E65: Tax Strategy with Matthew Getzler

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This podcast is brought to you by Ginsler Wealth. The information discussed today is meant to be general in nature and not tailored to specific investing or financial circumstances. This means that you should talk to your regular Gensler wealth advisor or your own advisor before acting on any information we discuss today. Nothing in this podcast is intended to be a solicitation and past performance does not guarantee future returns. Since I am scared of the cra, this last sentence is serious. For once Ginsler wealth and me are not providing tax advice in this episode. Talk to an expert like our guest or your own tax accountant and lawyer. Let me tell you how it will be. There's one for you, 19 for me because I'm the taxman. Yeah, I'm the taxman and you're working for no one but me. Today on the Unlimited podcast we speak with Matthew Goetzler, Partner and co Chair of the Private Client Services and Tax Groups at Torquin Maine. We expand on our last podcast discussion on Wills and Matt shares just a few of the last remaining viable tax strategies for families. Let's go. Welcome everyone to another episode of Unlimited Podcast. This is our second in our Wealth Hard series where we're going to talk about a number of things, a number of concepts, areas that are not investing focused and where we help families and where we think it would be good for our listeners to know and learn. So very excited today to have my good friend of 3040 years, Matt Goetzler, Matthew Getzler from Toric and Mains. Matthew is, I'll give you the official bio. He's a partner and co chair of the private client Services and tax groups at Torkin Mains. He advises families and private business owners on tax efficient estate and succession planning, cross border issues and private client solutions from estate freezes and prescribed rate lending to probate and US Estate tax planning. I think all of which we might touch on today. And Matt writes and speaks frequently on practical tax strategies that work for high net worth families and complex estates right down the line of the types of families and things we deal with. So today what I want to do is have a little bit of a carryover from our last podcast episode with Jessica Feldman Chitley where we talked about wills and powers of attorney and that was a know you could call it the 101 of what are they, how do they work, what do you need to know? And Matt is going to help us maybe with the 201 a little bit deeper, dive into a few concepts and then really we want to have a little bit of a Discussion about the tax strategies that are still available after all the changes governments have made for, you know, the last 10 years, what are still available to families to try to maximize their or minimize their taxes legally and appropriately, of course, and maximize what's left in the pocket for them, their families, their children, et cetera. So after that long diatribe, Matt, nice to see you here live in my office to record.

Yeah, nice to see you as well. And thank you for having me. It's a great pleasure. You run a great podcast, so I'm very excited to be a part of it.

I like when people say nice things to start. That's good. Okay, so maybe first of all, I gave a quick intro to you, but give a little bit of a background what you're doing. How did you get to sort of run the group over at Toric and Mains and. And then we'll dive into the next level of wills, basically.

You know, I've been practicing in the private client space for, I guess almost 20 years now. I started my career focusing more at a large law firm where, you know, we did things like public company work, more prospectus disclosure, you know, m and a type of advisory. But I really wanted to make a change and focus my practice more on people and businesses and the people who run those businesses. So that's been the transition for me from early in my career. But for the last 20 years, you know, I've been helping business owners, high net worth individuals and, and whatnot throughout in terms of, you know, their estate planning, tax planning, succession planning and, and everything in between. And so, you know, I would say primarily I am a tax lawyer for any type of private corporate tax work. But where I think, you know, I personally offer the most value is, you know, really succession planning, really seeing how a business can transition from one generation to the next because that brings in, and we're going to talk about a lot of these things, all of my skills to the table and lets me utilize them in the most efficient and meaningful way. So I mean, literally taking a business from one generation to the next and dealing with everything that comes with it, both from a tax side, family side and everything else. I think as a tax lawyer, you know, I always see ways to save tax, but I think I pride myself on both being a practical tax lawyer with good business sense, but also an overarching theme in whatever I do is really maintaining family harmony and recognizing that tax can't always be the right way to go. There is a path at the end and my structures intend to you know, structure in a way that is tax efficient but also ensures or minimizes the risk of issues down the road, which we always hear.

That's a great overview and a great way to think about, you know, executing for, for families and for clients. So, so let's, let's start do sort of part A of this discussion, which is carrying on from the original, I guess, Will's powers of attorney, but mostly Will's discussion about a month or so ago, give or take, with Jessica. And we want to dive a little bit deeper into a few things. Keep, keep in mind, we want to, we want to dive deeper, but we also want to make sure that we're not like, speaking a different language for, for our listeners. But I know I've worked with you on many, with many clients, for many clients, and you are very good at explaining some complex stuff. So I'm not super worried. So let's talk about, I think a couple items we want to talk about on the will side. And you could refresh or, or refer back to Jessica's for anything you think it makes sense. But she talked a little bit about what happens if someone dies without a will. And I know you have some thoughts you want to share with us around that situation, spousal rollovers this and that. So what's the concept of that you're trying to sort of make sure is not happening or what's the danger in that situation?

