Madeleine retired two years ago from her professional career to care for her husband, who was ill.
At 54, she is on her own again, a recent widow. She has three daughters in their early 20s, the youngest one with a mild disability.
As well as a substantial investment portfolio, Madeleine has a triplex in Toronto and a cottage in the Muskokas.
She knows she has all the money she needs, but she is concerned mainly with estate planning, getting the right investment mix, helping her two older daughters to buy a house and providing an income for life for her youngest child.
She wonders how to invest the $520,000 she has just received from her husband's estate.
"Given interest rates and my current portfolio, would you recommend purchasing another rental property?" she asks in an e-mail.
We asked Warren MacKenzie, president and chief executive officer of Weigh House Investor Services, to look at Madeleine's situation.
What the Expert Says
Madeleine is thinking of using life insurance as a tax-planning tool to offset the taxes her children will have to pay on their inheritance. But simply buying more life insurance so her estate will be larger is not really tax planning, Mr. MacKenzie says. Tax planning involves taking steps that will actually reduce the amount of tax that is paid.
Madeleine could do this by investing in a tax-exempt insurance policy through her professional services corporation from which she still collects a salary. This is a form of permanent insurance with a savings and investment component that is sheltered from tax during a person's lifetime so the entire value of the policy - insurance and investments - can be passed on to beneficiaries tax free.
"She would be investing her assets in a tax-sheltered environment that would reduce the amount of tax she will pay during her lifetime and at death," the planner says.
Insurance also makes sense to offset the tax bill heirs may face on an asset they don't want to sell, such as the family cottage.
As well, Madeleine wonders if there is anything she can do to lower the income tax payable on her registered retirement income fund (RRIF) withdrawals, Mr. MacKenzie notes.
"Unfortunately, all of the income from a registered account is taxable in the hands of the person who draws the money out in the year that it is withdrawn."
She wonders how much of her RRIF income she can give to her children during her lifetime without incurring taxes.
"Here, there is some good news," Mr. MacKenzie says. There is no limit to the amount she can give to a child who is over 18 years of age - after the money has been taxed in her hands. Mind you, Madeleine must make sure she still has enough money left to look after herself, the planner cautions.
One thing that keeps Madeleine awake at night is worrying about how to provide for her youngest daughter. She need not worry, Mr. MacKenzie says, because regardless of when she dies, there will still be enough money on hand to buy a life annuity for her daughter.
"All Madeleine needs to do is to update her will and leave instructions for her executor to use her handicapped daughter's share of the estate to buy an indexed life annuity." (Madeleine has decided against a Henson Trust, a type of discretionary trust designed to benefit a disabled person and managed by a trustee, because she wants her daughter to have access to the principal and not just the income.)
The biggest opportunity for improving her long-term prospects may be to better manage her investment portfolio, Mr. MacKenzie says. The difference between an average annual rate of return of 6 per cent and 5 per cent would be more than $1-million over the next 35 or so years.
As for the $520,000 from her husband's estate, Mr. MacKenzie suggests Madeleine invest it entirely in fixed income securities to shift her balance away from being too heavily invested in stocks. Given the uncertainty of financial markets, he recommends an asset allocation of 40-per-cent equities and 60-per-cent fixed income with a target return of 5 per cent a year. He suggests she invest half of her equity exposure outside of Canada.
Madeleine's investment adviser tells her she is doing well but has not given her any numbers to compare the performance of her investments against an appropriate benchmark.
"If she is not being told how she is doing compared to a benchmark, she should assume she is not getting value for the fees she pays," Mr. MacKenzie says flatly. He recommends she sit down with her investment adviser and draw up an investment policy statement and a written investment strategy.
Client Situation
The Person: |
Madeleine, 54. |
The Problem: |
How best to invest her money, arrange her estate and help her three children. |
The Plan: |
Consider the strategic use of insurance, balance her investment portfolio and arrange for a life annuity to be set up for her youngest daughter. |
The Payoff: |
Peace of mind, some tax savings and a secure future for her and her girls. |
Monthly net income: |
$4,260. |
Assets: |
Cash in bank $108,000; LIRA $590,000; RRSP $455,000; investment account $50,000; Canadian stocks held by corporation $125,000; U.S. stocks held by corporation $85,000; cash from husband's estate $520,000; house $1,300,000; cottage $600,000. Total: $3.83-million. |
Monthly Disbursements: |
Living expenses $765; housing $1,105; leisure $470; transportation $225; miscellaneous $300. Total $2,865. Savings capacity: $1,395. |
Liabilities: |
None. |
Special to The Globe and Mail
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