British Columbia-based entrepreneur and angel investor Jack* is 57 years old, married and has three adult daughters (two are completing university degrees and one is married). Over the course of about 20 years, Jack and his business partners built a successful professional services firm. But at the end of 2019, Jack sold his interest in the firm for $20 million, netting $16 million after tax.

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“When you’re working and building a business, you don’t think about what that business is worth,” he said. “You’re focused on your customers, making sure your employees have good careers and building your business. The value accumulates and then you exit. What do you do with it?”

As a part-owner of a private company, Jack created a separate holding company and trust structure to separate his personal assets from those of the business. The family’s investments, including the proceeds from the sale of his stake in the firm, are spread across three corporate entities.

The investments include: $1.3 million in registered retirement savings plans (RRSPs), $220,000 in tax-free savings accounts (TFSAs), $1.15 million in bonds, which pay out $50,000 a year, $1.5 million in universal life insurance policies, $3.5-million worth of capital dividends from the sale of Jake’s stake in the professional services firm, and $9 million in guaranteed investment certificates (GICs), including one that pays out $20,000 a month, which is used to cover monthly living expenses of about $17,000. Jack has also invested $800,000 in early-stage companies and $2.8 million in three limited partnerships.

Now that he’s exited the business, having his holdings in multiple entities is more complicated than necessary. Jack has a plan to amalgamate the three companies into a single holding company, which will mostly generate passive income from investments and consulting/contracting fees he and his wife Ann, a freelance writer, generate.

The couple also own an apartment in Calgary worth $450,000 and a principal residence in B.C. worth $4.5 million, with a $1.125-million mortgage at 1.65 per cent. The monthly payments are $6,550 and the property tax is an additional $1,800 a month. The bonds he owns will mature when the mortgage is up for renewal in two years. Jack and Ann plan to use the proceeds from the bonds to pay the remainder of the mortgage.

“We want to spend less than we earn on our investments and not take on any personal debt,” Jack said of his retirement goals. “I spent a lot of time governed by a schedule. Now that I can be where I want when I want, I am reluctant to go back to a regular ‘job’ unless I have to. I am more interested in unpaid or advisory work, where any compensation is in a share of the value that gets created, rather than a salary or fees.”

Now that I can be where I want when I want, I am reluctant to go back to a regular job unless I have to

Jack

Jack and Ann are active travellers and have discussed living in different countries for a period of time each year. They also want to host family vacations with their daughters and significant others every other year, and anticipate this could cost $50,000.

“Do we have enough money to keep us going in a comfortable lifestyle based on the things we want to do?” Jack asked. “How can we pass some money to our daughters now in a sensible way? Should I fund the life insurance policies to shelter some investment income and use them to protect the value of our estate that will transfer when I pass? Is there a more fee-efficient way to invest the proceeds of the business sale than mutual funds? Where should I park the capital that’s currently sitting in GICs?”

What the expert says:

“People sometimes think the wealthy don’t need a financial plan because they have so much money. But a financial plan is really a life plan to think through what you want to do with your life and your money,” Ed Rempel, fee-for-service financial planner, tax accountant and blogger, said. “The only difference between a financial plan for the middle class versus wealthy investors is the numbers are bigger.”

Based on the information provided, Rempel anticipates the couple’s cash-flow needs in retirement will be about $300,000 a year. Assuming average returns of about five per cent for the total portfolio in the long term, this will require about $8.5 million in investments to comfortably fund the retirement they want to have.

“They currently have $11.8 million, which means they are ahead of this goal by $3.3 million, or 40 per cent,” he said, but there is one key potential risk: “If they lose $4 million or more from their private and early-stage investments, they may not be able to fully support their desired retirement.”

The only difference between a financial plan for the middle class versus wealthy investors is the numbers are bigger

Ed Rempel

Rempel offers a couple of options to responsibly pass money to Jack and Ann’s daughters: invest the maximum annual contribution of $8,000 into the newly introduced tax-free First Home Savings Account for each of them; and consider maximizing the daughters’ TFSA contributions as well.

“Warren Buffet said give kids enough so they can do anything, but not enough that they can do nothing,” Rempel said. “Financial independence is about learning money skills. Jack and Ann may want to offer to match contributions rather than contributing the maximum amounts.”

If Jack and Ann want to control the investments, they can contribute to “in trust for” (ITF) accounts in their own names.

“If they invest for growth, there is little or no tax, because capital gains are taxable to the kids,” Rempel said. “Then they can give them the money when they think their daughters are ready.”

Rempel does not see any need to fund a life insurance policy given the current size of the estate (about $20 million) and the ability to defer tax in other ways, such as buy-and-hold investments focused on growth, which will likely perform better than the limited investment options within a life insurance policy.

He estimates that with an effective investment strategy, the estate could grow to $40 or $50 million in 30 to 40 years.

“An additional $1.5-million life insurance is insignificant and expensive,” he said, noting the plan costs about $25,000 after tax each year in insurance premiums.

Rempel also recommends Jack and Ann understand their risk tolerance, invest strategically and focus on returns after fees.

“They are investing piecemeal and have 15 or 20 mutual funds,” he said. “When you invest in mutual funds, you are investing in the fund managers. It’s much better to have five or six managed by top fund managers. Fees can be worthwhile if the fund manager is skilled and has a strong track record.”

Rempel suggests the couple hire a good investment counsel portfolio manager, who can effectively invest the entire portfolio based on their risk tolerance and help them decide on an overall target return and sustainable withdrawal rate.

“These portfolio managers are elite investors,” he said. “They are the only people in the investment industry with a fiduciary duty to do what’s in your best interest. Look for a track record of outperforming the index.”

The GICs are the portfolio’s least tax-efficient investments and incur a passive income tax of 50 per cent. The $20,000 they receive each month from the GIC is not a return, Rempel said, they are just taking out their own money.

“It’s a GIC that gives you part of your principal back every month,” he said. “They’d be better off setting up a systematic withdrawal plan with any mutual fund. The portfolio manager can do this.”

*Note: Names have been changed to protect privacy.

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