I think it's really about the danger in the situation more than anything. Jessica and yourself did a great job setting the, you know, landscape for what happens if you die without a will, with all of the practical issues related to guardianship and otherwise, and, you know, not having a distribution scheme that you want and not having necessarily having the people you want to manage the estate do it and dealing with trusts for kids, all that kind of stuff. And Jessica's, and I'm not going to repeat everything she said, but she talked about how when you die intestate and you have a spouse and children or grandchildren, there is a division of the property on a percentage base, preferential share that goes to a spouse, and then the balance is divided depending on how many children you have or grandchildren and so on. And so generally speaking, you know, when an individual dies in Canada, they are deemed to have disposed of all of their assets at fair market value. You basically have to pay tax on your death for all of the growth in the assets you've owned during your lifetime. And I would say the single most used exception to this general rule is when you die and leave everything to misspeps, whether outright or to a very specific type of trust that is afforded, a rollover, which is to say that your spouse inherits your assets based on what you paid for them, and those growth on those assets is really only taxable when that second spouse does dies. So you're deferring the tax until later death. And there's lots of policy reasons for that which we don't have to get into. But when you die without a will and there's a prescribed formula for how your assets are going to be distributed and they're going to be divided between your spouse and your children, there's an inherent inefficiency there because whatever portion of your estate that goes to your children is taxable on your death. And so, you know, someone with significant assets and significant underlying gains who might have otherwise been able to defer those taxes until the later of the spouse's death will find themselves having to pay tax on their death. And, you know, many people in these types of circumstances that would argue are generally younger if they don't have wills, which means they've had an untimely death in many circumstances. And, and the opportunity to defer that is not 10 or 15 years. It can be 50 or 60 years in some cases. And that I don't need to tell you what the value is of investing on a hundred cents on the dollar instead of 75 or 80 or whatever. So, you know, it can be quite catastrophic to have to pay those taxes on your death when, you know, never mind the fact that you probably would have left everything to your spouse and anyway, now you're paying taxes, you know, unnecessary.

So the, is the, is the conclusion of this concern, basically. So just make sure, like, what is, what is, what's. What's the, what's the solution then? If it's not as simple as just make sure you have a will that designates everything going to your spouse. I know there's a couple different ways to do it, but is that the conclusion or is there anything.

I mean, it's basically as simple as that. If you have a will and you intend to leave everything to your spouse, do, I suppose, take advantage of your rollover, Right. Like most people think it is just a given that that's going to happen. Well, it's not, right. As Jessica, you know, discussed on that last podcast, it's not as simple as that.

And you and I have set some of these up and we've talked about this, talk about, you know, designate everything to the, to your Spouse. There's also a concept of something called a spousal trust, which is a little bit different than just designating everything to your spouse, if I'm not mistaken. How does that work and what's the benefit of that?

Generally speaking, a spousal trust, if it's drafted properly, affords the same rollover as if you had given it to the spouse directly. And the reason people would typically use a spousal trust is to A, ensure that the spouse is taken care of, you know, during his or her lifetime. But B, it also ensures that following the spouse's death, whatever's left in that spouse address will be distribute, will be distributed in accordance with your will, not in accordance with your spouse's will. And, you know, we're talking about people who have untimely deaths or even people who are older and have a spouse die. It's not so irregular for that spouse to remarry or get into another type of relationship and new kids are brought into the picture, either with the two new spouses or both from previous marriages. And you can imagine. And Jessica talked a lot about blended family planning. You know, you can create a lot of problems where you leave everything to a spouse and then they turn around and either leave it to a new spouse or to kids or from both marriages or a kid from the new marriage gets favorable treatment. So it's more of an asset protection thing than anything. And not necessarily a lot of people think this has to do with trust of spouses. I think everybody mostly trusts their spouse, but lots can happen in many areas. Even if they get remarried to the best person in the world, you know, you could still frustrate what you built and what you intend to leave to just your children at the end of it.

Right? Yeah. So this last five minutes of discussion actually almost really has nothing to do, has little to do with tax. Now it's more to do with making sure you control your wishes, basically, which is critical. Okay, so the other. So let's keep rolling because this is great. Jessica also touched on probate and what happens when you pass away. And, you know, in Canada, the government very nicely wants to take a portion of your overall assets, all of them, not. Not just the gains. So can you just remind folks what probate is or means, and then what, you know, what do you do to try to minimize some of this?

Sure. And I mean, I use the term probate, but, you know, there's more official names for it. Like, basically, it's. You apply for a certificate of administration or. Or appointment of A trustee, either with a will or without a will. And basically, when you make that application, you have to advise basically, the value of the assets being administered pursuant to that application, and you pay approximately 1.5% of the value of those assets. So, you know, if you started the base case where you don't have a will, you have to disclose all of your assets, you have to pay probate on all of your assets, you know, and so Jessica talked about the importance of having a will, and she talked about the concept of multiple wills. And, you know, she gave the example of, you know, situations where people have assets that require probate and assets that do not require probate. And by having two wills, you can effectively limit the probate that you must pay to those assets that actually require probate. So she gave the example of someone who's got private corporate shares, which is the most common thing that is used, I would argue, in. In secondary wills. And so if someone were sitting on a company worth $10 million as part of their assets, if they died without a will, they would have to disclose the value of that company, and they would have to pay $150,000 of probate fees. So by simply having two wills, that $150,000 of probate Fees could be avoided just because you have two wills, as opposed to either not having a will or only having one will. And so, you know, it is a great first step and a great point to be made that you can. You can avoid the probate on assets that traditionally do not require probate by having two wills. But, you know, I would say there are ways to take that planning further, which would basically convert assets that typically require probate into assets that do not. So take the example of your house, for example. So your house is worth $3 million, and the probate that is owing on that house is $45,000. Because when you die and your name is on that house, in order to change the title of that house following your death, you need a probated will in order to do it. They won't transfer the name to the executors and trustees without that document. And so we do. There are many forms of planning to get around this. You know, some that I really don't like, some that I don't typically do. But I would say, you know, one form of planning, which is the one that I use most commonly, is called fair trustee corporation planning. And basically what happens is the individual would transfer legal title of the house to a company. The individual would still be the beneficial owner of the property. So you're segregating legal ownership and beneficial ownership. Because you're not transferring beneficial ownership. It doesn't trigger things like blank transfer tax when you change the title. It also means that when you die, you are able to claim the principal residence exemption. Most of these things are based on beneficial ownership. But what it does mean is that when you die, rather than the property being in your name and requiring a probated will in order to effect its transfer, the property is actually in the name of a company, ABC Co. And nothing has to be done on that person's death because beneficial ownership is changing behind the scenes without having to change legal title. And just by virtue of doing that, you can convert what was otherwise a typically required asset, asset that required probate, into one that no longer needs it. And you know, this extends far beyond just your personal residence. You know, you can be any type of property you own that might otherwise be subject to probate, including investments. A place like Gensler Wealth. Right, right. You know, you have an investment account at Gensler wealth in your own name. You know, consider converting it to a Baird trustee corporation so that when you die, you know, it can be the ownership of those assets can change without Ginser wealth having to change. The accountants satisfy itself that, you know, it is transferring those accounts to the right person because they're going to want a will with a probate stamp on it in order to do it. Otherwise they're exposed to transferring it to whoever the person purports to be the will, the executor and trustee of the will, when maybe later it's discovered that a will was signed five years later appointed to someone else.

