Jan 19, 2020
We must factor in the tax consequences of these investments. Remember the income that's going to be generated by this $10 million, most of it will be paid out to you either personally or through your corporation and that would mean tax.
There's three different ways that people are being taxed in their portfolio:
- Interest Income – it simply gets added onto your income and that basically means, if you've got a $10 million account, you're most likely in the top tax bracket. You’d be losing about half of that income roughly depending on which province you're in, but call it roughly half of that income to tax.
- Dividend income - if you own Canadian eligible dividend paying companies, the tax rate gets reduced. It gets grossed up and then you get a tax credit for your dividends.
- Return of capital or capital gains. Those are the best tax-wise. The cap gains are taxed at about half and the return of capital is not taxed at all in the year.
You need to focus on alternative asset classes as the asset allocation for the ultra-high net worth has changed dramatically. It used to be like a balanced portfolio where you'd see someone owning 60% of their portfolio in stocks: large cap, Canadian & U.S. Equities. Another 40% or so in traditional fixed income bonds, such as debt, debentures and perhaps preferred shares if you're considering that as fixed income.
Full Blog Article and Video on How to Prepare a Sound Retirement & Estate Planning Strategy (https://robtetrault.com/how-to-prepare-a-sound-retirement-estate-planning-strategy/)
That was the portfolio 10 years ago. That's what ultra-high net worth individuals owned at the high net worth offices.
What everyone's doing is they're moving away from just owning nothing but stocks and bonds in their portfolio. They've now started managing money. Much more like pension funds institutions do. Reason being is that if you have $10 million, you're no longer getting that to feed your retirement or to fund your retirement and your golf game. You're doing it likely as a multi-generational legacy leaving tool. So, when you get to that money, it becomes managing money like a pension.
You're likely not going to spend the entire $10 million in your lifetime. We want to consider multiple generations and legacy building.
*If this is something you want to chat about, the concept of legacy building or anything around longer-term time horizon for your investments, go to www.speaktorob.com and I'd be happy to book a call with you.
These asset allocation targets have changed. The high net worth firms are no longer putting people in 60/40 portfolios. It makes a lot of sense because tax is key. Not only tax, but you don't want to see a 40% correction in your $10 million portfolio if you own stocks, right? You don't want to see your 10 million bucks go down to 6 million bucks. That's not what people want to see. They want to see consistent growth uncorrelated to the markets or reduced correlation to the markets, tax efficient income with stable & consistent growth.
You likely want your $10 million to be there for your kids and to be there for your children's kids. Lot of different options you could consider including trusts & family foundations. You can consider giving the money to your own family foundation, which you then get a tax credit in the year you do it and then you can distribute the income over the future years of that family foundation.
The legacy building component on the 10 million bucks is likely important to you. Now, perhaps you own 30% alternatives, 40% alternatives or maybe even 50% alternatives in your $10 million. You’ve got half of your portfolio diversified in real estate across North America or across the world. You might have some in Seattle, in Dallas, in Toronto and some in the prairies.
Full Blog Article and Video on How to Invest in Real Estate Investment Companies & REITs (https://robtetrault.com/how-to-invest-in-real-estate-investment-companies-reits-real-estate-investment-trusts/)
Your portfolio of diversified real estate is truly a diversified portfolio. You could have some multifamily, some commercial, some retail and some industrial.
You actually own these buildings. You own them either directly, through private REITs or through a limited partnership. That’s indicated on your statement. You get to see that. That's how multi-generational wealth is typically built. If you've got that 10 million bucks, I'm strongly advising you to consider a shift in asset allocation.
If you're at one of the large investment firms and all they're telling you is let's build a balanced portfolio for your 10 million bucks, I would strongly urge you to consider and question why that's happening.
You ought to question yourself, why shouldn't I own ultra tax efficient investments that have a reduced correlation to the market and are able to generate income even in down years. That's what you should likely own.
The asset allocation in your portfolio needs to be shifted. The mentality must change in these ultra high net worth individuals. It's time for you to sit down with a Portfolio Manager and for you to understand/appreciate why this makes sense.