Lena is 82, "single by choice" and concerned about estate planning after a recent health problem. She also wants some help with her investment portfolio, but she dislikes paying fees and commissions.
"My goal is to ensure a conservative approach to maintain the value of my investments for my beneficiaries," Lena writes in an e-mail. She frets about the probate fees and capitals gains tax her estate will have to pay when she eventually dies.
She's dissatisfied with her investment adviser and has been interviewing others with a view to switching.
"I have been unsuccessful in finding a financial adviser whose focus is on my investment goals and objectives – and not on their products or commissions," Lena adds.
She believes her asset allocation needs revising because it does not meet her conservative risk profile.
Because of her "advancing years," Lena writes, "I simply do not have the investment time frame to ride out unsuitable investments that might be in my current portfolio." Her income consists of Canada Pension Plan and Old Age Security benefits plus investment income drawn from her savings.
We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Lena's situation.
Mr. MacKenzie holds the Chartered Professional Accountant (CPA) and Certified Financial Planner (CFP) designations.
What the expert says
"Lena is an active, very capable woman," Mr. MacKenzie says. She ran a successful consulting business before she retired in her early 70s.
"She is very hands-on when it comes to her investments and she has built up an investment portfolio of about $1.7-million," the planner says. But with 95 per cent of her portfolio in equities (65 per cent in common stock and about 30 per cent in preferreds), "she is definitely not in a goals-based portfolio," Mr. MacKenzie says. Lena is taking more risk than necessary to achieve her goals.
Lena spends modestly, so the planner's calculations show that if she spends $40,000 a year after tax and gives modestly to support relatives and charities and earns 4 per cent a year on her investments, by the age of 90, her net worth will have increased to about $2.3-million. Lena has more than enough money as long as she doesn't make any big investment mistakes, Mr. MacKenzie says. But at some point, she might lose her edge, so she should consider transferring at least $1-million to an investment manager who acts as a fiduciary; that is, one who must act in her best interest, he says. "At this point, she is fully competent to choose an investment manager, but if she delays this decision for 10 years, she might be less able to choose the right manager."
Lena should also consult with an estate lawyer and consider appointing someone who would have power of attorney to specifically manage her finances if that is ever required, Mr. MacKenzie says. If Lena really wants to reduce capital gains tax for her estate, she could donate those investments on which there is a large capital gain to her favourite charity, the planner says. "If she does this, she will receive a tax deduction for the market value of the investment and she will not have to pay any capital gains tax."
If she really wants to avoid probate fees, she could set up and transfer her assets to an alter ego trust. Assets placed in an alter ego trust during a person's lifetime will fall outside of their estate when they die, allowing them to avoid probate fees. There are pros and cons to doing this, so she should discuss it with an estate lawyer, the planner says.
One of Lena's beneficiaries has always struggled financially. Lena is concerned that if this person got a lump-sum inheritance of, say, $225,000, the money would be spent – and within one year. The person would again be struggling financially and be filled with regret about wasting a large inheritance, Mr. MacKenzie says.
To avoid this possibility, and help the beneficiary with his current cash-flow problems, Lena has decided to buy an annuity that will provide the person with a monthly payment of $814 for the rest of his life. Indeed, Lena has decided to make significant gifts to all her heirs and then check back in a year's time to see whether the money was wisely used, the planner says.
"She wants the inheritance to be a positive rather than a negative force in the lives of the heirs, so if the first instalment is not handled well, she may change her will and give to charity the amount she had planned to give to that heir," Mr. MacKenzie says. "She is planning to have a lot of fun giving away the portion of her capital that she will never spend."
The person: Lena, 82
The problem: How to arrange her affairs more conservatively with a view to estate planning.
The plan: Hire a professional manager for at least $1-million of her investments and strategically give away the money she will never need.
The payoff: Minimizing fees and taxes on her estate, helping the heirs that need help now, being able to confirm that her bequests will be used wisely, and having some fun seeing her money being put to good use.
Monthly net income: $3,395
Assets: Stocks $1,030,000; short-term deposits $435,000; TFSA $51,000; RRSP $225,000; residence $550,000. Total: $2.3-million
Monthly outlays: Housing costs (condo fees, maintenance, property tax, insurance) $1,090; transportation $285; grocery store $200; clothing $85; gifts, charity $540; vacation, travel $85; dining, drinks, entertainment $125; personal care $40; subscriptions $40; house cleaning $75; health care $375; phone $40; TFSA $415. Total: $3,395
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