Nortel anybody? The taxes are to die for

This week I had the opportunity to talk on my favourite topic - planning surrounding estates - with portfolio manager and author John De Goey, as part of his regular Make Better Decisions BullShift podcast series (podcasts.apple.com/gb/podcast/ep-97-make-better-wealth-decisions-how-to-laugh-at/id1658651612?i=1000666955752). We agreed some of the most important traits of an investment advisor are the same as those of an executor: independence, self-awareness, and the ability to recognize and deal with conflicts of interest.  John's most recent book (BullShift) makes it clear that investors and financial advisers aren't always the "rational decisionmakers" that economic theory assumes them to be, and that standard (traditional) advice is not always sound. The same can also be said of willmakers and executors, who need to recognize and grapple with their own biases and beliefs, and not make assumptions. You don't know what you don't know. 

In this vein, John shared a great (if not for the beneficiaries) story - if you were wondering, here's where Nortel comes in. 
When a person dies, the value of all RRIF assets is deemed to immediately be taken into the deceased's income at fair market value as at the date of their death and taxed. For those too young to recall Nortel's collapse, share prices went from a high of $124.50 in mid-2000 to just 39 cents before the company filed for bankruptcy in early 2009. In John's example, a person who ignored warnings not to put too many eggs in an undiversified basket paid $1 million for Nortel securities in the early 2000s (say 10,000 shares at $100 each) and held them - 80% or so of his portfolio - until his death, expecting that the sale of the securities by the executor would cover taxes due when the time came. Instead of a big inheritance, the deceased would have left beneficiaries with a big shock: a BIG tax bill and little to pay it with. Here's how:

• Purchase: 10,000 shares x $100/share = $1,000,000 investment
• Less sale price if shares held until near bankruptcy: 10,000 shares x (say) $0.50/share = $5,000
• Net gain: $1,000,000 - $5,000 = $950,000
• Tax at a marginal rate of, say, 50% due: $475,000

The $5,000 made from the final sale of the Nortel shares would leave, in this simplified example, net tax to pay of $470,000.

Executors, of course, are not responsible for market moves, a willmaker's poor investment decisions, or a company's bankruptcy, but executors are responsible for safeguarding assets, that is, trying to maintain or protect market value. If the willmaker had died when the shares had declined in value to $500,000, a financial or tax advisor could have recommended selling the shares to at least recover enough to pay the tax due. Executors should get financial advice to minimize their liability and avoid beneficiary charges that they did not take logical steps to try to mitigate losses.