Plan your estate, protect your family
By Nick Cawley, Director, Royal Bank of Canada Trust Company (International) Limited, Jersey
Four key steps can help ensure that your assets are distributed the way you want them to be.
THE SETTLEMENT of your estate may be many years down the road, but the time to prepare for it is now. Planning well in advance is paramount.
"A carefully constructed estate plan is essential in order to facilitate the smooth transfer of assets in the manner you intend, to make best use of the available tax relief, and to mitigate the administrative burden in the event of your death," stresses Piers Barclay, a solicitor in the Private Client department of Macfarlanes, London.
While no two estate plans are alike, effective plans invariably share some common elements. Here is an overview of those components, and the steps you can take to create an effective estate plan.
1. Assert your will power
Most people understand the importance of a will, yet many individuals continue to place their estates at risk by neglecting to draft this essential legal document and the first element of an effective estate plan.
Every jurisdiction applies different rules. If you die "intestate" (without a valid will), there is no certainty as to how your assets will be distributed. There are several other potential disadvantages to dying intestate:
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The administrator assigned to your estate is not likely to be aware of what you want and may not handle your affairs as thoughtfully as an individual of your own choosing.
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The distribution of estate assets may not reflect your wishes. For example, some countries restrict who can receive what assets and in what proportion.
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Your estate may face higher taxes.
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It could cost more and take longer to settle your estate.
A poorly drafted will can be as damaging as none at all. The costs associated with a contested will can be high and the process can tie up your estate for years. To prevent such difficulties, engage a lawyer or other estate planning professional in drafting your will.
If applicable, have your will reviewed by an expert in each jurisdiction in which you own assets or have beneficiaries. In some cases, changes will be required to ensure that your assets are transferred efficiently and in the manner you intend.
For example, it could be beneficial to have a resident of the foreign country act as executor for the foreign assets in question. If your will is not recognised in another jurisdiction, or contravenes succession laws there, you may need a second will to meet all your estate planning goals.
2. Protect your estate against incapacity
Your will effectively allows you to direct your estate after you've passed away. You need a similar document to direct your affairs whilst you're alive in case illness or disability prevents you from doing so yourself.
Through a power of attorney (the name and availability may vary by jurisdiction), you might be able to grant an individual of your choice the ability to take actions and make decisions on your behalf in certain defined situations. 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.
When you have your will drafted, you should consider having a power of attorney or similar document executed at the same time to ensure that your assets are safeguarded should either death or disability occur.
Trusts, both domestic and international, may be instrumental in achieving the following estate planning goals:
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Privacy. If you establish a trust during your lifetime, you transfer legal ownership of the assets to the trust, so those assets do not form part of your estate. In many countries, a will must pass a court process known as probate to determine its validity before the estate can be distributed. Probated estate assets become public record. Assets held in trust, on the other hand, remain confidential.
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Reduced probate fees. If probate fees apply to estate assets in your country of residence or on assets you hold overseas, assets validly transferred to a trust may not form part of your estate and may not be used in the calculation of any probate fee.
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Potential tax savings. Judicious use of trusts in the estate plan may make it possible to realise certain tax savings on certain assets in certain jurisdictions.
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Ease of distribution. Assets previously transferred through a trust are not subject to the estate settlement process. Your beneficiaries enjoy immediate access to the assets in accordance with the terms of the trust.
4. Use life insurance to cover estate liabilities
In many jurisdictions, estate taxes, capital gains taxes, or probate fees can significantly reduce the value of your estate upon death.
Unless there is sufficient cash available, your executors may need to sell estate assets in order to meet these liabilities. The assets in question may be ones you'd like to keep for your beneficiaries. In addition, poor market conditions may mean the assets are sold for less than full value, with the potential for substantial transaction costs.
Life insurance is an effective way to meet these liabilities and preserve your estate. The death benefit proceeds can be used to cover the taxes and other debts your estate must pay. Your executor won't have to sell estate assets, and a larger estate benefit is left for your beneficiaries.
There are many different life insurance products targeted for use in estate planning, so make sure you review your options carefully before buying.
Keep step with changes
Following these four steps will help you establish an effective estate plan. However, it's also important to review your plan every couple of years to ensure that it still reflects your wishes.
If you or a family member divorces or remarries, or you have a change in a business relationship (a partnership dissolves, or you incorporate), you may need to alter one or all of your estate plan's four key components.
Estate planning is a complex area. When reviewing or creating your plan, be sure to engage the services of appropriate professionals, including a lawyer, accountant, tax expert, and estate planning specialist.
I have elderly parents and want to fund their long-term care. What can I do?
The simplest option for funding long-term care is to establish and fund a separate investment account and arrange for withdrawals to be made on a regular basis. However, other options can provide benefits.
For example, holding the funds offshore or using a trust structure may allow you to achieve certain estate planning objectives.
With a trust, income from a trust fund could be used for the benefit of your parents to fund their care, with the capital going to another beneficiary - perhaps your children - after your parents' death.
If your parents live in another country and plan to stay there, take no chances with exchange rates. Make sure that funds are held and invested in the currency of that country.
If you plan to save over time to provide the needed funding at a future date, the oldest advice is probably the best - make regular contributions, preferably through a plan that deducts and invests a set amount each month or quarter.
If you aren't sure where your parents will ultimately reside, make sure your portfolio is diversified across currencies, with a level of investment risk that's appropriate for the time horizon when you expect your savings will be needed.
How key growth sectors go through the cycle
by Ray Mawhinney and Heather Peirce, RBC Global Investment Management, Toronto
The recent slump in the global economy has affected three major growth sectors differently.
WIDESPREAD TRENDS, such as a global economic decline or interest rate cuts, have a broad-brush effect on equities around the world. Within the overall market trend, however, individual sectors can behave quite differently - from one another, as well as from the broad market.