Speaking of investment accounts holding them jointly or bank accounts putting know your spouse or your somebody or if you're your child, for example, I, I see that a bunch. Is that a good strategy? Not maybe so good. What do you advise in those circumstances?

Well, I think, I mean, every situation merits its own discussion based on why it's in that person's name in the first place. So it just may not be optimal to add people to it. Using this bear trustee corporation planning achieves the bear, the probate planning without actually changing who owns the assets and whose names are. That's why I like it so much. But using spouses is oftentimes recommended people do it. But that's only good on the first spouse's death. Once the first spouse dies, you're back in this position where you have a solo person and you're exposed to probate. So some people might Say I'll just do it jointly with my spouse right now because it's quick and easy. And then I'll address what I'm suggesting when one of us dies. And sure, you can do that. The risk is that A, you die together or B, you just never do it. I would say adding children to both, you know, investment accounts or to houses and all those things, that is something I always recommend against. I think, oh, really? It is just set up for potential disaster and maybe 99 out of a hundred times that disaster won't occur. But I worry about that one out of 100.

And what's the disaster that the, the child says, well, now that I technically own this, I want to do something with it and it's mine and I'm not sharing it with my siblings if they're not on it or.

Exactly. The disasters can go a number of ways. Right. One, they can flip forced the sale of a house. Right. They're now a registered owner on the property. Right. And there's different ways to combat these things, but these are the risks I worry about. Another issue is you put on a child for convenience sake to avoid probate, but there's two other children and then you die and you know, that one child says it's mine and you have no right. And there are cases around these types of things to help protect against this risk. But the fact of the matter is, even if that issue can be defended successfully so that that one child doesn't get away with the assets, who even wants to deal with that?

Right.

Why expose yourself to court and litigation to get to somewhere, in my opinion, when there is an alternative that does has the same result, but takes away all of those risks.

Good. I like it. That's great. We, we talked just before this topic on the spousal, Spousal rollover, spousal trust, which is really sort of how to get assets into the hands of the people you want to get them into. I wanted to just talk about the concept of, like, how do you successfully make like a success, like a succession for your assets? And in particular, if it's a business or a corp or something like that, how do you draft wills that, you know, accomplish the objective that most owners of these types of assets would want?

I mean, this isn't so much a tax topic as it is a, you know, a practical and useful way to use wills. But, you know, a typical succession plan, like I mentioned before, where you're succeeding a business from one generation to the next, isn't always the case that all of the children are the successors of the business. Right. And if you want to leave a business for one child, but you have three children, you gotta figure out a way to ensure that if you're gonna leave the business to one, that the other kids are equalized. Right. Because I talked about maintaining family harmony at the outset. Well, maintaining family harmony is oftentimes ensuring that your kids feel like they've been treated equally at the end of the day. And so if I'm leading a business worth a million dollars or shares in a business worth a million dollars to that one child who's in the business, I'm going to want each of my other kids to receive the equivalent value of that million dollars. So it's really important to ensure that in those particular types of situations, you have proper drafting in the will, but also arguably just as important that you have sufficient value outside of this company to make that happen. Right, right. And that's where you run into problems quite a bit, I would say, in the sense that for a lot of business owners, you know, their biggest, if not their sole asset, other than their house, for example, is their business. And if you're leaving that to one kid, you may not have sufficient assets. And that's.

Well, and. And how do you know that what the value is going to be at the time of. Even if you think you have sufficient assets now, what happens as the business grows? The value grows. Can you pre plan for that or.

Well, you can, and we're going to talk about this concept a little bit later, but.

Okay.

You know, typically when you're doing a succession plan to bring a child into the business, and this isn't always the case, but oftentimes you will. The parent or parents will freeze their interests in the company so that all of the future growth accrues for the benefit of that child in the business or a portion of it. Right. If I'm passing a business on to the next generation and I'm no longer going to be active in, it stands to reason that the growth and value of that business is going to be derived by the child who's in the business, and that child is going to want that equity. Sure. There's other considerations you have to take into account, because maybe that child who's growing the business, part of it should be for the benefit of his or her siblings. Right. And that's part of every succession plan discussion. But if we were to say that the parents were satisfied with the value of the business right now as part of the succession plan, did not need future growth, you would undertake a reorganization that would freeze their interests. And I know we'll talk about that in a little bit. But what that would effectively do is put an ascertainable value on their interest in the company and then you can assess basically whether you have sufficient assets otherwise to equalize. And often times like there are many or there are a variety of post mortem tax planning strategies that we undertake to ensure that there's no double taxation on, on an individual's death and thereafter. And a lot of those or most of those plans will result in basically promissory notes being issued to the estate. And so notwithstanding that parents died with an interest in the company that's worth a million dollars, that they don't necessarily have to leave that to child who's in the business, because that million dollar shares can be converted into a million dollars of promissory notes and divided equally between the three kids. And everybody's been treated equally. If you think about it that way, a lot of things you have to consider are just how big is their interest in the company? And if you're giving promissory notes to children when you do that, can they demand it right away? And if they do, have you created an issue for the business where they have to come up with the cash to pay those promissory notes? So all these things need to be thought through in great detail. But at the end of the day, you build a plan and then you structure around it, taking not just tax, like I said it could consideration, but all of the practical and business aspects into account as well.

