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Balancing life and legacy

Couple want to live well, take care of adult kids when they're gone

Hey there, time traveller!
This article was published 18/5/2012 (1921 days ago), so information in it may no longer be current.

Norm and Helen may not have work pensions, but that shouldn't stop them from enjoying retirement.

That's because the couple have substantial assets to draw on to fund their future. In their late 60s, they have more than $3.3 million in assets spread out in their RRSPs, non-registered assets and incorporated company.

Norm and Helen are millionaires who live simply and have plenty for their own retirement and an inheritance for their children. Their main problem: how to minimize the tax take.


Norm and Helen are millionaires who live simply and have plenty for their own retirement and an inheritance for their children. Their main problem: how to minimize the tax take.

With such wealth, one might ask, "What's the problem?"

Norm says the issue is actually twofold: How do they structure an income they won't outlive? And how can they strike a balance between enjoying retirement and leaving a large gift behind for their three adult children?

"Honestly, I'm jealous of people with a nice pension every month," says Norm, 65, who is about to retire. "You don't have to worry that it's not going to be there and you can spend it with confidence."

Of course, Norm says he knows he's built a substantial war chest for old age, but he's spent so much time building it, he doesn't know how best to unwind it without squandering money needlessly on taxation and, as a result, leaving little behind. "I'm just wondering if I'm spending too much, because once it's gone, it's gone."

Having recently gone through a health scare, Norm has been thinking a lot about how to transfer his wealth. His adviser recommends setting up a trust. Another recommends insurance to deal with estate taxation. (The couple have term life insurance policies, but Norm says it's unlikely he would be insurable again.)

He says they've heard all the angles, but the main goal is to live comfortably and leave something behind.

"I think I've got enough here to leave them about half a million dollars each," he says. "Any advice on estate-tax management would be appreciated beyond what we're already doing."

Certified financial planner Bob Challis specializes in estate and taxation planning. He says Norm and Helen are like many financially successful families. They keep things simple. They earn a lot and spend little. As a result, they've managed to accumulate considerable assets. The problem for them is, now they have to be proactive in drawing on their assets in as tax-efficient a manner as possible to live well and leave behind a big legacy.

"So one starting point here is, how do they leave behind $1.5 million after-tax for their children?" says Challis, of Nakamun Financial Solutions in Winnipeg.


While they have many moving parts and variables that cannot all be discussed here, Challis says they should safely be able to accomplish both their goals.

"If he doesn't earn one more penny from consulting, how much on an after-tax basis can he actually plan on spending?" he says.

"The solution to that was about $100,000 a year."

This is a combined, after-tax income that should take them into their early 90s with more than $3 million left over before taxes -- without any trust or insurance strategies. This is based on a number of assumptions, including 2.5 per cent inflation and a four per cent return on investments.

Of course, the big X factor for Norm and Helen is taxation. The tax bill on their estate, if they were to pass away now, is more than $800,000, and it's climbing as they age because, based on their expenses, they will draw more income than they can spend.

Right now, they spend about $43,000 a year, or almost $3,600 a month.

That would leave them with $57,000 a year in excess that would presumably be reinvested, increasing their taxes slightly in the process.

Challis says without a forward-looking retirement-income plan, they could end up paying a lot more. A potential tax bomb, for instance, lurks in the way their RRSPs are set up.

Norm has more than $850,000 in RRSPs and Helen has about $100,000.

What's wrong with that?

Here's the problem: If Norm dies before Helen, his account will be passed on to her, tax-free. That's not a bad thing, except she will eventually face increasing mandatory RIF (retirement income fund) withdrawals. And with a large RIF, she could end up paying a lot more in taxes on those withdrawals.

The solution: Norm should convert his RRSP to a RIF sooner than later.

"We tested whether or not they shouldn't trigger RIFs now or later, and the answer was they ended up taking quite a bit less tax on current income by taking RIF money now," Challis says.

By converting his RRSPs to a RIF, Norm creates a predictable, regular income stream that while taxable, results in them paying less to the Canada Revenue Agency over time. Their average tax rate would be about 18 per cent initially, increasing to a maximum of about 21 per cent at age 72.

"If we hadn't taken RIF money in the early years, that taxation rate jumps to 28.5 per cent and stays there until he's 80."

Helen, in contrast, can leave her RRSPs intact for now and draw on income from other assets.

Furthermore, Norm should collapse his LIRA (locked-in retirement account) before other registered retirement accounts, because it's the least inflexible. While they don't need the money, the goal is to pay taxes on the registered retirement assets in a controlled, reduced manner. The after-tax money that isn't spent can be reinvested in more flexible, non-registered options.

Overall, about two-thirds of their assets are in Norm's name and the remainder in Helen's. Ideally, Challis says, they want assets held 50-50 so they can create income streams that are roughly equal. This reduces taxes.

"So, for example, $100,000 split between two people leaves you with about $75,000 spendable, but $100,000 in one person's name leaves you with about $67,000 spendable."

As for insurance, because of Norm's health, getting another policy may be impossible or too costly. But Challis says one alternative is to use a loophole in the Income Tax Act available to policyholders who can't be insured again, yet own a business.

"If an individual becomes uninsurable and owns a life insurance contract and has a holding company, that person can swap a $130,000 life insurance contract, for example, for cash from the holding company without paying any tax in their hands personally," Challis says.

"When the person dies, the value of the life insurance death benefit comes out of the holding company back to the beneficiary, also tax-free."

This would effectively allow for $230,000 tax-free cash on a $130,000 insurance contract, he says, keeping in mind the total would likely be reduced because an actuary will assess the existing contract in today's dollars -- a smaller amount because of inflation.

Another consideration is hiring a fee-based financial planner who can act as an intermediary between them and their other advisers -- the lawyer, the accountant and the investment expert.

"You pay a retainer fee to a person who is held accountable for developing the planning concepts and quantifying the net benefit of those estate or trust questions and putting it in terms you can understand," Challis says, adding a fee for a plan to deal with assets like theirs could run about $10,000.

But even without precise planning, he says, the couple should be in good shape.

"The bottom line is these folks will be able to meet their goals with a very reasonable margin for error."


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