where excess income may be repaid to the owner of the policy by way of a “dividend” or non participating with no dividend. Whole life policies accumulate a “cash value” which can be accessed by the insured either by termination of the policy or often by loan.

Most people who are shopping for insurance are doing so for a specific purpose. The purpose can be anything from providing for a family in the case of premature death to insuring a mortgage or providing for the death of a business partner. These types of objectives are usually best accomplished by term insurance. The cost varies widely even for roughly similar coverage. It is well worth your while to shop around and get competitive quotes. For those of you who know someone in the life insurance business (and who doesn’t), you can consult with that person and obtain assistance as to the type of policy and amount which is best for you. For those of you who are “do it yourselfers”, there is a great deal of information and a guide to rates and available brokers at www.term4sale.com. This is a very handy and useful site for comparison purposes whether or not you choose to use any of the information or links which are provided.

Even for those who already have insurance, it is a good idea to consult with a planner in order to determine whether or not the amount and type of insurance is consistent with your needs. You may also discover that there are policies available which are much cheaper than what you are now paying.

ESTATE PLANNING

Trust for special needs individuals

A common problem in estate planning involves the need to plan for individuals who are mentally impaired and unable to care for themselves. Usually these persons are institutionalized and are in receipt of funding from either the provincial or federal government.

Continuation of provincial funding can only be maintained if the person continues to qualify under the criteria set out in the applicable legislation. Under the current rules, a single person can have no more that $5,000.00 in liquid assets. There are also restrictions on income. A full description of the Rules is available at the government web site http://www.gov.on.ca./CSS.

The job of the estate planner is to design a plan which will best suit the needs of the individual after the parents are deceased. If the estate is relatively small and there are other children who can benefit, the solution is what is known as a “Henson” trust which allows the trustee full discretionary power to determine not only the amounts and timing of any payments to the child for his or her lifetime but whether such payments will be made at all. The other children are named as beneficiaries of the remaining capital when the child dies. Because the child does not have any right to the income, the amounts held in trust are not counted as income so as to deprive the child of the benefit of government plans.

More difficult situations arise when the estate is larger and there are few other beneficiaries. In such cases, the job of the planner is to determine whether a Henson trust is even necessary or whether an ordinary trust would be preferable. This involves a careful calculation of the current benefits available to the child including not only all of the direct payments but also the value of programs which are paid by the government. The decision also involves a consideration of the level of disability and the alternatives available in the private sector and their costs.

Anyone with a special needs individual should obtain advice from an estate planner familiar with this area in order to best provide for the individual.