Appreciating will power
No matter where you live or what you own, your will is arguably the most important element of your estate plan.
By Murray Shapiro, Senior Trust Specialist, Royal Bank of Canada Global Private Banking, Toronto, Canada
Most people understand the importance of having a will. Yet many individuals continue to place their estate at risk by neglecting to draft or revise this essential legal document.
Even in jurisdictions with forced heirship laws where, generally, disposition of one’s assets is restricted depending on the composition of one’s family, a will remains important. It allows you to direct what could be a substantial bequest to named beneficiaries.
Dangers of dying without a will
If you die without a valid will (“intestate”), estate assets are likely to be distributed according to the succession laws of your home country and can be impacted by the laws of any country in which you have assets, particularly land or buildings. There are several potential disadvantages to such a settlement:
- The distribution of assets may not reflect your wishes in terms of timing, allocation, and/or recipient.
- Lack of proper estate planning could result in a higher tax bill.
- It will take longer and cost more to settle your estate.
- The administrator assigned to look after your estate may not be the one you would have chosen to handle your affairs.
If you do have a will, it’s essential that you review it on a regular basis. An out-of-date or invalid will can be as detrimental to your estate planning as none at all. There are a number of life changes that could require you to revise your will to ensure your wishes are carried out. These can include a change in a business relationship (for example, a partnership dissolution), one or more beneficiaries moving to another country, acquiring assets in another jurisdiction, or if you or a family member divorces or remarries.
When one is not enough
While having a valid, up-to-date will in your country of residence is an important first priority, if you have assets anywhere else in the world you may need two or more wills. This is especially the case where you own real property. Whenever any form of real estate is involved, the laws of the land where the property is located generally govern, and the results can be very different from the laws in your country of residence.
In cases where your will is not recognised in a foreign country, you’ll need to consult an expert in that jurisdiction to draft a will which will work there. Should you die without having done this, it is basically like dying intestate. Even in cases where you don’t require a second will, you usually need a resident of the foreign country to act as executor.
If you need to draft multiple wills, it’s essential that the wills work together, ideally referencing each other so there is clarity about your intentions. Standard wording in many wills revokes all other wills previously created. If two or more wills are involved, any revocation language should be reviewed carefully to ensure one doesn’t inadvertently revoke the other.
Drafting or revising your will may reveal more complex estate planning issues that are best addressed by incorporating more sophisticated solutions.
For example, forced heirship laws are common in many countries in Latin America, the Middle East, and Europe. Under these laws, certain classes of heirs have a right to claim a portion of the estate regardless of what the decedent’s will says.
If forced heirship laws apply to your assets, and these laws conflict with your wishes, you may want to consider alternative strategies that will provide an opportunity to try to meet your estate planning objectives. A possible strategy is the use of an international trust established in a foreign jurisdiction that can hold and manage assets on behalf of your chosen beneficiaries. While this strategy is generally not effective for immoveable property, it can be effective for moveable assets, such as investments.
Trusts can also be used for a number of other planning purposes, especially when more than one jurisdiction is involved. For example, the U.S. imposes upon non-residents potentially high estate taxes once their assets exceed a certain dollar value. And some European countries impose an inheritance tax on the transfer of real property owned by a non-resident. In some cases, the use of a foreign trust and/or a holding company can provide estate or inheritance tax relief.
And don’t forget that cross-jurisdictional issues can apply even if you don’t own foreign assets. For example, if your children or other beneficiaries live abroad, tax and ownership issues might arise by reason of their being a resident of a particular country.
Proper planning can ensure that the bulk of your estate goes to the beneficiaries you have selected in the proportion you want. Other advantages can also be obtained. By transferring assets to an international trust either through your will or during your lifetime, undistributed income can accumulate within the trust. In cases where trust income can be accumulated tax-free, at the end of the trust’s fiscal year, the income can be capitalised and ultimately received tax-free in certain jurisdictions.
Planning is the priority
There are many ways to structure your financial affairs to carry out your estate wishes effectively, but the one element that’s common to each structure is planning.
