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At age 79 and recently widowed, Cora is seeking the best way to wind down her assets, keep taxes to a minimum and leave an inheritance for her four children.

Looking back, Cora and her family enjoyed a comfortable lifestyle. Her husband was an independent businessman, Cora worked in education. The children are in their late 40s and early 50s.

“We retired in our 50s and our income – about $75,000 each before tax – is a combination of rental income, pensions and investments,” Cora writes in an e-mail. “I have always preferred real estate,” she adds. “We bought our first building, a five-plex, in 1968 for $50,000.” She was 26. “I took this lesson from my grandparents’ experience in the 1930s.”

When she was 50, Cora sat down to figure out how much money she would need to retire comfortably. “Like all women of my generation, I was penalized for being a mother” because the years of working part-time reduced her pension entitlement. “I saw that my pension was not adequate so I bought a duplex to make up the shortfall.” More purchases followed.

Today, Cora has a mortgage-free house in the Greater Toronto Area and a portfolio of rental properties that generates about $100,000 a year after expenses. She has a defined benefit pension, indexed to inflation, that pays nearly $25,000 a year.

“Would I be better off selling my properties gradually or after death?” Cora asks. “Would I be better off giving my children money now and lighten my tax burden?” She also plans to donate to charity, which would lower her capital gains tax bill.

We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Cora’s situation.

What the expert says

Cora is in good health and financially secure, so she wants to focus on minimizing income tax, enjoying life and managing and using her capital wisely, Mr. MacKenzie says.

“Like many retirees, she wonders if she should simplify her life and start to give away capital that she is never going to use,” the planner says. “Spending or giving away surplus capital makes sense for retirees whether their surplus is a few hundred thousand or a few million dollars.”

Cora conservatively estimates her net worth at about $7.7-million, consisting of her home, five rental properties and an investment portfolio of about $2.7-million.

She asks whether it makes sense to sell a rental property each year or continue to hold them and have them all liquidated by her estate executor, Mr. MacKenzie says. “It makes sense for her to sell one property each year while she is still in control because it will simplify her life and give her more time to enjoy life and to travel,” he says. By taking her time, and gradually selling properties when good offers come in, she can expect to get a higher price than if her executor liquidates them all within one year.

By spreading the estimated $4-million of capital gains over a number of years rather than selling them all at once, less income will be taxed at the highest marginal tax rate. Depending on how quickly the properties are sold, this strategy should save between $100,000 and $200,000 in income tax. As well, disposing of the properties while she is still alive will greatly simplify her estate.

Cora’s $2.7-million investment portfolio – which now includes her late husband’s investments – is spread over accounts with five different financial institutions and includes mutual funds, individual stocks and bonds and guaranteed investment certificates. “There is no evidence of an overall investment strategy and the portfolio is too complicated for anyone to rebalance or follow a disciplined investment process,” Mr. MacKenzie says.

Cora is unclear about her asset mix, whether it is goals-based or how her performance compares with an appropriate benchmark. She is unsure of the amount she is paying in fees and whether the portfolio is designed for income tax efficiency. “To improve this situation, she should ask each of her advisers for a detailed and comprehensive investment proposal for the entire portfolio,” the planner says. A consolidated investment portfolio will be simpler and easier to manage. It will reduce fees, increase tax efficiency and allow Cora to follow a “goals-based,” disciplined investment strategy, including regular rebalancing. “It might make sense for her to ask a family member or her executor for an opinion on the merits of the different proposals she receives.”

One of Cora’s goals is to leave $1-million to her favourite charity. She asks whether it would be better to make a $1-million lump-sum charitable contribution at death or contribute $100,000 a year for the next 10 years. “She should make the donations at the rate of $100,000 per year because it’s better to get the tax deduction sooner rather than later,” Mr. MacKenzie says. “Otherwise, her income in the year of death and the previous year might not be sufficient to claim all of the donation receipt.”

Annual donations will also let her enjoy seeing the good she can do. He suggests she use a donor-advised fund to administer the charitable funds because it is simpler and more efficient. Donor-advised funds are public charitable foundations that offer low administrative costs. The donor is in control of when and where the donations go and will get the full tax deduction. Compared with a private charitable foundation, the advantage of a donor-advised fund is that you avoid the office expenses, the need to appoint a board of directors and the need to file a foundation tax return.

Cora asks whether it makes sense to start giving “inheritance advances.”

“This is a good idea because it may help her heirs when they most need the help,” the planner says. This will allow her to see whether the heirs are using the money wisely. If it is being used unwisely, she can take an action to help them make better decisions.

Her children are middle-aged and may be retired before Cora passes away, the planner notes. “It’s common for those who receive a large inheritance after they retire from work to express regret that it didn’t come at a time when it could have been used to create memories for the family,” he says.

Cora can easily afford to make inheritance advances. To maintain her basic lifestyle (excluding gifts), she needs about $60,000 a year after tax. In 2022, her minimum annual withdrawal from her registered retirement income fund, Old Age Security, Canada Pension Plan and indexed pension comes to about $63,000 a year before tax, he says.

If Cora earns 4 per cent on her $2.2-million in non-registered investments, that’s another $88,000, bringing her pre-tax income (not counting rental income) to about $150,000 a year.

With this level of income and capital, she could sell and give away all the proceeds from her rental properties and still have her home. She would have more than enough capital to enjoy her lifestyle. The forecast assumes an inflation rate of 2 per cent and a lifespan of 100 years.

Client situation

The people: Cora, 79, and her four children

The problem: Should she liquidate her properties gradually or leave them to her estate? Should she give advance inheritances to her children?

The plan: Sell the properties over the next few years, give advance inheritances and use some of the funds to gradually donate to her favourite charities through a donor-advised fund. Consolidate her investments.

The payoff: Much simpler financial affairs during her lifetime and after.

Monthly net income: More than enough.

Assets: Cash $37,215; GICs $60,660; RRIFs $350,000; mutual funds $1,383,515; TFSAs $194,065; bonds $603,780; stocks $112,475; investment properties $4-million; residence $1-million. Total: $7.7-million.

Monthly outlays: Property tax $310; water, sewer, garbage $170; home insurance $180; electricity $320; heating $400; garden $185; transportation $380; groceries $400; clothing $100; gifts $1,000; charity $610; vacation, travel $500; dining, drinks, entertainment $550; subscriptions $100; club membership $10; doctors, dentists $485; drugstore $5; health, dental insurance $195; communications $500. Total: $6,400.

Liabilities: None.

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

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