A couple we’ll call Luke and Mary, who are both in their late fifties, live in southwestern Manitoba. They have recently moved in together. Love may be forever, but tax and inheritance law make it essential they review their finances.
Farm Financial Planner asked Colin Sabourin, a certified financial planner with Harbourfront Wealth Management in Winnipeg, for guidance.
Luke has two children, who are 24 and 26 years old. His farmland is worth $5 million and the farm corporation is worth $5 million. As well, he has $100,000 in a tax-free savings account (TFSA) and $150,000 in taxable investments. Mary has $100,000 in her registered retirement savings plan and $40,000 in a TFSA.
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For testamentary purposes, Luke wants to split his assets fifty-fifty between his two children and leave some cash for Mary.
They figure Mary would need an additional $750,000 to maintain her way of life if Luke were to pass away. Luke wants his farm assets to remain in the family. Therefore, based on the balance of his TFSA and non-registered portfolio, there would not be sufficient funds for Mary to sustain her way of life.
Life insurance is a solution, Sabourin suggests. Luke can purchase a term, 10-year insurance policy for $500,000. It would cost him $167 per month and he’d make Mary the beneficiary. This $500,000 insurance policy along with the $250,000 he currently has, his TFSA and taxable investment account add up to $750,000. In his will he should stipulate that Mary receives $250,000. He would not need to mention the $500,000 in the will as the life insurance death benefit wouldn’t make up part of the estate for Mary as a direct beneficiary.
This is a short-term solution. Ten years from now the term insurance policy will become more expensive, climbing from $167 per month to $800 per month. Luke will want to cancel his insurance policy at that point as it won’t make sense to continue paying this amount for insurance. Therefore, Luke should start saving some money today to replace the life insurance coverage that will disappear in 10 years.
For Mary, if Luke lives for another 10 years and then passes away, she would only need $600,000 to maintain her retirement lifestyle allowing for some growth in her present personal assets. Luke needs to make sure he has $600,000 of cash available for Mary in 10 years in case he passes away.
Luke currently has $250,000, so in 10 years at a stock market average gain of eight per cent per year, he’d need to save an additional $4,160 per year to grow his portfolio from $250,000 today to $600,000 in 10 years. He would then have to update his will to make sure it says that Mary is to receive $600,000 from his estate.
The longer Luke lives, the less he’ll need to leave for Mary because her lifespan will be shrinking. Every few years, Luke should review how much he’d like to leave her based on her future retirement needs in the event of his death.
For his children, Luke should draft a pre-nuptial agreement. Even thought he’s not getting married, after living together for three years Manitoba family law will apply. A pre-nuptial agreement is the best way for Luke to protect his farm assets along with its future growth. He should review his plans with counsel.
Luke’s son is farming, so it would be appropriate for the farming corporation to go to his son and the farmland to go to his daughter. Each asset is worth $5,000,000 — so it would be fair. To protect the farm, he can set up a lease agreement on the farmland going to his daughter. For example, he could have a 10-year lease agreement set up where his daughter has to rent the land to her brother.
When Luke passes away, his executor will be able to increase the cost base of the land and farm shares being transferred to his children. Luke’s executor should make sure the adjusted cost base (ACB) is bumped up by Luke’s $1,000,000 capital gains exemption. Any additional gains wouldn’t trigger taxes to Luke’s estate as the farmland and corporate shares could be transferred tax free as a gift.
