Getting Assets into and Funding your Family Trust – Part 2

As mentioned at the end of my last blog, there are 4 main ways that you can get assets or funds into a trust and each of them are dealt with differently for tax purposes:

1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

Let’s start with lending to a trust. You can lend money or assets to a trust, by simply taking back a Promissory Note. This means that the Trust is taking a loan from you and is going to pay interest no less than once a year and intents to one day pay back the principal. When lending to a trust the current prescribed interest rate must be used as the minimum interest rate for the loan. You can go higher if there is a purpose for doing so. Currently the prescribed interest rate is quite low at 1% (as of the date of this blog) and has been that low for over a year now. This is extremely beneficial for loaning to a trust or Corporation as well as for spousal loans. If you have any such loans that are still at a higher interest rate, now would be the time to reissue the loan at the lower interest rate. Interest on loans must be paid within 30 days after the trust’s year end. A Family Trust has a year end date of December 31^st, so the interest must be paid by January 31^st of the following year.

Let’s now talk about gifting to a trust. Gifting to a trust is not used in many circumstances as there are many issues around gifting to a trust. As discussed in the last blog, when assets are put into a trust they must be put in at Fair Market Value. This is of course true if a gift is coming to the trust, meaning that the person gifting the assets may have a capital gain on the “deemed disposition” of the asset. If there is no gain on the asset then this would be irrelevant, however it is something that must be considered before the gifting happens. We also must look at attribution when an asset is being gifted to a trust. For example if someone gifted the trust some stocks, then the income from the stocks may be attributable back to the person who gifted the stocks. There are many considerations when looking at gifting to a trust, and in fact it may not be the best option to get assets into a trust. Typically the settlor and trustees would not want to make gifts after the set up of the trust.

Again, it is best to consult with a professional before making any movement of assets and/or funds into and out of a trust. Kustom Design is here to help you. In my next blog we will discuss the other 2 ways to get assets and funds into a trust.

Structural Issue or Why Not, it Looks Good There!

I was showing a house in Hillhurst was VERY surprised to see this… Put it this way we left!

Getting Assets into and Funding your Family Trust – Part 1

If you’ve been reading the series of blogs on Family Trusts, you should now have a good understanding of the how to set up a trust, the basics of using it, and the benefits and drawbacks associated with having the trust. We will now begin to discuss some of the different ways to get assets into your trust, as well as how to get funds into your trust.

As already discussed, when you are setting up a Family Trust it is best to have someone else settle the trust with a small asset, such as a silver ingot. This is the initial property of the trust and should be the only asset given to the trust without consideration. Typically when assets or funds are put into a trust there should be consideration for the asset or funds. For example if we’re going to put real estate into the trust, there must be consideration to acquire the real estate, such as currency or another form of asset in consideration for the real estate. This is a general rule although there are some small exceptions which are very specific and will not be covered in this blog series.

When putting assets into the trust we must consider the tax consequences. First of all we must understand that all assets going into a trust should be at Fair market Value. Fair Market Value is the current price that the asset would sell for on the open market. For example if it is real estate, you can look at a Market Assessment by a licensed realtor, an appraisal from a licensed appraiser, or sometimes the value on the Property Tax Assessment of the property. This means that if you own the asset that is going to be put into the trust, you will most likely have a disposition that could result in a Capital Gain. Before transactions are made that add property into a trust or take property out of a trust, you must plan for the potential tax consequence. Kustom Design can help you with the planning, but it is up to you to ensure you take the time and book the consultation.

There are 4 main ways that you can get assets or funds into a trust:

1. Lend

2. Gift/Transfer

3. Sell/Acquire

4. Income from Business and/or investments

Each of these methods are dealt with differently for tax purposes. In the next blogs we will begin to look at each of these ways to get assets and funds into a trust.

All about VIRM’S (Variable Interest Rate Mortgages)

It seems like the VIRM is the more common mortgage option now adays, especially given the fact that the spread between the discounted 5 year variable closed and 5 year fixed is currently over 2%. Just to put it into perspective, the difference in monthly payments between the two on $100,000 is approximately $113 based on a 35 year amortization. But whether the variable mortgage may be the right option for you shouldn’t be solely dependant on rate. As you know, the interest rate on a variable mortgage fluctuates and more importantly is currently on its way up but not knowing how the product works may leave you with more challenges down the road. Aside from using IDEAS outlined in my blog Fixed or Variable to help you evaluate your situation, I thought I would go over everything you need to know about Variable Interest Rate Mortgages. Keep in mind that the products in my blog are specific to TD so always check with your lender on their mortgage products work.

