Risk and reward: the real cost of probate

Joyce Wayne highlights the key takeaways from Leony deGraff’s financial advice at the CARP meet.

My investment choices for the last year aren’t abysmal, but the results are anything but stellar. I know what happened.  Since the Brexit vote in June 2016 and the election of Donald Trump in November 2016, I’ve been off my game.

Before these events, my performance in the stock market was tallying between six and seven per cent per year, which these days, is as good as I can expect, given my risk tolerance.  I don’t use a financial advisor. Instead I trade online, make my own decisions and have only myself to blame if things go south.  There are no hidden fees so I keep my initial investment unless, of course, there is a downturn in the market, which appears to be happening on a regular basis.

I was enjoying the daily task of following the markets coupled with the world events that I believed governed the success or failure of my portfolio. All that changed in the last year.  The first twist in the road was how dead wrong I was about Brexit.  I expected the citizens of the United Kingdom to vote against cutting themselves off from the European Union.  Even the Queen appeared to be against Brexit.

Wrong. As soon as the returns began to roll in from Sunderland, a riding in North-east England, the grim faces on the BBC announcers said it all. Britain would succeed from the union and with it certain of my ETFs and individual stocks took a surprising plunge.

Six months later came the U.S. presidential vote and again my investments went south. I was driving along the QEW, listening to CNN on Sirius radio when the November returns came in. Hillary Clinton wasn’t doing as well as predicted and by the time I gave up and went to bed in the early hours of morning, the result no one predicted had come true.  It’s not the there wasn’t a Trump bump in the U.S. market;  I just didn’t take advantage of it.

After the market crash of 2008, I’d learned my lessons the hard way. Stay the course. Don’t pull out of the market when there’s a downturn.  Wait until the indexes return the money I’ve only lost on paper until I sell. Never buy high and sell low. Ensure my portfolio is properly diversified and recalibrate twice a year. Keep emotion as far from investment decisions as possible.  All of the above are easier said than done.

In professional parlance, I was allowing my emotions to drive my investment strategy. Probably the worst thing any solo trader can do. The emotional weight of my questionable choices has left my portfolio languishing. These days, I’m only keeping pace with inflation.

That’s when I attended a CARP meeting in Burlington. It was time to admit that I needed advise, or at least another opinion.  The subject of the CARP get together was estate planning and probate fees. It might sound dry, but these are topics we all need to face sooner or later.  Along with the other one-hundred or so older adults in the audience, I decided to listen up and to take to heart what Leony deGraff, independent financial advisor and retirement and estate specialist, had to say.

DeGraff scored #2 on the Wealth Professionals Top 50 Advisors in Canada chart in 2014. A longtime favourite of CARP members, she shared a great deal of valuable information with the crowd looking for ways to keep probate fees under control as well as secure their investments in turbulent times.  For instance, I had no idea probate costs can be as high as 16.5 per cent when including accounting, legal and executor fees.

Understanding probate is all the more important since the province of Ontario changed the rules in 2015.  I recall probating my parents’ wills, but the law was much simpler twenty-five years ago. As deGraaf says, “The good news is the fee schedule did not change —it is still calculated as $5/$1000 for the first $50,000 of assets and 1.5% thereafter in Ontario. The bad news is the government intends to collect a lot more of this tax.”

“In the past, there was no way for the province to know about conservative or understated estate values since the old system didn’t have any form of checks and balances, no way to see if the reported values were correct or even how to enforce compliance. In short,” according to deGraaf, “the old system was a joke, the new system has teeth.”

Talking about probate fees got me thinking about other things: the currency of my will, if my choice of executor makes sense or if I was putting too onerous a burden on a family member, how easy it would be for my beneficiaries to get at their inheritance and ultimately how rock solid my assets are.

After going through a very long list of the executor’s duties and the fact the province can review probated estates up to four years after death, deGraaf turned to an investment I hadn’t heard about as a solution to high probate fees and risky global markets.

They’re called segregated funds and this is how they work.  The funds, which resemble mutual funds, are managed by life insurance companies. As is the case for a life insurance policy, the assets in segregated funds are exempt from probate.  “There is a 100 per cent death benefit as there would be from a life insurance policy and typically there is 100 per cent guarantee of the investment from day one. If you invest your money up to age eighty, in many cases, you can “reset” your deposits every year to capture the growth in your portfolio,” deGraaf points out.

I like the idea of not losing money since I have fewer and fewer years to recoup losses as I age. The downside is that the fees or MERs for these funds are high, 2 per cent and up. For instance Empire Life offers the Asset Allocation Fund for which the MER is 2.66 per cent. The year-to-date growth of the fund is 2.83 per cent net.

I might consider trying out some segregated funds for a small portion of my investment portfolio, one that I’m certain I won’t need to divest. Financial coach Leony deGraaf is stellar and she’d take the burden of some decision-making from my shoulders, plus being a great sounding board.  The big question: is it worth locking in funds with such high management costs?

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