While it may be many years before your estate is distributed, planning today significantly increases the chances that you will achieve your estate planning goals. And considering the time and high costs associated with a contested will and estate plan, be sure to get legal advice on the drafting of all wills and estate documents, and include other professionals in the process as needed.
Estate planning checklist
- Make a will with the assistance of a legal professional.
- Review your will regularly and revise it upon significant life changes (such as marriage).
- If you acquire property in other jurisdictions, find out whether you need another will.
- Attend to other estate planning issues, such as having a power of attorney.
- Review tax-planning opportunities with regard to your estate.
In addition to your will
When you have your will drafted or revised, you should consider having a power of attorney or similar document executed at the same time.
A power of attorney (the name may vary depending on the jurisdiction) gives someone else — in certain defined situations — the ability to take actions and make decisions on your behalf. A power of attorney that takes effect upon incapacity can help ensure that your affairs continue to be managed in your best interest, and that your estate assets are preserved for your intended beneficiaries.
With both a will and a power of attorney, you can be confident that your assets will be dealt with according to your wishes should either death or incapacity occur. As with all elements of your estate plan, be sure to seek appropriate professional guidance when setting up a power of attorney.
Enjoying your wealth
An under-the-cover look at rare-book collecting
I've inherited a substantial library of books from a relative. What gives certain older books their value?
There’s a misconception that age automatically means value in book collecting. So the first premise of being a successful collector is not to assume that a book is worth a lot because it’s old or not worth anything because it’s relatively new. What affects value more is the demand for a book and its rarity.
For instance, a unique copy of a J.K. Rowling book inscribed to her father recently sold for US$40,000. That book was published in 2000, yet it fetched a higher price than the average 15th-century book that comes onto the market.
First editions are generally the most sought-after books. On occasion a second edition could be worth more because it is more rare, but the first appearances of major works usually bring the strongest prices and have the most value.
On the whole, rare books have been a steady, appreciating area of collecting. To give an example, a copy of the American classic The Great Gatsby that Christie’s sold for $19,000 in 1992 came back to Christie’s in 2002 and sold for $140,000.
More than any other area of collecting, the practice of collecting rare books is guided by personal taste. The best collections are put together based on a book lover’s own interests and not necessarily a monetary interest.
A good source for comparing rare book prices from around the world is abebooks.com. The site shows you the estimated market value of the book, which is generally double what it might fetch at auction. You can also contact an auction house and give a listing of your collection (author, title, city, date). The experts there should be able to help you get a sense of its value.
Our thanks to Francis Wahlgren, Department Head, Books & Manuscripts at Christie’s North America in New York. He can be reached at (212) 636-2665 or by email at fwahlgren@christies.com.
Getting a fix on fixed income
Part of a series of articles featuring the managers of our investments.
As Chief Investment Officer for RBC Suisse, part of Royal Bank of Canada Global Private Banking's global network, George Riley is responsible for the discretionary investment management of client portfolios, which include fixed-income assets.
What role do fixed-income investments play in a portfolio?
Fixed income traditionally appeals to people looking for conservative investments that offer security of capital. Over the past three years, investors have also seen fixed-income investments as an attractive alternative to poorly performing equities.
How much of a portfolio should be invested in this asset class really depends on the individual investor’s tolerance for risk.
How might interest rates affect fixed income in the near term?
Interest rates in the developed markets have been at record low levels, so we’re expecting rates to rise. The U.S. economy grew 8.2% in the third quarter of 2003. If that strong growth continues, the U.S. Federal Reserve will likely raise rates to control inflation.
The U.S. growth will stimulate the Eurozone economy, enough perhaps for the European Central Bank to also raise rates, although probably less aggressively.
With rates so low in recent years, bond prices have been relatively high. But all things being equal, when interest rates go up, bond prices fall.
What are some ways to manage fixed-income investments in a rising interest rate environment?
