The Challenge of Protecting Yourself

Recently I heard a (true) story on the radio about how a couple married for 63 years have lost thousands of dollars and will need to spend more in dealing with and fighting off the Public Trustee.

Worse the husband came within an hour of losing his life due to neglect at a nursing home and by the Public Trustee.

So I contacted the radio host and suggested that people be told about the necessity of having a Power of Attorney to avoid this. And he had me as a guest to talk about it. I will try and post a clip of the interview here.


But since the interview and after talking with a client and friend who is a Doctor I have realized that for most people EVEN WITH a Power of Attorney they are STILL at great risk. This is because Manitoba does not embrace the concept of Power of Attorney for Personal Care in its laws. Other Provinces such as Ontario do. The sad truth is that a standard Power of Attorney document only gives authority to handle financial matters, and that in that situation the Public Trustee is still the body responsible for the Personal Care of those who are incapacitated. Doctors regularly point out that the Power of Attorney presented to them by children of patients do not cover health care!

It is ESSENTIAL that you have both a Health Care Directive and a Power of Attorney for Personal Care. Although Manitoba law does not provide guidance on POA for PC it does NOT prohibit it.

There is nothing to prevent you from either a) adding a paragraph to your General Power of Attorney Document - naming a Power of Attorney for Personal Care, or b) Signing a separate document naming a Power of Attorney for Personal Care. You may also want to add a paragraph to authorize all of your care givers and health care providers to provide your personal health information, as provided in the Privacy Health Information Act or similar legislation, to your POA for PC.

Make sure that you state that this is an enduring POA in that it does not terminate in the event of you losing mental competence and make sure it is witnessed by a licensed medical practitioner, lawyer, judge, peace officer, or someone authorized to perform a marriage.

Finally since you can only change this while you are still competent you need to provide for the possibility of you outliving your POA by naming successor POAs.

More on Misdirection

After I attended the session I emailed one of the other speakers at the session, inquiring how they could be part of such a presentation. Their part was straightforward and informative, but it seemed that their reputation and presence lent a certain air of credibility to the sellers pitch.

I have heard back that they were not expecting the message, had been told that only the PPN was being promoted, and they have since determined to not associate with the seller in the future. BRAVO.

PPNs

What is a Principal Protected Note?

It is an investment where you are in effect turning a long term investment risk into a short term investment risk. You are betting that not only will the investment do well - but more importantly that it will do well up front. If it doesn't do well in the early years then your investment will be turned into just enough bonds to return your money by the end of the guarantee period.

More specifically it is an investment in a program that reinvests in a specified high return investment(s) and guarantees that if the investment doesn't continue to do well that you will get your original money back at the end of the term, usually 5- 10 years. The best of both worlds. Potential high returns - no chance of loss.

The ability to limit your loss to $0 comes at the expense of losing your ability to hold through the recovery after short term poor returns. Even then you need to hang on until the end to get the guaranteed return of capital.

If you are interested in the details read on.

What is it.

• It is an investment vehicle sold by a promoter - could be a bank but may not be.

• It is guaranteed by a bank or insurance company to return your original investment at some date in the future - usually 5 to 10 years.

How does it work?

• You buy from the promoter. They give your money to the guarantor, who invests it based on specifications established by the promoter and shown in the literature you would have been given.
  

• Sometimes additional investment amounts are added by using a loan. For example for every $1.00 you invest there may be an actual investment on your behalf of $1.50 and an offsetting $0.50 loan against the investment.
  

• On an ongoing basis the value of the investment is compared with a schedule of minimum values which the guarantor uses to determine if it is necessary to start selling the high return investment. The money would be used to paying back the loan and buying specified bonds instead. If the investment falls too low the guarantor is required to replace the entire investment with bonds. Once bonds have replaced the original investment you will get your money back at the end of the guarantee period - BUT YOU WILL NEVER gain if the original high return investment recovers.

Here is the good part.

• You can earn a high return if the underlying investment does great. Because there is often a loan and extra investment you can do even better than the underlying investment.

Here is the bad part.

