Giving a gift to the next generation
If you have assets in several countries, you may have to contend with a variety of tax and estate administration rules.
By Murray Shapiro, Senior Manager, Toronto
Royal Bank of Canada, Global Private Banking
Parents often wish to pass on assets they’ve accumulated over their lifetime to their children in order to help them financially, whether to finance a home purchase, back a business venture, or provide for their education.
However, gifting assets to your family’s next generation can be a complicated task. The first consideration is whether you prefer to make an inter vivos gift (made during your lifetime) or to make arrangements for specific assets to specific parties after your death. There are advantages, and disadvantages, to both choices.
Gifting through a will
Gifting assets through your will allows you to continue to control, enjoy, and benefit from these assets for as long as you live. Should you need cash, perhaps to invest in a business or satisfy a legal liability, the assets are available to you.
If you have assets in different jurisdictions, they are very likely to be subject to succession rules, probate regimes and estate/inheritance tax systems that are considerably different than the country where you live.
French succession laws, for example, give considerable rights to children — to such a degree that they override provisions in your will if there is any conflict between the two. And a Canadian resident with U.S. assets may have to pay U.S. estate taxes even though he or she rarely sets foot in the country.
Where you have assets in multiple jurisdictions, you may need to seek the advice of several professionals to achieve your estate planning goals. These could include a professional in your country of residence, another in the country where the asset to be bequeathed is situated, and in some cases, a professional to advise on the tax implications of the gift to your estate and the intended recipient.
Inter vivos transfers
Effecting the transfer of wealth directly to your intended beneficiary during your lifetime, instead of through your will, offers a number of potential advantages.
Certainty. When you give away assets during your lifetime, you know for a fact that they are going to the person you intend. The downside, of course, is that the assets are no longer under your control. The recipient may use the assets for uses you never intended or don’t approve of, and is free to give them away to someone else.
Simplification. If you’ve accumulated wealth in different forms in different countries, taking care of those assets can become a complicated and time-consuming burden. Transferring the ownership of some assets can be a welcome way to simplify your affairs during your lifetime and reduce the complications that can arise during the administration of your estate after death.
Asset preservation. Once the assets are transferred out of your name, they are less likely to be considered as part of your estate that is available to satisfy your liabilities. In such situations, it is critical that the transfer of assets not contravene applicable fraudulent conveyance laws.
Consider an international trust
There are many situations in which a direct inter vivos transfer is not the most desirable solution. For example, you may want to give assets to your children, but are unsure if they have the skills to manage them.
If your children live in a high-tax jurisdiction, the “gift” may bring with it a sizeable annual tax liability as well, depending on the nature of the asset, the type of income it generates, and the tax situation of the recipient.
Transferring assets to an international trust for your children may be a preferable alternative. Gifting assets into trust means transferring the ownership and control of such assets to a third party — the trustee — who will hold and administer them on behalf of those persons you name as beneficiaries. Depending on your intentions and objectives, the trust can be structured to provide them with income and/or capital to maintain their lifestyle, while ensuring there’s enough money for their continuing financial security.
A trust can also enable you to achieve specific goals. For example, you might establish a trust for a particular purpose — such as funding a beneficiary’s education. There can be tax benefits, as well. In some situations, assets gifted to an international trust during your lifetime may avoid income tax and possibly estate or inheritance taxes. In effect, this can be another way to achieve your asset preservation goals, and provide a greater proportion of your wealth to your family.
Before you act
Keep in mind that when you transfer assets either directly or through a trust, there’s always the potential for capital gains tax or gift tax to apply to the transfer. The precise implications will depend on the country you live in, and on the nature of the assets transferred.
As these are complex issues, to protect your interests as well as your family’s, be sure you plan ahead with the help of qualified professional advice.
Cultivating a taste for orchids
Orchids are fascinating plants, and I’d like to start a collection. What makes some of them so valuable and what factors should I be considering?
In many ways, the current fascination with orchids dates back to Victorian England, when explorers would bring back these tropical rarities from their expeditions and auction them off.
Today, it may be a particular plant’s colour, unusual shape, scent, or genealogy that makes it valuable. In Japan, for example, orchids routinely sell for several thousands of dollars, and perfume companies sponsor competitions in order to acquire the rights to particularly fragrant specimens.
Often prized for their rarity, orchids are actually one of the largest plant families. There are some 25,000 identified species and more than 100,000 hybrids. With such a wide variety, it should be fairly easy to find one that matches the growing conditions available to you.
If you’re just starting out, you may want to seek out an orchid society in your region. Their members know from experience what works, and they will also be able to tell you where to buy.
Orchids are controlled by the Convention on International Trade in Endangered Species (http://www.cites.org/), so it’s important always to deal with a reputable breeder.
Also keep your eye open for orchid shows, where the plants are judged on characteristics such as the complexity of their blooms or the colour and shape of their leaves. It’s a serious business, with substantial money at stake.
A prize-winner’s descendants can fetch as much as US$4,000. One particular specimen, of the highly prized Neofinetia falcata species (originally grown only by Japan’s samurai class) recently sold for about US$100,000.
Our thanks to Dr. David Roberts, orchid taxonomist at the Royal Botanic Gardens at Kew in London, England. (D.Roberts@rbgkw.org.uk)
Investing in good governance
Dan Chornous
Chief Investment Officer for RBC Asset Management Inc.
As Chief Investment Officer for RBC Asset Management Inc., Dan Chornous is responsible for overseeing US$34 billion of funds around the world under the care of RBC®
It’s been almost three years since the Enron accounting scandal made business headlines, but corporate malfeasance seems to show little sign of abating.