Okay, so we, you mentioned a lot about this estate freezing and, and what that. Not estate freezing. But you said freezing a number of times. I know we have one more topic on the will side, but actually I think maybe why don't we jump to some of the tax planning because it'll follow on what you just said about freezing. Then we'll go back to another question that I think is both about wills and tax planning. So just, just to keep the concept going. So do you want to talk about what that means when you say we're going to freeze or an estate freeze? And what is it? Why do people do it? Why is it good? What does it help with?

Yeah, for sure. I'm happy to talk about that. So the estate freeze is generally a corporate reorganization whereby shareholder basically exchanges their shares, which are presumably common shares in these particular circumstances for fixed value preference shares. And what I mean by fixed value preference shares is they have to have very specific characteristics, but they are basically redeemable by the shareholder and retractable by the corporation at the fair market value of those shares at the time of issuance. So if your company was worth a million dollars at that time and you exchanged it for fixed value value carbon shares, they're worth a million dollars because the company can buy them back for a million dollars and the shareholder can demand a million dollars in exchange for their shares, but that creates the freeze of their value. Right. And so, you know, not talking necessarily in the context of a succession plan that you've just talked about, but you know, earlier I had mentioned, you know, when an individual dies, they are deemed to dispose of their, their assets at fair market value. And ignoring spouses and spousal rulers because it's either on the first death of the second death, by freezing an interest in the company, you've also frozen your death tax exposure. Right. Because if my shares are worth $1 million today and I assume a 25% tax rate on death, you know, my death tax exposure in respect to those shares is $250,000. If I died right, then if I didn't do a freeze and I died 15 years later when the value of the company doubled, so too has your death tax exposure. Right? Right. And so the estate freeze basically says freeze my interest today at 1 million, lock in, in theory, my $250,000 death tax exposure and all of the growth of the company going forward is actually going to accrue for most commonly a trust, but potentially direct, direct individuals. But typically it's going to be for the benefit of children or grandchildren, meaning that extra tax and that extra growth is not going to be owing until the next generation dies. And this goes back to what I mentioned before, and you know this better than I do. Right. If you can defer tax, you are always going to be better off because the money that you don't have to outlay in tax can be used to invest and create a greater return. And the longer you can defer, the more it actually becomes a tax saving as opposed to just tax deferral. Right. A lot of these strategies aren't necessarily tax saving. A lot of them are tax deferral. I mean, we'll talk about prescribed planning after and we'll talk about U.S. state tax planning. And those are actual potential tax savings. But the concept of an estate freeze is rooted in the concept of deferral. And so, you know, it's a great planning tool, but the reality is it's not always advisable or necessary. And what I mean by that is, it's great for me to say that, you know, you have a company that's worth a million dollars today going to be worth $2 million when you die. If you did a freeze today, you've reduced your death tax exposure because of that growth. Well, what if that company is going to be sold the day after you die? Or hey, you haven't achieved any deferral. The kids aren't taking it over because they're just going to realize that anyway. Right. And that's like in an active business, I would say it almost always didn't make sense to do in shape freeze. You don't really ever know what's going to happen. But take a Gensler wealth client who has investments and they're thinking right now, well, I've got investments that are, you know, the value is sufficient for me to last per my lifetime. Why don't I do a freeze so that if it's worth a million dollars today and it's worth $2 million when I die, I only have to pay $250,000 of tax instead of 500. Well, I would say when you die, like what's going to happen? Are your kids just going to sell everything, divide it and go their own separate ways? Because if so, what have you achieved? And in my example, I'm also being very extreme in assuming the person's got a cost base of a dollar in this asset worth a million dollars. But if investments are turning over at a relatively, you know, normal pace, well, the reality is you might have $800,000 of cost base on that 1 million. So your death tax exposures now shrunk to 50 grand. But by the time you die and it's worth 2 million, you may have $1.8 million of cost base. You've realized those gains during your lifetime, you've paid taxes on them. You don't have this large underlying tax liability.

So it seems to work better for active businesses. Oh, but what does that mean?

Like, so the lifetime capital gains exemption is basically a allowance, if you will, by the government that when you sell a Company, the first $1.275 million of the proceeds are tax free, provided it meets those certain conditions.

Government doesn't usually let you get anything tax free.

So I know you think in these last 10 years and what they've done, you know, with the introduction of tax on split income rules and, you know, a variety of other things, they're actually trying to discourage business owners. Yes, but this is actually one of those things that is a great Thing, thing for, you know, business owners in Canada and really is a great way for people to monetize fair sale in a more, you know, efficient way.

I would say that's that number is for each human, each individual.

That number is budgeted.

But you're going to tell us there's a way to spread that somehow around other individuals.

Well, that's right. Right. Because if I'm the sole shareholder of my company, they sell my business. I thought for $10 million, I get $1.275 million of tax free and the rest of it is subject to taxes and normal capital gain. Well, what if before, when the company was worth $5 million, I had frozen the company, introduced a family trust as the new common shareholder and when I sold, which would be two years after two years or more after I'd implemented this structure, I sold it for $10 million. Well, if I have a spouse and I have a number of children, that the $5 million gain that's now within the trust can be allocated to any one or more of them. And if you've got a spouse and three children, for example, that entire 5 million could be spread amongst four of them. You wouldn't pay a cent of tax or capital gains tax, I should say, in respect of that. So rather than you having to pay $1.25 million of tax on that $5 million of proceeds, your family unit has now paid zero tax on it. So the savings are quite meaningful and incredible. Now there are alternative minimum tax considerations that have to be taken into account when we talk about this. But I would argue that if you're able to use the lifetime capital gains insurance exemption for a child, even if they have alternative minimum tax exposure, and even if that alternative minimum tax could never be refunded, the savings are still going to be way more than the cost of that alternative minimum tax, AMT,

as the experts call it. That is for session 301 right now or in 201 maybe, but the point is well taken. And then the only other question I hear a lot with the estate free freeze is, well, if I freeze the value and all the growth goes to my kids or whoever. But hang on a second, I'm still, I'm still the CEO running the company. Do I lose control somehow by doing this? Because, you know, how does that work?