There are two types of variable mortgages. Open and closed. Both with TD are 5 year terms but the 2 main differences are the rates and prepayment privileges. With the variable closed, the rate is usually priced below bank prime and with the open it’s usually priced above bank prime. In terms of pre-payment priviledges, the closed term does not allow the mortgage to be pre-paid in full without paying 3 months interest compensation. The open term allows pre-payment in full however administration fees apply if the mortgage is paid in full in the first or second year, $500 and $250 respectively. Two important things to note about variable mortgages with TD is that they are NOT assumable nor portable. To learn more about portability, please visit my article on Porting or Replacing your Mortgage.

The interest rate on a variable mortgage is calculated monthly, not in advance and changes when TD Mortgage Prime changes. This is different than a fixed rate mortgage in which the interest is calculated semi-anually and not in advance. The rate is set on the 1st day of each month based on the variable mortgage rate. So if the bank prime changes mid month, your variable rate will not be changed until the first of the following month. Keep in mind your lender’s rate adjustment policy if you choose to go with a variable mortgage. Your payments on our variable mortgage are fixed for the entire 5 year term. I always recommend to those who choose a variable mortgage to set their payments based on a higher rate to pay off the principal faster and to safeguard against interest rate increases. Since interest rate fluctuations can push the outstanding balance beyond the contractual amortization, it is always a good idea to increase the payment frequency and amount. For more information on how to pay off your mortgage faster, please visit my blog on Mortgage Payment Plans and Say Goodbye to your Mortgage Faster. When your interest rate reaches the point where your payments no longer cover the interest charged under the mortgage, this is referred to as the Trigger Rate. If this occurs, you may be asked to pay your mortgage down to the appropriate trigger point, re-evaluate your property, convert your mortgage to a fixed rate, or increase your regular payments.

If you currently have or choose to go with our closed variable mortgage, you have the option to early renew into a fixed rate mortgage with a minimum term equal to the lesser of 3 years or remaining period of the original term. If you have or choose to go with our open variable mortgage, you have the option of renewing into any fixed term mortgage. So as you can see, there is more to variable mortgages than just the rate. Knowing what your options are during your contract period can have an impact on your decision or situation down the road. Going forward, the variable may no longer win according to the Financial Post, but there never seems to be a clear answer on whether to lock in or stay variable. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Calgary Real Estate Market Update ~ July 27, 2010

Jared Chamberlain a Calgary Realtor® video blogs about the current real estate market in Calgary Alberta. He talks about the numbers of July 2010 compared to last year and how the market is different. He suggests that if you are a Seller in the Calgary Real Estate market to make sure you focus on pricing and preparation. If you are a buyer in this market, then there are some good deals and potentially a few motivated sellers that are needing to sell their property. Please comment and share your thoughts below or email Jared at jared@tcgroup.ca.

Staging your Home

According to the Calgary Real Estate Board, the number of single family homes sold in June in the City of Calgary was down 42% from the same time a year ago and condominium sales saw a similar decrease at 40%. Increased inventory levels and fewer first time home buyers entering the market is making it tough for sellers but one concept that may lead to better success is to see your home through a stagers eyes. When putting a house on the market, home staging aims to capitalize on your home’s best features to sell it quickly for the highest price. In speaking to a few real estate professionals, it may be as simple as rearranging what you already have or bringing in new furniture and accessories, or a combination of both.  It wasn’t until I walked into a house last week with bright pink walls and red carpet that I realized how important home staging can be if you decide to put your house up for sale on the market.

According to Christine Rae, Ontario President of the U.S.-based Real Estate Staging Association, 63% of buyers will pay more money for a house that is move-in ready than one that needs renovations. Staging a home encourages buyers to see themselves living in the space and allows them to form an emotional connection to the property. Staging is not about hiding problems but showcasing a property’s integrity.

A stager will reveal things about your home that you may not want to hear because they must look at it through a buyer’s eyes and ultimately remove any reason for a buyer not to complete a purchase. This can be things like bad odours, outdated floors, drapery, wall colours etc. Remember that that renovations made to sell are not about personal taste but to meet the needs of potential buyers.

The cost to stage your home may vary but can hold potential payback in your price. Consult with your Real Estate Professional to see if they offer home staging as part of their services or can refer you to a home staging professional. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Original Article: Comforts of Home

Canadian Mortgage Broker News – Rate is higher but still historically low

Canadian Mortgage Broker News - Rate is higher but still historically low

Why I Was Hibernating PLUS New $1000 Contest

Jared Chamberlain video blogs about why he has been hibernating over the past two weeks. As well, he talks about a brand new facebook photo contest that The Chamberlain Group will be launching and giving away $1000! Check out The Chamberlain Group on Facebook for more info.

