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Because Francine does not speak English, her daughter is seeking advice on her behalf.

Christinne Muschi/The Globe and Mail

It’s among the things old folks fear the most – a health event lands them in the hospital and they can’t go home again because they need round-the-clock care. The family is distressed. The search for a nursing home begins and the usual questions arise: How much can Mom afford to pay? What should we do with the house she has lived in for 60 years?

That’s what happened to Francine. Now, at the age of 90 and in poor health, she’s caught up in the fuss. Fortunately, she has two children to help with the transition. Her late husband left her a substantial investment portfolio in addition to their Montreal-area home. Her combined work pension and government benefits total about $28,000 a year.

Because Francine does not speak English, her daughter is seeking advice on her behalf.

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“Until recently Mom was looking after her house and her personal finances almost all by herself,” the daughter writes, “but her medical situation has completely changed and we now have to figure out the next steps.” Through her daughter as translator, Francine asks: “What can my budget be for residential and extended care, assuming I stay in my neighbourhood and live for another three years? From a financial point of view, and for everyone’s peace of mind, what would be better, to sell the house or rent it? How can I make the most of the remainder of my estate after I die, when it will be passed over to my two children?”

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

What the expert says

“When a person is in their 90s and in failing health, it’s more important to have family and competent advocates that care about you than to have a large estate,” Mr. MacKenzie says. “Francine is fortunate in that she has both.”

Mr. MacKenzie starts by looking at the assisted-living budget. A top-of-the-line retirement home could cost $100,000 a year, the planner says. Francine may live a lot longer than she expects, so it would be prudent for her to set aside up to $800,000 to supplement her private and government pension income.

Francine has nothing to worry about financially. She could afford to spend as much as she wanted to, the planner says. Indeed, if she so chose, she could stay in her own home and hire 24/7 caregivers for $120,000 to $140,000 a year, he adds. “With her pension and investment income, and by using up some of her readily cashable investments such as her savings accounts and GICs, she could do this until age 100 and still leave an estate of more than $1-million.” Apparently, she has decided not to do that.

To keep things simple, Francine should keep her tax-free savings account (about $70,000) and her registered retirement income fund ($136,000), the planner says. She should put about $600,000 of her non-registered investments aside in a laddered guaranteed investment certificate portfolio. She could give the remainder – about $1.5-million, including the net proceeds of the house sale – to her children and grandchildren while she is still alive, Mr. MacKenzie says.

If she liquidates her investment portfolio, Francine will have a capital gain of about $28,000, half of which will be taxable as income. To minimize income tax, Francine could take half of the gain this year and the remainder next year, the planner says.

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Next, he looks at the house. Francine is fortunate that she doesn’t have to sell it immediately to pay for her health care. She can take whatever time she needs to grow comfortable with the idea. Selling the family home can be traumatic for the entire family.

When Francine is ready, it would make more sense financially, and from a lifestyle and estate-planning point of view, to sell the house rather than have the children renovate it and rent it out, Mr. MacKenzie says. “Her son and daughter have busy lives and really don’t have time to oversee a renovation,” he adds.

The family also asked about capital-gains tax. Francine would not pay capital-gains tax on the sale of her principal residence. But if they decided to rent the property, one-half of any capital gain that accrues between the date the property changed from being a primary residence to being a rental property would be taxable, he says. As well, the net rental income would be fully taxed as regular income.

Finally, Mr. MacKenzie offers Francine some estate-planning suggestions. He recommends she invite her son, daughter and grandchildren to a family meeting to discuss the passing of funds to the next generation – and the one after that – and to explain how, through several generations of hard work and frugal living, the family was able to accumulate enough money to enjoy financial security, Mr. MacKenzie says. “Francine can use this meeting as an opportunity to explain how she hopes her children and the grandchildren will use their inheritance,” he adds. He recommends she meet with her son and daughter first to discuss what amount they feel would be appropriate to give to the grandchildren now.

Francine would enjoy the pleasure of seeing the good she can do for her grandchildren, Mr. MacKenzie says. “She would be giving the money at a time when the grandchildren may have the greatest need.” She’d also have an opportunity to explain how she hopes the funds will be used, and to see whether the grandchildren, all in their 20s, are using the gift wisely, he adds. Giving the money now would minimize Francine’s income tax and reduce the possibility of a claw-back of Old Age Security benefits.

Transferring some of her wealth now would make sense for another reason: Francine’s investment portfolio is almost entirely fixed income, which is suitable for her but “does not offer the opportunity for growth and inflation protection that would be appropriate for her heirs, who have a much longer time frame.”

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Client situation

The person: Francine, 90, and her family

The problem: How to arrange her financial affairs and budget for assisted living.

The plan: Sell the house as soon as she is comfortable with the idea. Set aside $800,000 and consider passing the remainder to her children and grandchildren while she is still alive.

The payoff: The pleasure of seeing the good her legacy can do.

Monthly net income: $4,225

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Assets: Bank account $40,000; GICs $27,000; investment portfolio $1,200,000; TFSA $70,000; RRIF $136,000; residence $800,000. Total: $2.27-million

Monthly outlays: Property tax $835; home insurance $100; utilities $290; maintenance, garden $50; transit $30; groceries $180; clothing $55; gifts, charity $1,770; personal discretionary (grooming, dining, entertainment) $120; health care $165; phone, internet, TV $135; TFSA $500. Total: $4,230

Liabilities: None

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

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

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