Yeah, and it's a great question. And so two things I would say to answer to that is first of all, I would never implement an estate freeze and to have the person control. So we have these concept, this concept of what we call thin voting shares. Okay. These are shares that have no value but voting control of the company. So if I were the sole owner of my company, if I was doing an estate freeze and introducing a family trust and recognizing that there's likely going to be three trustees of that family trust, and even if I'm one of them, I can't control them. After I exchange my shares for these value shares, I would generally have the individuals subscribed for $10 of shares that give them voting control of the company. And we separate that, just to be clear, from the free shares. You could make those free shares voting in theory, and they could control the company. But there are more elements of planning which may be for another day where you know, there is a possibility to be tax efficient by redeeming those shares over time, utilizing my graduated rates for the next 15 years to pay nominal tax on the deemed dividend that arises when you redeem those shares. So that not only have I taken my million dollar asset with $250,000 tax liability, but conceivably shrunk it to zero by paying nominal tax by the time I die. Right? So there are so many planning opportunities. But my fear is if I'm so tax efficient and amazing that I'm able to do that and my only votes are attached to these shares, there comes a point where you lose your control. Right? So these separate shares ensure that even if you are undertaking that planning, you have the ability to control the company. In the second piece, I better give

your phone number because people are going to call you after this. Zero tax. We got a magician on the podcast today. I love it. I'm just joking.

Well, sorry, just one more point.

Yeah.

Was just to address another comment where I thought you were going with your question is, you know, many people may say, I'm not sure right now is the time to freeze because I haven't necessarily accrued enough value for myself. Right. My response to that would be, you can be a discretionary beneficiary of that trust. So in theory, increased value can revert back to you. Now, it's not tax efficient to revert that value back to yourself because the whole reason or one of the main reasons of doing this was to defer your taxes in the first place. But you know, circumstances change and having that flexibility, in my opinion, is critical.

I love it. That's the estate freeze discussion. So going back, as I said, I wanted to jump around because you mentioned freeze as part of our will discussion. So figured let's dive into there back to the will. And then it'll also tie into some of your tax planning. More and more we're seeing families with, you know, some U.S. assets or a family member in the U.S. or how do you work both on the will side and then maybe tax planning side to solve for some of the issues that US assets, US situated people create. And maybe what are some, what are some of those issues and then how do you solve them?

Let's talk on the, on the will side first. So, you know, Canada and the US are very different in their taxation systems, right?

Canada's not the 51st state yet.

Well, they did eventually be and frankly, I would create a lot of work for me as we transition. But you know, in Canada, we tax our people based on residency, meaning if you are a resident of Canada, you are subject to the Canadian tax regime. I mean, people who are not residents in Canada may be subject to Canadian tax regime for other reasons, you know, including owning real estate in Canada. But ignoring that for a moment, you know, U.S. tax is based on citizenship, meaning whether you're a resident in the US or not, you are subject to the US tax regime and the US estate tax regime. And so just to give an idea of what the US estate tax regime is, you know, I had previously talked about what happens in Canada when you guy, you disclose your assets, you pay tax on your underlying assets. In the US it's quite different. They look at the value of your assets, you have an exemption, and anything in excess of that exemption is subject to U.S. estate taxes. So right now the exemption is the highest it's ever been. It's $15 million US which is a very big number. A lot of people, or most people I would say are, are under that exemption. Not necessarily most people that walk into our doors, but most people in the world. And so if you have this $15 million of exemption and you're ultra high net worth client at this point, right? And you have a spouse who is a U.S. citizen or you have children who are U.S. citizens, whether they live in Canada or whether they live in the US or frankly anywhere else in the world, does not change the analysis of their exposure to US estate tax. It may change how we deal with them in a will, but it doesn't change the exposure. And so the concept is basically to ensure that when you die, whatever you leave to that spouse or your children, as the case may be, is structured in a specific manner and in specific trusts that basically ensure that the value that's assets never form part of their estates for the purposes of calculating their US estate tax exposure on their deaths. So this is planning that can't be done after you die. It has to be proactive planning and the value proposition of it is significant. Right. If you're talking about ultra high net worth clients with spouses or children who stand to inherit $100 million, you know, simply structuring their inheritance in this manner can prevent that hundred million dollars from forming part of their estate when they die. And 85 million of it or something could be subject to tax at 40%. By simply structuring it in this manner, you can completely avoid that US estate tax exposure.

So just be clear, the US estate tax above that threshold, 50 million is 4. 40%.

It's up to 40. Up to 40, yeah.

Holy moly.

Yes.

Usually it's Canada that is more egregiously taxing its citizens. And in this case, the Canadian estate tax is essentially the pro. Well, sorry, two parts. Essentially the probate that we talked about, which is just one, one and a half, I say just because it sounds like nothing now in comparison. And then obviously your tax on all the gains that were that were left just prior to your death, but 40% or up to that is a ginormous number.

It is extremely significant and you'd be shocked at how many people are not planned for it or don't even realize it. And I think it's one thing, it's interesting to note that I always have a not a good chuckle about because that would make me not normal, you know, because Canada's death tax is based on, you know, underlying gains that haven't been taxed during your lifetime. And the US side is taxed on the value of your assets. If you die with $100 million of cash in Canada, you wouldn't have to pay a cent of tax on your death. If you die with $100 million of cash in the U.S. you are exposed to the U.S. estate tax regime and those egregious rates above and beyond the exemption. So, you know, to get to $100 million of cash in the U.S. you would think, unless you have a really successful cash business, that you've realized gains, paid the tax, turned it into cash, and now you're getting taxed on it again, Double tax. Really?

