Think About The Bigger Picture

“Proficiency at billiards is evidence of a misspent youth” is an old thought that seems not to have been written by anyone. It is taken as a given and while it may be true, I suspect it is overstated.

In my case, billiards should be replaced by pool, and snooker. I cannot claim proficiency, but I think I learned a way of thinking that carries over to real life.

“It’s not what you make, it’s what you leave.”

Organizing income

It doesn’t matter much how much you make, but it does matter how much you have left over to build your, life, provide security, and grow your children, your community, your business and any associated with it.

That means your take home pay. The remnant left when the government has taken what they want. It could also mean what’s left after taxes from investment income. You make a mistake if you manage income instead of what you keep.

Always think optimizing after tax income. No skilled tax practitioner attempts to minimize tax unless it increases after tax value.

Tax planning is intentionally difficult.

If taxes were easy to avoid, everyone would do it and then what? Nonetheless every little bit helps. Employment income is very difficult to reduce or to change the rate applied. Business and investment income are more fruitful areas  of study.

In business, with just a few exceptions, you may write-off expenses incurred to earn income. Similarly, some expenses relating to investments are deductible. The careful keepers of their income use those. For example, some people organize their affairs to make mortgage interest paid deductible while others miss the opportunity.

Some forms of income are less taxable per dollar received. In Canada capital gains create income for taxes equal to one half the gain. Some people find there are ways to earn income as a capital gain rather than as a more taxable form. Dividends attract less tax because the corporations involved paid some of the tax before you get your share of the income.

Some tax sheltered income structures are available. The most common are Registered Retirement Savings Plan – RRSP, Tax free savings account – TFSA, and Registered Education Savings Plan – RESP. Each has advantages and disadvantages. Each is a container for investments with tax and other advantages. You should know why you chose to invest the way you did. Especially true if you choose not to use any of them.

The idea of tax planning is found in four possible planning tools.

  1. Deduct – find how to write off some expenditure. Maybe make mortgage interest deductible. Fussy and it requires several variables.
  2. Divide – find how two or more people can be taxed on a lump of income. With progressive taxation, income splitting is attractive. Not easy.
  3. Defer. – Pay it later. The present value of the tax is less. RRSP.
  4. Change type. – If you can change a highly taxable form of income and have it become some other form, you win. Not easy.

It’s easy to miss obvious opportunities. Talk to people who know how. Understand the purpose of tax planning. It is not minimizing tax. It is optimizing after tax value. In most cases simple arithmetic.

Your estate

In this case what you leave matters.

Estate planning has two time spaces to think about.

  1. What you do while you are alive, and
  2. How your wealth is distributed.

Distribution is the more common form of planning. People focus on it and often overlook easy ways to make the distribution larger. What you do before death matters. Paying taxes too soon is one variant. Failing to transfer unneeded wealth while living another.

  1. Try to think of estate planning as beginning now and ending about two years after the second death of a couple. Integrate spending, investment, charities, and distribution plans to optimize the total available and the timing of the distribution.
  2. Assess how much can be distributed earlier and how. Money an heir receives at 35 is much more valuable to them than the money they receive at 60. Consider loans with security if you are concerned about it turning into a super-car. Replacing a mortgage they have with a bank, for example. Consider a series of disbursements so they can learn more about investing or debt management.
  3. Consider more than two generations. Grandchildren should be considered as possible heirs.
  4. Know what you want to have happen if an heir should die before you.
  5. Understand some of the useful tools. Life insurance is an often overlooked tool that provides meaningful value. It may enhance the size of the estate because of its tax-advantaged investment structure, or it may speed up the distributions by providing liquidity to more rapidly clear debts, avoid sale of assets, or make specific cash bequests. If you don’t think it will work for you, explain your reasoning. Facts may be useful. Get some.

The takeaway

Money is too hard to come by to waste because you don’t know how to avoid the waste.

Learn what you can, or find someone who can help you. If you don’t have know-how, you need know-who.

Learn to leave more than money. Character, wisdom, and experience are good choices.

It’s not what you take when you leave this world behind you. It’s what you leave behind you when you go.
— Randy Travis – Three Wooden Crosses

I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com 

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