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Facelift (Globe and Mail/John Woods)
Facelift (Globe and Mail/John Woods)

Financial Facelift

A special challenge needs a special plan Add to ...

Deanna and Paul have a single, overriding concern - how to provide for their baby daughter, who has Down syndrome, after they die. Deanna is 36, Paul is 39.

Their combined annual income is $66,670. They have a home in central Canada with a small mortgage and Deanna contributes regularly to a registered disability savings plan and RESP for their daughter.

Recently, Paul and Deanna bought a rental property that they hope will provide them with cash flow when they retire and their daughter with enough income to live on for the rest of her life. There is also a question of care.

"Will the rental property's net cash flow be sufficient?" Deanna, who is an accountant, asks in an e-mail. "How can I arrange for my daughter to get safe, reliable and consistent help managing her money and the rental property when we are no longer here?"

We asked Linda Stalker of Henderson Partners Chartered Accountants and Professional Advisors in Oakville, Ont., to look at the family's situation. Key to the couple's plan for their daughter is a trust.

What our Expert Says "This couple has been very good about not living above their means," Ms. Stalker says. As well, they have used any extra money to pay down their home mortgage quickly.

While buying a rental property for retirement income is a sound strategy, the couple is overweight in real estate and have little in the way of surplus funds to contribute to their retirement savings, Ms. Stalker says. Paul is contributing $140 a month to his RRSP.

Deanna and Paul hope to retire at age 60 with an annual after-tax income of $40,000. By then, the rental property will be generating net income of $25,000 a year.

Their family home should be debt-free in about 10 years, Ms. Stalker notes. They can then shift the money that was going to the mortgage to retirement savings. Their home and savings will provide a comfortable estate for their daughter.

But there's a catch. If they leave her too much, she could lose some of her government benefits. To get around this problem, Deanna and Paul should form a Henson Trust in their will, Ms. Stalker says.

The key to a Henson Trust is the absolute discretion of the trustee. The trustee decides the amount of money or property the beneficiary receives and when, so they are not considered assets or income under provincial benefit definitions.

A note of caution: "Since the trustee has absolute discretion, it's important to choose the trustee wisely," she recommends. A trusted family member can work together with a lawyer or accountant to administer the trust, she suggests.

Unlike regular trusts, there is no lifetime limit to the exempt amount of assets that can be held in a Henson Trust created or derived from an inheritance and/or the cash surrender value of a life insurance policy.

The new registered disability savings plan (RDSP), which came into effect in December, 2008, and to which Deanna is contributing $1,000 a year, allows lifetime contributions of up to $200,000, Ms. Stalker says. Like RESPs, RDSPs are non-deductible for tax purposes, but investment income accrues tax-free. Based on the couple's current income, they will also receive Canada Disability Savings Grants.

Both Deanna and Paul invest through group RRSPs at work in mutual fund portfolios that allocate their assets based on their risk tolerance.

"The management expense ratios will be high but may be worth it for this couple in order to obtain diversification without managing the funds themselves," she says. Still, they should ensure they are monitoring their funds' performance regularly.

Deanna and Paul need to increase their insurance coverage, the planner says. They have group insurance of one times their salary, and Deanna has critical illness insurance on the rental property mortgage.

The drawback of group insurance is Deanna or Paul may not be able to take it with them if they change jobs, and they may not qualify for personal insurance at that time.

"I recommend that they look at $400,000 in term insurance for a 20-year term, at which time their mortgages will be mostly paid off and the rental property will be providing an income."

Finally, they should also explore disability insurance and ensure they have up-to-date wills and powers of attorney.

Client Situation

The People:

Paul and Deanna, ages 39 and 36

The Problem:

How to supplement retirement income and ensure the financial security of their 15-month-old daughter who has Down syndrome.

The Plan:

Pay off their home mortgage, then redirect the money to savings to supplement their pension and rental income, and set up a Henson Trust to manage their daughter's financial affairs after they are gone.

The Payoff:

Peace of mind and financial security both for them and their child.

Monthly Net Income:



House $250,000; Rental property $468,000; RRSPs $70,095; RESP $1,000; RDSP $3,517; Total $792,612

Monthly Distributions:

Mortgage, property taxes, property insurance and repairs $800; public transportation, gas, car insurance $355; groceries $500; clothing $100; daycare $560; utilities, cable, phone, Internet $550; vacation $500; entertainment, dining out $140; gifts $100; charity $25; rental property $185; medical expenses $50; insurance $65; personal care and baby items $325; RRSP contributions $140; RESP and RDSP $150. Total $4,545


Mortgage on principal residence $70,000; mortgage on rental property $318,000; family loan $50,000; Total $438,000.

Special to The Globe and Mail

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