So how do you avoid this? And in particular, if you are the child of someone who passed away and you live and reside and are a citizen of the US only, how is something set up to sort of bypass all this?

Well, it's basically the use of very specific trusts that have very Specific limitations. I won't necessarily get into all of those limitations. But if you use these trusts, and these trusts will all take. It can have very different forms depending on, you know, how the testator wants to, to deal with things. Right. You can have the child or spouse be the sole trustee of his or her own trust, or you can require multiple trustees for this trust and then you can put in different flexibilities. And if you have those limitations on those things, then you are protected from US estate tax to the extent that these assets continue to exist in this trust when you die.

Okay. And the trust is. Has. We're talking a Canadian trust or.

Well, it depends on where the children or the spouse, I mean most circumstances the spouse are going to live in Canada. But you know, the planning is a little bit different for US Citizen children who are in Canada versus US Citizen children who are in the US in the latter, it is way more common to create a trust today to which that child's inheritance will pour over under the will. And for US Citizen children who live in Canada, the trusts will actually be created pursuant to the will itself. So you could create a trust today that lives for the next 30 years before you die if you have a kid in the US Whereas if the kids in Canada, that trust doesn't actually get created until you die because it's created pursuant to your will.

Okay, again, I think we're getting into stuff for maybe the third go round if, if we have it.

Well, to bridge the second part of your question, you know, you had talked to me about, you know, our discussion on the US So far has been limited to US citizen beneficiaries. But what many people don't realize is that the US estate tax regime also extends to people who are not US.

Ah, yes, yeah, but who owns assets? I did want to tight our US Citus property.

Right. And so US Citus property. Most people.

What does that mean?

Most people think like real estate. Most people in Toronto own real estate in Florida. Right. And so, you know, or elsewhere in the U.S. and so, you know, there is U.S. estate tax exposure in respect to that, but there is also US estate tax exposure in respect of investments that an individual owns in US companies. So your shares of US companies are exposed to the US estate tax regime when you die. Now when you are a Canadian and you have this exposure to US estate tax regime, you know, because of our treaty and everything else, basically what happens is that 15 million dollar US 15 million dollar exemption that I was talking about before is ground down based on the Proportion of your assets in the US to your worldwide assets. So if your aggregate estate is worth less than 15 million U.S. you don't have U.S. estate tax exposure even if you own real estate in the U.S. even if you own U.S. securities in your own name. Because that calculation I just gave you is always going to give you the full exemption mathematically, right? Where you get into problems is where your assets a good problem to have exceed that exemption. Right? And so if you had $5,000,000 of U.S. of assets that were technically exposed to the U.S. state tax regime and you had $50,000,000 of worldwide assets, you take your $15,000,000, you multiply it by five, you divide it by 50, your exemption is $1,500,000 U.S. and then your U.S. estate tax exposure is the value of your U.S. estate tax exposed assets in excess of that exemption. So 5 minus $1,500,000, $3,500,000, 40% rate on that. You know, you're talking about. I don't want to get my math right wrong and embarrass myself, but I think that's like $1.4 million of US estate tax exposure, right? And so there are different ways to deal with different assets. But why don't I just talk about investments? Because that's particular interest to you. So if I had, if this were my situation and I had this $5 million of assets or investment in U.S. equities that are exposed to U.S. estate tax, you know, there is a relatively simple fix for that. If I were to transfer those investments to a corporation in Canada, which I could do on a tax deferred basis, meaning there would be no tax on the transfer provided I met certain conditions. But that would be my job to make sure that doesn't happen. When I died, if I died with shares of a Canadian company which owned US equities, as opposed to owning those US equities myself, I don't have any US Estate tax exposure in respect of those investments, right? And so you know, to save $1.4 million of exposure for the relatively nominal cost of putting such a structure into place place in many circumstances, it's a no greater. I mean, the alternative is get rid of all your US Investments and only invest in Canada. But I think Brian will tell you, as any advisor, worth their worth, their worth, their weight is would tell you that's not necessarily prudent strategy, especially in the concept of diversification and everything else, which is not my specialty in yours. But I know you well enough to know that you would not simply say sell off your US equities when there is a reasonable, relatively cost efficient way to protect against it while maintaining the overall investment objective.

Yeah, it's a good point. I think a lot of Canadians definitely invest in the US it's the biggest market to invest in, in the world. And it's been pretty amazing over the last number of years. But they don't know they've got this potential issue building up or bubbling up in the back end. So that's, so that's good to know. And again, I think this is, you know, good, good overview, but clearly there's a lot of complexity around here and that's, that's why you got to call. You got to call Matt again, off to give your number. Maybe the last thing to touch on is something I see quite a bit. I think you call it prescribed rate loan planning, which is going to sound like Greek, as they say to some of the listeners, the way I've just laid that out. But basically, how do you. Another strategy basically to try to maximize the after tax value to let's say a family unit or a family group. How does that work? What does that mean? You've talked about trusts a lot. I don't know if you use the term family trust, but I think that's where those come in. And people always ask me, should I have a trust or a family trust? I'm not really sure what that means, but I hear other people do it. I know what it means. I mean, that's what the, you know, the folks say to me. Can you just describe that a little bit and how there might be an opportunity still, I hope to save some taxes.

You know, people always ask me, do I need a trust? They don't really understand why either.

Yeah.

And that's normal. But people also always ask me, how can I tax efficiently pay for all of these crazy costs? I pay for my kids. Yeah, we both have young kids. We both know firsthand how much they cost.

Yeah.

Wouldn't it be amazing if you could finance all of those costs with their tax rates and not yours? Well, the answer is there is a possibility. Right. You know, this prescribed rate loan planning is basically a strategy and it can take different forms, but I'll focus on the one with a family trust, whereby an individual loans money to a trust, takes back a promissory note equal to the amount of the loan, and the interest rate is the prescribed rate of interest at the time the loan was made.