Fixed-income investments make money either in absolute terms or relative to other fixed-income investments. In absolute terms, bond investors can make more money in a rising rate environment by holding defensive investments such as floating rate bonds. These have a coupon that moves with short-term interest rates; if rates go up, so do your payments.
Another example is a Treasury Inflation Protected Security (TIPS), which adjusts the principal value of the bond in step with inflation every six months. Its semi-annual interest payments are then calculated on this inflation-adjusted principal, which means you also receive more interest as inflation rises. At maturity, you receive the par value or the inflation-adjusted principal, whichever is higher.
Another strategy is to hold only short- and long-term bonds in your fixed-income portfolio (called a “barbell” strategy). If 10-year bonds are yielding, say, 4.5%, and short-term bonds (less than two years) are yielding 1.5%, you can get a fairly good average rate of return.
And relative performance?
Holding corporate bonds that offer higher yields than government bonds can help boost performance. If the yield “spread” (the difference between the rates) gets smaller, you’ll end up with a positive performance relative to the government bond, no matter what interest rates are doing. But you need to identify those bonds that are trading at wider-than-normal spreads.
Where do you see the most promising fixed-income investment opportunities for 2004?
Investors will need to position their portfolios so that negative market influences are avoided or minimised. But with administered interest rates so low, it may be 12 to 24 months before short yields compete with where longer yields are now. However, you may have to give up some yield to avoid risk to capital values.
There are also many types of hybrid bonds, sometimes called structured notes, which provide returns based on defined market movements. For example, an “inverse floater” offers a rate of interest that varies indirectly with changes in interest rate levels. These are specialised products, however, and investors really need to seek professional investment and tax advice if considering adding these components to their portfolios.
For further information, please refer to Global Investment View, which includes an analysis of the stock, bond, and currency markets. This publication is available from your Relationship Manager.
RBC in the winner's circle
When it comes to choosing a financial institution, strength and reputation are usually top of mind. We’re proud to report that Royal Bank of Canada is considered to be at the top of its class in two important areas — safety and corporate reputation.
Safest North American bank
Every year, Global Finance magazine publishes its list of the world’s safest banks. The rankings are based on long-term foreign currency ratings from Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s, three leading international credit rating agencies.
Since 1987, Global Finance has been bringing news and analysis about global financial trends to senior management and corporate decision-makers. The magazine reaches more than 285,000 readers in more than 160 countries.
For 2003, RBC was the highest-ranked North American bank for safety. It ranked 11th in the world from an initial pool of the 500 largest banks as measured by asset size. The top six ranked banks were government owned, making RBC the fifth-highest ranked private sector bank.
Many factors are taken into consideration in the assessment process. These range from growth in assets, profitability, global reach, and strategic relationships, to the opinions of equity and credit rating analysts.
Canada’s most respected
RBC was voted the most respected corporation in Canada for the second year in a row in KPMG’s annual survey of Canada’s Most Respected Corporations, conducted by the research firm Ipsos-Reid.
The award is based on input from Canada’s leading Chief Executive Officers, who are asked to name the companies they most admire in nine categories.
In winning the award as Canada’s most respected corporation, RBC placed first in six categories: best long-term investment value, human resources management, financial performance, corporate social responsibility, corporate governance, and “top of mind.”
Committed to performance
With high rankings in so many categories in Canada , and global recognition as one of the safest banks in the world, RBC offers both security and peace of mind to its investors and clients.
Stagger deposit maturity dates
Fixed-term deposits are an excellent choice for shorter-term needs. As with any investment, however, proper management helps to maximise their effectiveness.
One of the best strategies is to consider staggering the maturity dates of your fixed-term deposits in a low interest rate environment, where rates have greater room to go up than down.
Here’s how it works. Rather than selecting one term for your entire deposit, you split it into several, smaller deposits, each with a different maturity. For example, if you have US$250,000 to invest, you might buy five separate deposits of $50,000 each, with terms from one year to five years.
This ensures you have a portion of your savings in ready cash each year for any income needs, and you’ll have deposits maturing annually to capitalise on any higher rates which might be in effect at that time.
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