The following is a look at how current conditions have affected three key growth sectors at different stages of their economic cycle, and what lies ahead.
Financial sector loses interest
Typically, financial services shares are sensitive to interest rate fluctuations, anticipating them by several months. In fact, the sector outperformed the S&P 500 Index in the U.S. by more than 53% between March and December last year. This was despite the fact that the overall economy fell into a slump.
However, once the U.S. Federal Reserve began cutting interest rates, the sector began to falter, as it forecast an end to the rate relief. Looking ahead, if the U.S. economy recovers slowly and steadily by the end of this year, financial stocks could still be market leaders, though not at the growth rate of last year.
If the recovery is rapid, there is likely to be a flow of money out of the financial sector as investors look for more aggressive growth potential offered in sectors like technology.
Longer-term trends such as increasing globalisation and international deregulation of the industry should have a positive effect on this group. These trends are also likely to contribute to continuing mergers and acquisitions among players in the sector, which will affect valuations.
Health care catches cold
The health care sector outperformed the broader S&P market index
by more than 30% last year, but has been one of the worst
performers over the first half of 2001.
Last year's performance was helped by the decline in the technology sector, largely because the defensive health care sector is often considered a safe haven when other growth sectors start to stumble.
The reverse is also true. The large Fed rate cut in January 2001 was the single worst day for the health care sector in the past year, as investors searching for more aggressive growth potential left the sector in favour of technology.
Since then, health care stocks have performed reasonably well, as investors realise the economic recovery may not be as rapid as originally thought.
Short-term, the large-cap pharmaceutical companies in the U.S., such as Pfizer and Eli Lilly and Company, may be in for tough times. In addition to many big-name drugs going off patent shortly (like Prozac), the new balance of power in Washington means a patients' bill of rights and a Medicare drug benefit scheme could be in the works.
Long-term trends - such as the wealth of aging baby boomers who can afford superior medical treatment - work in favour of this sector beyond this particular economic cycle.
In addition, if Japan gets its economic house in order, global health care industries could benefit. Japan is the second-largest health care market in the world.
Telecommunications calls collect
The telecommunications index of the S&P was down by more than 4% by the end of May this year, underperforming the broader S&P 500 Index by slightly more than 2%. But after a year that saw the shares of U.S. long-distance carriers decline by 59%, that's a relative improvement.
Short-term, the outlook remains uncertain for the sector. The larger long-distance carriers in the U.S., such as WorldComm and Sprint, are spending less this year, improving their books but hurting equipment suppliers as a result.
On a positive note, this means the big carriers will be able to capitalise on the cheaper prices for the equipment they'll need, once the economy recovers. The stronger carriers will also have cheaper access to the excess capacity of the less healthy networks.
An improvement in the economy will also result in an increase in voice or data traffic over the networks, improving the outlook for earnings.
Globally, Japanese carriers are in better financial health than their U.S. counterparts, which are suffering from cut-throat competition, and the European firms, which are strapped with debt from the purchase of third-generation (3G) licences from their governments.
This article was prepared in mid-June based on information available at that time. For further information, please contact your relationship manager or visit our Web site.
Is your pension on track?
A NEST EGG of $1 million or more might seem like a lot. But assuming a conservative 5% rate of return, it would generate an annual income of only $50,000. You may need a significantly larger sum to provide the lifestyle you want in retirement.
In addition, extenuating circumstances sometimes prevent even the most conscientious savers from sticking to their savings goals. Perhaps you've had to forestall your regular payments towards your nest egg because you've relocated out-of-country, moved jobs, or had to meet unexpected costs.
If you need to boost your retirement savings efforts to keep your plan on track, here are a few tips.
Investing smaller amounts at regular intervals over the course of your career is a relatively painless way of saving a considerable sum for retirement.
If you work in a jurisdiction that offers a tax-advantaged retirement savings program, make sure you take advantage of it. Even if contribution amounts are limited, the tax savings and tax sheltering that may be available can greatly enhance the wealth-building process.
If you've maximised your tax-advantaged savings, and are still falling short of your goals, consider establishing a supplemental savings program. Beware of expensive savings arrangements - often called "international pension plans" - that allow you to contribute regularly but impose high fees and commissions.
A more attractive solution may be to invest regularly in one or more no-load mutual funds, which impose no commission or sales charges. You can invest a large lump sum or contribute smaller amounts through a regular
contribution program.
In the latter case, look for a fund that won't charge additional administration fees for investing on a monthly or quarterly basis. As a standard feature, you should enjoy the flexibility to change contribution rates and investment options, and much lower management fees.
If you're currently saving in one currency but will need access to another when you retire, make sure you've covered your currency risk. Even the most stable currencies can rise or fall within a broad range over a number of years.
Currency diversification is the first step to ensuring that your savings aren't eroded by a low currency exchange rate at retirement. International no-load mutual funds are an effective, convenient way to diversify by currency.
If you would like more information on how Global Private Banking can help with your retirement savings, please talk to your relationship manager.
Fixed-term deposit ... the simple solution
Knowledgeable investors sometimes forget that complex financial and investment arrangements are not always necessary. In fact, some financial needs are best met with very simple solutions - such as a fixed-term deposit.
Fixed-term deposits generally fulfill two key objectives: capital preservation and a competitive rate of return. They are an excellent choice when you have a middle-term need for cash, such as saving for a major purchase, paying ongoing education expenses, or holding funds in order to capitalise on an investment opportunity.
Depending on your needs, you can choose deposits with terms ranging from seven days to one year.
In times of market volatility, they offer welcome security and peace of mind. You know exactly what the return will be from this cash element of your portfolio.
For more information on our fixed-term deposit accounts, talk to your Global Private Banking relationship manager.
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