What's prescribed rate mean?

So the government sets the prescribed rate of interest. Currently, it's 3%. The lowest it's ever been is 1%. And I can't tell you how many of these strategies I put into place place when it was 1%. I mean, I was just promoting it through the roof at that time because it was never going to get better than it did at that time. But essentially, you know, if you have a loan that you've made at 3% to a trust, and let's just assume your rate of return is 7%, and let's just assume you're going to do a million dollars, okay? So if you did Nothing, I had $1 million and I invested it, and I earned $70,000 in the year, and I paid top rates of tax, I'm basically paying in excess of $35,000 of tax on that investment. So if I instead took that million dollars, loaned it to a trust, put it back, my promissory note, okay, $30,000 is going to be paid to me in each year. I'm going to pay $15,000 of tax on that. But the other $40,000 that's earned by the trust, say I have three children, which, coincidentally I do. If I were to take that $40,000, allocate it equally to my three children,

these as beneficiary, as trust that you've set up.

That's right, yeah. Conceivably, there could be zero tax holding on that $40,000 income. Just by that, I have saved the family unit $20,000 of tax in the year. Now, in order to do what I just said and allocate that $40,000 to your kids, you must actually pay the amounts to or for the benefit of the kids. It's for the benefit of the kids. That's the real key here. Right. Because a lot of people don't necessarily want to start putting, you know, this is an example where you're putting $13,000 a year into an account for a kid. You do this for 10 years, they're 7 years old. By the time they're 17, there's 130,000, plus all of the juice that's grown on it, where that's in this kid's name. Right away. Uncomfortable with that.

Yeah.

But going back to what I said before, 13,000. I can think of many ways to use that $13,000 in each year to pay for the things that I pay for my kids all the time. School, hockey camp, whatever. Right. The clothes that they wear, the food that they eat. Like you could go so far as using it for these things. Right. And so technically, you know, If I'm paying $13,000 for my children's expenses. You know, like I mentioned before, I have to earn $26,000 to pay for it. Right here I have an opportunity to use my kids tax rates so they pay zero and then use that $13,000 to pay for those things. So I'm not building a banking camp for them that's growing and growing and growing so that when they're 18, they can tell me they want their money and they're legally entitled to it. And there's, you know, 200, $300,000 in an account for them. I don't want that for my kids. I don't know about the other listeners, but that's not appealing to me. What is appealing to me is how do you pay for those expenses? Using their, their, their tax dollars basically, or their tax rates, I should say. So it can create a lot of efficiencies. And you know, this is a basic example. But many people will create those side pools, right, because if you have $10 million you're doing this for, the amounts are significantly higher. I mean, the reality is at a certain point, the more income you allocate to kid, the higher the tax rates they're going to pay and it's going to become either inefficient or the difference is going to be nominal enough that it doesn't make sense. So it's not like you would do this on $100 million of assets, right? That just wouldn't make sense. And so, you know, there is a limit to where it stops making sense. And as kids get older, of course, you know, they may get jobs and the values go down and of the splitting and all that stuff. But that is a neat strategy for this. And you know, we're talking about doing this via trust. And you know, to do that there are costs of creating a trust, there's ongoing administrative compliance. And you know, one thing I didn't mention yet is that that interest must be paid by January 30th in the year following the year in which the interest is owing. And if you don't pay it once, you have tainted it forever. And when I use the term forever, that sounds scary, but a really nice thing about these trusts is when you make your loan at the prescribed rate, that rate sticks forever.

I was going to ask, so people

who locked in a number of years ago at these 1% rates, you know, in my brain, you know, if I see prescribed rates going up, I think, okay, investment returns must be going up correspondingly. Seems to make sense. Logical sense to me. So if I locked in at 1% when investment returns were 5% and today prescribed rate is 3%, investment return to 7, I've just created more income splitting opportunities. Right? And so, you know, people say, well, it's 3% now, there's no sense in doing this. I would say maybe you don't have the same long term sense in doing it as when it's 1%. Right. I've just shown you with a basic example the value you can derive right away from it. And the reality is, you know, in almost all circumstances where I do prescribe rate planning, the costs to implement are more than covered by the benefit in year one. Right. And then you've got pointless years going forward.

And by definition, with the phrase prescribe rate loan, the government is prescribing the rate that you should use for these types of things. Leads me to believe, I mean, this is perfectly under the rule of the, you know, the income tax Act. And like, you know, people are always worried if I put some structure in place, is that going to cause me a problem later? Am I going to get, quote unquote audited in this case? This is, you tell me, as close to plain vanilla tax planning. That's, you know, a little bit more than what most people do. But it's pretty plain vanilla and not really on the risk spectrum, very high. Is that a fair statement?

True, the loaning strategy? Definitely. I would agree with that statement. I would say where a lot of things come up in these contexts which have questions is what is the trust using the loan funds to invest in? Fair, right. So if you're using public securities, generally speaking, you're good. If you want to be a little bit more aggressive and you know, invest in other things, you know, without getting into too much detail when, while your kids are minors, there's a possibility that the type of income you're sending to them is subject to the kiddie tax, which causes every dollar of income to be taxed at top rates. And even once they become, depending on what the trust is invested in there, the tax on split income rules may apply, which similarly causes every dollar to be taxed at top rates. You have to be careful with what the trust you is using its loan funds to invest in in order to ensure you're getting the tax results.

What could you invest in that would be bad?

I mean, there's lots of them. But I would say if you took the money and invested in a private corporation that you control and you pay a dividend to this trust and you think that you can then allocate it.

I see you've got problems.

Got it.

Essentially you're taking what really should be coming to you, uh, and giving it to the kids or something.

