Couple facing end-of-life issues look for investment advice to meet expenses on one income

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Oliver has terminal cancer. He and his wife, Jessica, are trying to make the best of the time they have left together.

Ideally, they'd like to spend more time at the cottage and as little time as possible dealing with their finances. Still, they have important decisions about money to make in the coming days.

In the first of a two-part Money Makeover last week, legal and tax experts provided the couple with an overview of the benefits and drawbacks of setting up a spousal testamentary trust. A trust could help reduce potential taxes Jessica would pay on as much as $436,000 in non-registered assets that would otherwise be held in her name.

The experts estimated a trust would save Jessica about $2,000 a year in taxes -- at best.

"But time is obviously an issue," Jessica says, adding she and Oliver hope for at least a couple more months together.

"My adviser who recommended the trust said 'If we don't get the spousal done, we'll just have to deal with the chips as they fall,'" says Jessica, in her mid-50s. "I probably could afford to deal with it that way."

Regardless of her choice, Jessica will need to manage expenses -- more than $4,000 a month -- on one income. Her net monthly income from work is about $2,800, but she will receive a survivor's benefit from Oliver's work pension and CPP. The monthly work pension benefit will be about $881, and CPP will be about $544 a month.

"I don't have any plans to retire soon," she says. But Jessica says age 60 sounds reasonable. The couple own their home and cabin, worth about $200,000. Jessica says they might leave the cottage to their adult children, but she may sell it if no one uses it regularly and upkeep is onerous.

Jessica says she wants help to invest for the future.

"I really want to know what my options are."

Winnipeg-based certified financial planner Jan Fraser says Jessica likely doesn't need the additional hassle of creating a spousal trust to save taxes on investment income.

"She's probably going to have to withdraw some of the capital in the future for a new car, for example, and maintenance on the home and cottage, so that will reduce the real benefit of the trust," says the financial adviser with Fraser and Partners.

"There are less complex ways to deal efficiently with the taxes that will arise from investment earnings."

One of them is to structure her non-registered investments so taxes on earnings can be deferred until much later in life.

"They can accomplish this by using corporate-class mutual funds with a lot less time and effort than creating a trust," she says.

Mutual funds are typically structured as trusts, but corporate-class funds are held in a corporation. One benefit is investors can switch mutual funds within the corporate structure without triggering capital gains taxes. Furthermore, taxes on income earned from the funds can be offset by expenses and losses associated with other funds within the corporate structure.

But many fund companies also provide a mechanism within the corporate-class framework so investors can receive a return on capital as income instead of investment earnings.

"That amount is not taxable because the investor has already paid tax on it before the investment was made," she says. "In essence, you're deferring the taxes on the investment earnings until much later."

Until Jessica retires, she should be able to cover monthly expenses based on her income and the survivor's benefits from Oliver's work pension and CPP. It's unlikely she'd need to draw much income from her investments until she retires.

But once she does retire at 60, covering more than $4,000 in expenses will be a challenge based on her current, ultra-conservative portfolio structure. In fact, she might find building a retirement cash flow of $4,000 a month hard if she holds off retiring until 65.

"In her current situation, if she works until age 65, she would still burn through her capital fairly quickly," Fraser says.

Because the majority of their money is held in GICs, term deposits and savings, the overall annual return on her portfolio would be about two per cent.

"If she can adjust her investments and be comfortable with them to produce a four-per-cent annual return, she could meet her income needs to retire at age 60," Fraser says, adding the calculation is based on three-per-cent inflation over a 35-year-period.

Jessica can likely get that return on a portfolio of GICs, and bond and dividend mutual funds.

"If she does that, she can maintain her current lifestyle nicely in retirement," Fraser says.

"But she can't retire as comfortably earlier than 65 if she just maintains the status quo."

These numbers, however, are based on meeting current monthly expenses, which may be lower in the future. Fraser says she based Jessica's income needs on current spending as a precaution.

Jessica, however, has added flexibility providing she is open to the idea of selling the cottage.

"If she were to sell the cottage at age 70, for example, she could use the proceeds to comfortably fund her retirement if she chose to retire at age 60," Fraser says. "That would replace the capital she would be using in early retirement, even with the status quo portfolio."

In contrast, if she invests to achieve a four-per-cent annual return on her investments and makes use of a corporate-class structure for non-registered investments, she should be able to meet her retirement goals without cutting back much or selling the cottage.

"In actual practice, if she's working with an adviser, she would blend the corporate-class income," Fraser says. "She might receive some return of capital and some investment earnings to pay a little tax."

The main benefit of this strategy -- as an alternative to setting up the trust -- is Oliver and Jessica don't need to make investment decisions today because Jessica should be able to manage household expenses on her employment and the survivor's pensions benefit until she decides to retire.

This strategy also reduces the complexity of their retirement plan -- a point that shouldn't be overlooked.

"When most people retire, they're looking to simplify their financial affairs rather than making them more complex," Fraser says.

"With a trust, there would be a level of complexity that isn't warranted in this case, and the easier solution is investing non-registered investments in a corporate-class structure."

Note about last week's story: Part 1 erroneously stated that including the cottage in the trust would trigger a deemed disposition on the cabin resulting in taxes that would have to be paid on applicable gains. Lawyer Caroline Kiva says the cabin could pass into the trust without triggering capital gains, but including the cabin would serve little purpose from a tax-savings perspective because it wouldn't be used to generate income.

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Oliver's and Jessica's finances

Income

Jessica: $63,623 ($2,817 net a month)

Expenses

Monthly: $4,081

Debts

Car loan: $7,000 owing, zero interest with $250 monthly payments

Assets

Home: $350,000

Cottage: $200,000

Oliver corporation: $30,000

Oliver life insurance policy: $100,000

Oliver group life insurance policy: $56,000

Oliver RRSP: $51,235 in GICs

Oliver TFSA: $21,305 in savings

Jessica RRSP: $123,232 in GICs

Jessica TFSA: $21,305 in savings

Joint investments: $53,772 in mutual funds

Joint term deposits: $110,465

Joint long-term savings account: $116,665

Joint short-term savings account: $15,535

Net worth: $1,086,514; including insurance payouts: $1,249,514

Republished from the Winnipeg Free Press print edition June 9, 2012 0