In this interview, Dan Chornous explains just what good corporate governance is, why it matters, and what investors can do to try to protect their assets from corporate wrongdoers.
What is good corporate governance?
Governance is the relationship between the managers of a company, the board of directors they report to, and the shareholders that the board serves.
Good governance seeks to boost shareholder value by making sure that string of relationships is well-defined, properly staffed, and closely monitored for the benefit of the firm’s investors.
Why is good corporate governance important for investors?
Because investors own the company — it’s their money and it ought to be managed in their best interests.
Common sense says that those firms with the best governance structures may eventually be rewarded with the highest share prices — everything else being equal.
Mind you, poor corporate governance doesn’t necessarily mean the company is headed for a high-profile catastrophe like Enron or Parmalat. It may mean simply that the governance standards in place are not encouraging the highest possible returns on your investment.
Why has governance become such a critical part of investment decision-making?
As recently as 20 years ago, if you didn’t like the way a company operated, you’d sell its stock. The belief was that if management did not look after the interests of shareholders, the stock price would fall.
But Enron turned this theory on its head. In that instance, no one even knew there was anything wrong until after the catastrophe occurred.
Incidents like this have made everyone realise that there is a shared benefit to having a well-functioning system of checks and balances that are effectively monitored and enforced.
Companies have to strike a balance between encouraging risk-taking and strictly controlling what the board and the managers can do.
In recent years, that balance appeared to have shifted; investors felt there was too little control. Those controls are now under new scrutiny.
How can investors know whether they are dealing with corporations practising good governance?
Companies typically post their governance procedures on their websites. The main element to look for is independence — for the majority of the board of directors, as well as important board committees such as audit, human resources and compensation, and governance. These should provide impartial oversight over company management.
Check the qualifications and attendance records of board members, and look for reasonable compensation packages for management. Of course, if your money is being professionally managed, this type of due diligence should be executed on your behalf.
What about investing overseas in unfamiliar countries?
Generally, where the rights of shareholders are recognised and securities regulation is effective and refined, investors may have some protection.
To a certain extent, the global movement of capital fosters common governance standards, because countries without a governance structure or regulatory system are frozen out of the market. Where those institutions are newer, however, there may be less protection.
It’s an aspect of investment risk that investors should not overlook when contemplating an investment in less-developed economies. Obviously, professional advisers can help lessen that risk.
How does RBC ensure good corporate governance?
We’ve shown considerable leadership in several ways. As a company, RBC has been progressive with its own board, separating the role of CEO from chairman and ensuring the independence of the directors and the board committees.
Where we’re investing on behalf of an individual or group, we follow governance guidelines, and monitor the companies we invest in accordingly.
When necessary, we may take a more active role — withholding votes, voting against proxies, or discussing our concerns with management.
®Registered trademark of Royal Bank of Canada
Global investing with peace of mind
Investing can be complex and time-consuming. In light of the challenges, many investors choose to invest through a global investment fund. For Royal Bank of Canada Global Private Banking clients, the RBC Regent Strategy Fund Limited*™ may be an appropriate choice.
This investment fund offers a simple, cost-effective and flexible way to invest in a variety of asset classes in international markets under the guidance of top-tier investment managers.
The RBC Regent Strategy Fund offers a range of investment funds in each of the major asset classes — equities, fixed income, and cash — as well as balanced classes that blend these asset classes in single funds.
The funds’ world-class investment managers are selected by RBC based on performance, process, staff, and investment philosophy. The selection and monitoring process is rigorous. For example, for our European equities class, we screened more than 1,500 potential managers before making our selection.
The RBC Regent Strategy Fund uses the buying power of RBC to have the investment management firms manage to objectives that we specifically design to meet the needs of private clients and trustees. We may request a risk adjustment, for example, or an increased exposure to a particular country.
The result is a range of investment funds designed to meet the specialized needs of our Royal Bank of Canada Global Private Banking clients.
Managers are monitored scrupulously, and may be replaced if the RBC Regent Strategy Fund believes they are not meeting objectives. If an investment manager is replaced, the transition will be seamless. There will be no switching costs and no potential tax impact.
Should you decide to adjust your asset mix — adding U.K. equities in place of U.S. equities, for example — you can do so with no up-front charge.
The fund requires a minimum initial investment of $25,000 in the currency of the class for equity, bond, or balanced classes and US$250,000 (or £150,000) for the money market class.
To find out how the RBC Regent Strategy Fund can take the worry out of international investing, please contact your Relationship Manager or visit our website at www.rbcprivatebanking.com.
* Depending on your citizenship and residency, some or all of the funds may not be available to you. In particular, the funds are not available to U.S. Persons or residents of Canada.
Heading home?
Working outside of your home country can be a rewarding experience, offering career enhancement, along with the opportunity to accumulate substantial assets.
But when it’s time to return home, many expatriates find they have special wealth management needs such as pensions, savings, or mortgages.
Careful preparation and planning can go a long way to ensuring a smooth return. There are a number of banking and investment services you may want to consider as you relocate.
Royal Bank of Canada Global Private Banking can help. We offer a full range of global financial services, including international banking, wealth management, international trusts and estate planning, and international tax planning.
As the international private banking arm of Royal Bank of Canada, we can tap into an extensive network of people and services offered by one of the world’s leading integrated financial institutions, including personal and commercial banking, investment funds, as well as brokerage and advisory services. For more information visit us at www.rbc.com.
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