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financial facelift

Annie.CHAD HIPOLITO/The Globe and Mail

Well-fixed financially, Annie would like to give some money to her two adult children “sooner rather than later,” she writes in an e-mail. “Charitable giving would also be of interest,” she adds. Annie is 69 and working part-time. Her income of $133,100 a year comes from contract work, withdrawals from a life income fund and Canada Pension Plan benefits. Her B.C. residence is valued at $1-million.

“Like many seniors, I find myself on my own, with a significant portion of assets in RRSPs and facing the looming deadline of my 71st birthday,” Annie writes. At 71, she will have to roll her registered retirement savings plan into a registered retirement income fund and at 72, begin making mandatory minimum withdrawals, which will add to her income taxes.

“I’m interested in tax efficiencies for income structuring because the options like income-sharing are not available to me,” she writes. (Couples can lower the family tax bill by splitting income with spouses.)

“I’d also be curious to see how I might be able to help out my two children financially without jeopardizing the assets I may need for future care,” she adds. Her retirement spending goal is $70,000 a year after tax.

“Am I structuring and receiving income in the most tax-efficient way possible?” Annie asks. “Will funding a charitable endeavour as part of my estate planning be possible? If so, when should the mechanics be put in place?”

We asked Tara Ennevor, a financial planner and associate portfolio manager at RGF Integrated Wealth Management in Vancouver, to look at Annie’s situation.

What the expert says

Annie has enough registered assets to generate the retirement income she desires without any concern, Ms. Ennevor says. “Therefore, she can give to her children and charity now from her non-registered account.”

Annie already has a tax-efficient strategy set up that is in line with her risk tolerance and investment objectives, the planner says. Annie’s non-registered portfolio is largely invested in stocks, so she receives mainly dividend income. She has a large unrealized capital gain, so when she sells the investments, half of the gain will be taxable as income, Ms. Ennevor says.

Annie can reduce her taxes by gifting money to her children now, the planner says. None of the income the children may earn will be attributed back to her. “Giving non-registered assets now will reduce the eventual value of her estate and probate fees,” the planner says. “If she gifted $300,000 to each child now, she would still have enough assets left to generate her desired $70,000 a year,” she says. “She has the ability to increase her after-tax/after-inflation income to $100,000 if needed.” She would also have the pleasure of being able to help her children.

In preparing her projection, the planner assumed a 6-per-cent growth rate for Annie’s investments and a 3-per-cent inflation rate. She assumes Annie will draw on her financial assets to the age of 95, after which she still has her home. The planner also included CPP and OAS benefits, including the OAS clawback.

Annie could gift securities in kind to the charities of her choice each year, Ms. Ennevor says. “The gifting of securities or mutual funds in kind is exempt from capital-gains tax triggered by the gift,” the planner says. “If she donates a $10,000 security with a $5,000 gain, she will get the charitable tax receipt for $10,000 and pay no tax on the gain,” she says. “If she instead sells the $10,000 security and donates the $10,000 to charity, she will get the tax receipt for the whole amount, but will pay tax on the gain of $1,050″ (taxable gain of $2,500 and a 42 per cent tax rate).

Annie’s will is more than six years old and needs to be updated, the planner says. “This is a good time for her to add in her charitable gifts.” Annie can ask that her executor gift securities in kind to take advantage of the capital-gains tax exemption, she says.

Annie should consider choosing a centralized registered charitable foundation, such as Abundance Canada or Canada Gives, where she can set up her own “foundation” and they take care of all the administration, Ms. Ennevor says. “She can donate to her foundation now and via her will, and decide where and when her gifts will be distributed.” She can also change the charities receiving gifts at any time without having to update her will.

Annie could also consider using life insurance as part of her estate planning, Ms. Ennevor says. “She has surplus assets that she plans to pass on to her children and charity via her estate,” the planner says. Income earned from her non-registered account is exposed to her high marginal tax rate. At death, her registered assets will trigger significant tax obligations because they will be fully taxable, she notes. “Tax-exempt insurance can preserve the value for her beneficiaries by covering her tax obligation.” If she needed to, Annie could access the investment account within the life-insurance policy through tax-free policy loans, which are repaid after death with part of the death benefit, Ms. Ennevor says.

She could also apply for insurance and transfer ownership to a charity. “The charity will then change the beneficiary designation to the charity and a tax receipt will be issued for any premiums paid by Annie.” When she dies, the insurance proceeds are paid tax-free to the charity. No donation receipt is issued for the insurance proceeds. “In transferring ownership to the charity, she gives up control and access to any cash value in the policy,” the planner says.

Client situation

The person: Annie, 69

The problem: Are her investments structured in the most tax-efficient way possible? Can she afford to give money to her children now without running short of funds for health care if she eventually needs it? Can she afford to fund charitable endeavours?

The plan: Continue with current income structure. Give now to her children and consider gifting to charity on an annual basis, plus designating gifts of securities in kind in her will. Consider tax-exempt life insurance to shelter some of the tax on her investments and provide a tax-free death benefit to pay the substantial tax owing on her registered investments.

The payoff: The pleasure of giving now and seeing her gifts at work. Receiving tax savings from charitable gift receipts and from reducing the size of her estate.

Monthly net income: $11,000.

Assets: Bank account $10,500; non-registered portfolio $1,499,000; TFSA $78,000; RRSP/LIF $1,755,000; residence $1,000,000. Total: $4.3-million.

Monthly outlays: Condo fees $623; property tax $417; home insurance $155; heat, electricity $113; maintenance $200; garden $50; transportation $266; groceries $700; clothing $100; gifts $150; charity $83; vacation, travel, other $980; dining, entertainment $200; personal care $100; subscriptions $50; pet $200; health care $90; communications $155; TFSA $500. Total: $5,260. Surplus $5,740.

Liabilities: None.

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

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