Mortgage Payment Plans

Choosing a mortgage with the right combination of features to meet your needs can save you money, reduce the amount of time it takes to pay off your mortgage and most importantly provide you with peace of mind. Knowing how to utilize those features to your full advantage can be confusing though so today I wanted to go over the various mortgage payment plan options that TD has to offer. Other lenders should have similar payment plan options but you may want to check with them to be sure.

With your TD Canada Trust mortgage, you can choose a payment frequency of weekly, bi-weekly, semi-monthly, or monthly. With the first 3 types of payment frequencies, you can also between regular or rapid repayment. Rapid plans basically accelerate the repayment of the mortgage by permitting the equivalent of 13 “monthly” payments per year instead of 12 on a regular plan. Of course, this will lower your amortization in the long run. Just to give you an example, for a $50,000 loan with an interest rate of 11%  amortized over a 25 year period, making a rapid weekly repayment reduces the period from 25 to 18 years. Since you can increase your minimum payments by up to 100% on all our fixed and variable term mortgages anyway, you can even pay more than the rapid option.

From time to time I get customers that don’t know the difference between semi-monthly and bi-weekly so just to clarify:

• Weekly payments are due on the same day each week
• Bi-weekly payments are due on the same day every other week
• Semi-monthly payments are due twice each month, usually on the 1st and 15th
• Monthly payments can be set up on any day of the month for a monthly payment frequency

Now here comes the important part. I get a lot of customers who aren’t familiar with conversion dates and interest adjustments so if you happen to request a change in payment frequency, please take note of this. If you are on a monthly payment plan, you are always paying for the month behind. Same goes for a semi-monthly plan, you are always paying for the 15 days before. In other words, on a monthly plan, your June 1st  payment is paying for the month of May. So if you decide to convert to semi-monthly and you want your semi-monthly payment to start on July 1st, you will have an interest only payment due on June 15th which is the conversion date. This covers the period between June 1st and June 15th. Your first semi-monthly payment would then begin on July 1st. Having to make that interest adjustment payment can throw people off so hopefully this clarifies things.

The easiest thing to do is to have your mortgage payments come out on the same day as pay day. Most of us are paid on a bi-weekly or semi-monthly basis so use this opportunity to increase the frequency of your payments. If its within your financial means, choose the rapid repayment feature to lower your amortization which will save you more money. For other strategies on how you can own your home faster, please visit my blog on Say Goodbye To Your Mortgage Faster. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Confirming Down Payment

Every mortgage approval comes with different conditions but the one condition most common among most approvals is confirming the source of down payment. It may seem like the easiest condition to meet but suprisingly can create some challenges because of the way the banks want you to confirm it. So I wanted to go over the different sources of down payment and what kind of documents you may be asked to provide your bank. Knowing this may better prepare you and provide you with a more comfortable experience. Keep in mind that the guidelines in my blog are specific to TD so you may want to check with your lender on what their policies are when it comes to confirming down payment.

Savings
If your down payment is coming from a bank account, simply providing your latest balance from your bank online or from a bank machine won’t be good enough. We will want to see at least a 30 day history of savings or more and you may be asked to further verify any large deposits that were made in that period. If you take out a cashback mortgage, the cashback you receive cannot be used to confirm down payment as this is not considered your savings.

Gift
If your mortgage is insured by CMHC or genworth, a gifted down payment must come from a relative or immediate family member. You must provide a gift letter that states the funds requires no re-payment, the relationship of giftor to giftee, and also verify the existence of the gift. The existence of the gift also means verifying at least a 30 day history of savings or more. In addition to the gift letter we also need to verify that the funds are on deposit in your account prior to closing or sent directly to your solicitor. So as you can see, a simple gift letter will not suffice. The best thing to do is to contact your lender and find out exactly what documentation they require for confirming down payment if it’s in the form of a gift.

Other Liquid Assets
If you have other investments like bonds, stocks or RRSP’s, these can also be used to confirm down payment. You might have to pay witholding tax on your RRSP withdrawal unless youre utilizing the first time homebuyers plan. TD will require a recent statement showing the description of your assets and the current value. Remember that locked in RRSPs cannot be used for down payment as they represent pension assets. Borrowing against liquid assets or a home equity line of credit against another property is fine but payments will be included in your debt service ratio.

Proceeds from the sale of a property
If your down payment is coming from the sale of a property, we will ask you to provide a a firm unconditional offer to purchase and sale together with a recent mortgage statement. We will take into account real estate commissions, lawyer fees and other costs associated with the sale when calculating the net proceeds.

I hope this clarifies the different sources of down payment and more importantly how lenders may ask you to confirm it. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

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