Risk profile key in assessing best tax, estate planning strategy
There are a number of approaches lawyers and other advisors can take when implementing estate and tax planning strategies for individuals and families — but it is ultimately the client’s tolerance for risk that will serve as the main factor in deciding the most appropriate path, Calgary tax and fiduciary services lawyer Dennis Nerland tells AdvocateDaily.com.
As Nerland, a founding partner of Shea Nerland Law and leader of the firm's tax and estate planning practice, explains, when it comes to determining which strategy is best for a particular situation, the crucial factor is the risk profile of the key decision-maker of the family.
“The risk profile is determined by asking a series of carefully designed questions. Where some see risk from chance of loss, others see opportunity for gain. Other factors relevant to determining strategy include whether things like asset protection, peace of mind and enduring legacy result from implementing the strategy,” he says.
At the moment, he says, ‘tax deferral’ strategies are the prevalent approach, as they carry less risk.
This method ultimately involves delaying the payment of tax otherwise due, usually to be paid by a person’s successors.
“A risk-averse family would likely prefer a deferral strategy such as a standard freeze to a savings strategy such as a multiple capital gains exemption strategy, whereas a risk-on family would likely pursue both,” he explains.
Other approaches, Nerland says, include an income splitting strategy, where parties shift income from a higher income individual to a lower-income member of the family — usually between spouses or parents and children.
Characterization of income is another process where individuals can realize benefits by converting one source of income to another, such as interest to dividends or capital gains.
Individuals can also plan a strategy around maximizing credits, he says, such as through philanthropic gifting.
While clients can also opt for offshore tax and estate planning methods, these have become more difficult year-over-year for the past 60 years, he says, “to the point where they are extremely limited to special circumstances these days.”
Offshore strategies, adds Nerland, are by far the riskiest option due to the reputational risk they carry.
Ultimately, the appropriate solution for clients, he explains, will involve the right asymmetric return.
“Success, as we define it, is a net increase in the client’s wealth and peace of mind as a direct consequence of implementing the strategy,” says Nerland.