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financial facelift

Jeffrey wants to ensure that his ailing mother is comfortable in her final years. She wants to ensure her estate creates a lasting legacy for generations.

This Financial Facelift is for Joan, a 92-year-old widow with one child, Jeffrey, who has power of attorney over his mother’s affairs. Joan has some savings, but her main asset is the family home in suburban Vancouver, which has risen substantially in value.

Joan has had a heart attack and is showing signs of “moderate” cognitive impairment. “It has become clear to us that my mother is no longer capable of living on her own,” Jeffrey writes in an e-mail. He and his wife plan to move Joan into a self-contained flat in their home so they can help her with medications and housekeeping.

Joan has worked hard and lived frugally all her life. Rather than spending her savings, she has been scraping by on government benefits – Canada Pension Plan, Old Age Security and the Guaranteed Income Supplement.

Jeffrey wonders how to invest the proceeds of the house’s sale to ensure his mother has enough money for whatever care she might need if her health declines further and she has to move to a nursing home. “I feel the burden of responsibility to ensure her assets outlast her no matter what,” Jeffrey writes. “I want to make sure she is comfortable and well-taken-care-of during her final years.”

Jeffrey and his wife are comfortable financially, so they need nothing in the way of an inheritance. Joan’s stated goal, Jeffrey adds, is to ensure her great-grandchildren can pay for their higher education. Their mother – Joan’s granddaughter – is a spendthrift with a habit of running up big debts. She owes about $18,000 now that she is unable to pay off.

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

What the expert says

Jeffrey needn’t worry about his mother running out of money, Mr. MacKenzie says. If Joan nets $1-million from the house sale and invests it in a “very safe” portfolio designed to yield an average annual return of 3 per cent to 4 per cent, she will have enough to pay for a comfortable nursing home ($5,000 a month) and still have more than $1.1-million in assets at the age of 100, the planner says.

So the question Joan and her son should be asking is not how to invest to earn a higher rate of return, but rather how to ensure that as a result of the inheritance, Joan’s legacy extends down to the fourth generation.

In terms of investments, Joan should first top up her tax-free savings account, the planner says. Together, Jeffrey and Joan should work with an investment advisory firm that is held to the fiduciary standard – such as an investment counsellor – to create a conservative portfolio of blue-chip stocks and fixed-income securities, he says.

Next, Joan should consider a plan to give the part of her net worth that is clearly surplus (about $600,000) to her heirs or favourite charities while she is still alive, the planner says. Joan would reduce her annual tax bill as well as the tax and probate fees that would be payable by her estate. More important, Joan could “enjoy seeing the good she can do,” Mr. MacKenzie says. It would also simplify the administration of her estate.

The spendthrift granddaughter – the third generation – is a conundrum. Joan worries that if her granddaughter had unrestricted access to an inheritance, she might spend it frivolously.

Then there’s the question of the great-grandchildren’s higher education. Joan could set up a family registered education savings plan for the three children and make a lump-sum deposit of $150,000, the maximum amount allowable. This would help to ensure that her great-grandchildren will have the money they need and help lower the tax Joan will be paying on her investment income.

By putting the maximum amount into the RESP, Joan would forgo the Canada Education Savings Grant. However, eliminating income tax on the income from $150,000 of investments would more than offset the loss of the grant, Mr. MacKenzie says. Having the money in an RESP would make it more difficult for the spendthrift granddaughter to misuse it, he adds.

To encourage the granddaughter to be more responsible, Joan could give her enough to pay off her debts plus $50,000 to invest. Joan and Jeffrey could arrange to have an investment adviser explain investment basics to the big spender. The remainder of the inheritance, about $380,000, could be placed in an informal trust. Then, over the next few years, Jeffrey could monitor the portfolio on Joan’s behalf to see whether his daughter squanders her inheritance or invests it wisely.

Joan could explain to her granddaughter that if she manages the initial $50,000 prudently, she will receive about $380,000 more in five years’ time and the informal trust will be terminated. If the granddaughter does not invest wisely, the money would go to Joan’s favourite charity or to her great-grandchildren through a trust.

Client situation

The people: Joan, 92, her son, her granddaughter and her great-grandchildren.

The problem: How best to use the proceeds of Joan’s house sale to provide for her health-care needs, to help teach financial responsibility to her granddaughter and to help her great-grandchildren with the cost of a university education.

The plan: Invest the money in an asset allocation designed to yield a 3-per-cent to 4-per-cent rate of return, contribute a lump-sum to an RESP for the great-grandchildren and try a carrot and stick approach to help teach financial responsibility on the spendthrift granddaughter.

The payoff: The comfort of knowing her hard-earned money will be put to the best-possible use.

Monthly net income: $1,570

Assets: Term deposits $56,000; GICs $174,700; TFSA $32,860; residence $1,000,000. Total: $1.26-million

Monthly outlays: Property tax $420; water $20; home insurance $65; utilities $215; groceries $160; clothing $10; gifts, charity $50; dining out $40; drugstore $20; telephone $45. Total: $1,045

Liabilities: None

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