Yeah, I think the, the concept is rooted more in things where you have an element of control over the income. And that's in respect to the tax on split income rules. More so than the kitty tax. The kitty tax is more like black and white, I would say. But you know, if I have, if I take the money that I've lent to the trust and I put it into a private corporation that I control and I can control the dividends that are being paid, you're not doing what the spirit of what this is. Right. And so I generally say limit it to, you know, public securities and you don't have to worry.

Okay, so. So maybe second last question on this theme of like pitfalls or things to avoid or worry about. Any based on anything we've talked about in the last hour, anything that you've seen that sort of went awry because, you know, maybe they didn't follow your good advice or something was like, what do people need to watch out for if they're going to do some of this work? And obviously the first thing is, I would say is call Matt or Jessica or somebody that is the expert in setting this stuff up. But any stories that you think this would be good for listeners to understand? Yeah, I mean, like, I think it's

really hard to explain stories that have happened to me because of course, course there's no respond back.

You've never had a problem.

And apologies if I've made all of this planning seem really simple by explaining it the way I have.

But you have, you, you've explained it simply, but we know it's not simple. Yeah.

There are too many pitfalls. The list.

Okay.

Like you just got really earthful. Like it's, it's whether it's on the will side. Something as simple as leaving everything to your spouse. You. Because you think it's tax efficient. But what you're leaving to them includes shares of a company for which there's a shareholders agreement which doesn't allow you to transfer them to a spouse.

Right.

That's a problem. Right. And you have to canvas these things as a person advising on the wills because not standing. You're trying to do it on a tax efficient basis. You may actually be doing works because if you do transfer it to a spouse and you are in breach of your shareholders agreement, there are going to be default Provisions which could mean that you chairs get bought out for 50 cents on the dollar or something like that. Nobody went with that. Right. And so you have to be very careful and things like that. I would say that's like a pitfall of the most basic variety when you talk about a will. And then on the tax side, the Income Tax act is just an impossible, impossible piece of legislation. And I feel like people, including myself, are learning something new every day in it and something that you didn't think about and have to think about in the ways that you structure and you know, in an estate freeze, for example, you want to be mindful of the corporate attribution rules, right? And what basically the corporate attribution rules are, are provisions in the Income Tax act that say you can't exchange your shares like we do in the concept of an estate freeze if it's to benefit somebody else. Okay. Which is exactly what an estate freeze does. Right. There are exceptions to these rules, Right. The exceptions to these rules include if I'm using a trust and I'm concerned that the corporate attribution rules a apply. Well, I should include a provision of my trust that says while I'm alive, my spouse and my minor issue cannot benefit from the trust. And if I have that clause and just speaking very high level, then the corporate attribution rules don't apply. And that's really important in the context of a freeze of a, an investment company, for example, because the, you know, if you think about what I just said said and put it back into the context of why you might do a freeze to introduce a trust to multiply the lifetime capital gains exemption, I had to include a clause like that. I haven't achieved anything if my kids are minors and my spouse can't use the lifetime capital gains exemption because they can't benefit. Right. And so, you know, there's two ways around that concept to allow you to do what I've said you can do. One is if the company of which the trust is the shareholders small business corporation at all times, corporate attribution rules don't apply. But this requires, you know, I don't want to say constant necessarily overlooking, but where, you know, where there is a risk that it may not be considered small business corporation at a time because it's accruing a lot of cash, for example, that's not used in the business, you got to be very careful. Right. The other alternative is the corporate attribution rules don't necessarily apply if I get a return on my free shares, but that's creates a level of inefficiency as well. Because if I have to pay a dividend to myself of a couple hundred thousand dollars, each year's following three is like, have I really created efficiency if I could have not paid that dividend and just had the value of the company accrue for my own benefits? So, you know, those are tip of the iceberg things and innocuous ones. There are way more advanced mistakes or oversights that can have significantly more risk and consequences.

If that last few minutes wasn't clear that, you know, some, some of these very nicely explained concepts are much more complicated and, and that's why people need, need help to do this. So we'll leave, we'll leave the tax and the planning at that. My last question for you, which I

ask everybody, I already, I've already planned on it.

Have you? What are you doing for lunch? No, no. My last question, we call it the unlimited question. Our tagline, your wealth unlimited. You know us very well. Our listeners are probably tired of hearing me say this, but we help families with whatever touched them financially. It is unlimited what we will do for families. Families, you know, in the realm of financial and wealth management. That's a little bit what this Wealth Hard theme is. You can learn more about that.

By the way.

Go to wealth hard dot com. You can play the Wealth Hard game that I vibe coded using AI, which I've mentioned in my last queer letter. But anyways, put that all aside. Unlimited. You've been practicing tax law for 25, 30, 25 years. I don't know if you could do anything. The world is unlimited to you and you'd be doing something else. I think I know what you'd going to say. What would you be doing right now if not practicing in your current practice?

Well, for me it's an easy answer. Very unrealistic one, but a very easy one. My love for tax and why I really love tax law rooted in my love for numbers. And my love for numbers is rooted in my love for baseball. So if I could be anything, I would.

You beat Brad Pitt, Moneyball.

I would rather be playing than being the guy architecting the things. As much as that would be a great alternative to being the player. You're asking the question what I'd be or what I want to be. I'd better play baseball.

I love it. Okay, sir, thank you very much for diving a little bit deeper into some of these strategies. And really I want to actually commend you because we talked about at the beginning like having to explain this stuff clearly. This is not simple stuff and one of the reasons why we work together a lot is because I know you can help our clients and, you know, explain things clearly and then execute. So thanks for your time. See you soon.

Thank you for having me.

Okay, bye bye.

The unlimited podcast is hosted and produced by Brian Gensler and is not to be taken as investment advice. If you like what you heard, don't forget to rate the podcast and follow us on Social medianslerwealth. Thanks for listening and see you next time.

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