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A widow, her children, and adapting to the winds of change

Margarite's goals are to maintain her lifestyle, support her disabled child, travel, spoil her grandchildren and leave a healthy estate to her three children.

Mark Blinch/Globe and Mail

When Margarite's husband died, he left his family well provided for. In addition to their home, he bought three investment properties, one for each of his children.

As the years went by, Toronto real estate rose in value substantially. But rental properties require regular maintenance and eventually, renovation. Margarite, who at the age of 69 is still working in an office earning $50,000 a year, faced a severe cash-flow crunch. By the time she contacted Financial Facelift, she had run up about $600,000 in mortgages, high-interest second mortgages, back taxes and credit cards.

Her daughter stepped in to help. First, they mortgaged the family home to repay the high-interest debt. Together, they decided to put two of the properties up for sale. Margarite will use part of the proceeds to pay off the mortgage on her home, where she hopes to stay as long as possible. She plans to leave it to her daughter. Her elder son is living in the second house, renovating it, paying the mortgage and paying Margarite $500 a month. Margarite plans to leave that house to him.

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Margarite's younger son, who gets social assistance benefits under the Ontario Disability Support Program, has been living rent-free in one of the properties being sold, but soon he will have to move. Initially, Margarite planned to rent him an apartment. Now, she is considering using part of the sale proceeds to buy him a condo in the $300,000 range so he would have a secure place to live. There is nothing in that price range in Toronto, so the son would have to leave his familiar surroundings and his family.

There's another potential problem. Because Margarite still thinks in terms of one property for each child, when she dies, her three children stand to inherit homes that differ in value. Presumably, they would also share in whatever financial assets remained.

We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Margarite's situation. Mr. MacKenzie holds the designation of Chartered Professional Accountant (CPA).

What the expert says

Margarite likes her job and her co-workers so she intends to keep working until the end of 2020 when she is 72, Mr. MacKenzie says. Her goals are to maintain her lifestyle, support her disabled child, travel, spoil her grandchildren and leave a healthy estate to her three children "but not at the expense of quality of life," she says. She has not been doing the things she enjoys because she's been short of money and fearful of not having enough in her old age. She needs a financial plan to prove to her that she has more than enough capital to achieve all her goals, he says.

"With more cash going out recently than coming in, it was difficult for her to realize that she is in fact quite wealthy." While her real estate sales have not yet closed, Margarite's accountant has advised her that she will net $1.3-million after expenses, income tax and debt repayment. The properties are held by a private corporation, and because of a debt owing to the shareholder (Margarite), the proceeds can be paid to her on a tax-free basis, her accountant says.

About $300,000 of that will go to buy a condo for her disabled son, with the remainder being invested. Margarite has very little investing experience and is uncomfortable about the stock market.

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Margarite spends modestly on herself, and when she retires, her work pension of $14,875 a year, indexed to inflation, her Canada Pension Plan of $19,355 (deferred to the age of 70 and including survivor benefit), Old Age Security benefits of $7,020, rent from her son of $6,000 and her investment income of $40,000 a year (assuming the sales go through and the money is invested at a net rate of return of 4 per cent) will be enough to ensure she never runs out of money, Mr. MacKenzie says. It adds up to $7,270 a month or $87,250 a year before tax.

Margarite should be in a goals-based investment portfolio with an asset mix designed to take no more risk than is necessary to achieve her 4-per-cent goal, he adds. She should also have an investment-policy statement that clearly explains the investment process and sets out the benchmarks against which she can measure performance.

First off, Margarite should open a tax-free savings account and deposit $52,000 to take advantage of her unused contribution room. If she wants to leave the second house to the son who is living there, she should consider immediately transferring it to his name so he could designate it as his principal residence and avoid being taxed on any future rise in value, Mr. MacKenzie says. If she is concerned that he might lose it through divorce or to creditors, she could take back a second mortgage to cover her equity in the property, he says.

For her disabled son, Margarite should open a registered disability savings plan (RDSP) as soon as possible to take advantage of tax-free income and matching government grants, Mr. MacKenzie says. She could contribute up to $200,000. If she makes payments annually rather than a lump sum, the plan could qualify for up to $70,000 in grants. Designed as a long-term savings plan, an RDSP does not interfere with disability benefits.

If she can find a suitable trustee, Margarite could also explore the possibility of setting up a Henson trust, either now or in her will. This also would allow her son to keep drawing social assistance benefits. The trustee has absolute discretion over how to use the funds. A Henson trust can pay out up to $10,000 a year, plus "comforts," including a radio, television, clothing, extra food, recreation, entertainment and spending money, among other things.

She might also want to rethink buying a condo for her son that is so far from Toronto. She could either rent an apartment for him or buy a place a little closer to family, even if it costs more.

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If she thinks her children might feel they have been treated unfairly, Margarite might instruct her executor in her will to sell any real estate she owns so the children could inherit equal amounts of cash, Mr. MacKenzie says. The proceeds would be added to her remaining financial assets. She could also consider buying life insurance and using the proceeds to equalize the inheritance. She should hold regular meetings with all her children so that there are no surprises when her estate is settled.

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The person: Margarite, 69, and her three children.

The problem: How to ensure her own financial security and provide for her disabled son.

The plan: Draw up a financial plan to prove that she has more money than she needs, set up an RDSP for her son and consider a Henson trust.

The payoff: Peace of mind and a comfortable living.

Monthly net income: $5,250 (salary after tax, pension plan contributions and employee benefits plus rent [from elder son] plus OAS)

Assets: Bank accounts $10,000; anticipated net proceeds from property sales $1.3-million; principal residence $1.6-million; second house $1.6-million; estimated present value of pension $220,000. Total: $4.7-million.

Monthly outlays: Property tax $585; utilities $305; home insurance $130; security $35; maintenance $800; garden $20; car sharing $800; parking, transit $60; groceries $435; clothing $110; gifts $100; grooming $50; club memberships $100; dining, entertainment $400; other personal $100; dentist $50; phones, internet $240; unallocated spending $1,200. Total: $5,520

Liabilities: Mortgage on second house $800,000

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

Money Monitor: Saving beyond a defined pension plan (The Canadian Press)
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