• Most high return investments are very irregular. Often they have some negative return years offset by huge positive return years. An average of 15% return is usually more like 30% one year and -10% another.
  
• What this means is that the longer you can hold the investment the better your chances of you earning its long term average.
  
• But if you may need to sell in a short period - say within 3 years - your chances of losing are far greater than if you can stay invested long term.
• Unfortunately, the PPN guarantor may be forced to sell in the short term if a bad year or two happens in the early part of the investment. So in effect you are increasing the risk that you may only earn 0% - rather than riding through the temporary poor market.

Misdirection

I saw an ad in the paper for a seminar about finding the perfect investment for our times - with some very high profile speakers. So 'always looking for the better way', I went.

The seminar's guest speakers talked about how the handling of taxes in different investment types make a huge difference in their returns - absolutely true . The principal speaker (seller) pointed out how only investments that guarantee capital should be looked at.

He pointed out that he had picked the perfect investment, a Principal Protected Note, for which his assistants at the seminar were the exclusive agents. PPNs are interesting and have their strengths and weaknesses. See my posting on this blog for more information. But they are widely available.

Then came the actual message - the one that can separate the confused from their money. Turns out the seller used to hold seminars promoting a particular charitable donation program. In this program you donate a certain amount and end up with a charitable receipt or receipts totaling 3 to 6 times the actual donation - with the result of a tax refund which considerably exceeds the actual donation.

He pointed out that unlike the other programs that Canada Revenue Agency was challenging, HIS is NOW bullet proof because it uses CASH not loans. (I have since come to understand that CRA have started disallowing donations under the 2003-2005 versions of his program). He also pointed out that the CRA did not feel strongly enough about his program to challenge it in court.

This illustrates the art of misdirection. CRA does not challenge these programs by going to court. It simply sends the donor a letter saying that your donation reported on a previous years return is not allowable and instructs you to pay up. The DONOR could take CRA to court, if it wanted. If you don't you simply pay up or have their bill collectors turn you and your bank accounts and salary upside down until the money is paid. Why would CRA take the promoter to court, when the onus is on the donor?

The other element of misdirection is talking about CASH. The issue is not form of payment - but whether you made a free and clear donation. If you expect something back - it is not a gift. In the case of some schemes you use a loan with the understanding that you wont have to repay the loan. In this program, after you make a cash donation you apply to be the beneficiary of a consignment of medical supplies which you then donate back and get the receipt for the value of the medical supplies. Usually the amount is about 4 x the size of your original donation. PROBLEM is - from the CRA point of view (and any thinking adult) your original donation is part of a transaction buying the consignment of supplies.

To put it in perspective here are the numbers for a smaller donor.

• Contribute $10,000 to the foundation.
  
• Get a consignment on paper for $30,000. Donate the consignment.
  
• Get a receipt for $10,000 and $30,000.
  
• Use the receipts for tax returns and get refund of $17,000. Net profit $7,000.
  
• If reassessed then 2 to 4 years later pay back $17,000. Net cost $10,000.

The final piece of misdirection. The seller was claiming to sell PPNs, and only mentioned the Charitable donation program for NO APPARENT REASON. He did note that if you used the Charitable donation program then you COULD take the refund for the extra receipt and invest it in a PPN (which guarantees the Principal) just in case you are reassessed.

I would bet a coffee that when the prospective victim asks for info on the PPN then he/she will be strongly encouraged to make an even more profitable investment through the Charitable program.

There are good incentives to make donations. Alone a Charitable donation results in a reimbursement for your donation of 40% to 50% (after the first $200) depending on your province. You can also combine tax incentives to double up. For example you can buy 'Flow Through Shares' which give you a separate tax break (as a flow through credit) to encourage investment in Canada's resource industries. Then you can donate those shares to your favourite charity and get a charitable receipt (but only for the actual current value of your purchased shares) as well . This is legitimate and encouraged through recent changes to the tax act. And it goes directly to your charity - not a charity which you really know nothing about.

Where there are good incentives there are those who will use misdirection to lead you to the slaughter while they stand on the side and pocket your losses.