Putting It All Together

The scenarios below are fictitious but may represent similar circumstances of families in New Brunswick. While they contain information about planning ideas, they are not meant to be used as financial or legal advice for your specific family situation. We thank Jeff White from Freedom 55 Financial for providing the financial planning information for these scenarios. Feel free to check out Jeff’s web-site at http://www.jeff-white.net.

Scenario 1 – Marc, Michelle and Nicola

Marc and Michelle are parents of six year old Nicola who has Down syndrome. Nicola is in a grade 1 class at her local elementary school. She does not have brothers and sisters at this time but Marc and Michelle are planning on having at least one more child. Nicola’s grandparents are very active in her life and talked about providing for Nicola in some way.

Marc and Michelle are both in their early thirties. Marc works full time as a supervisor in a local grocery store while Michelle works 25 hours a week as a nurse. They have net family income of $70,000. Marc and Michelle own their own home that is currently valued at $150,000 and have a mortgage under which they currently owe $125,000. Collectively, they have $31,000 saved in RRSPs and Michelle has been contributing to a pension plan through her employer – a local nursing home. They also have assets of $4,200 in a GIC that earns 2% interest plus a savings/chequing account with a balance of $2500.

Marc has a $50,000 term life insurance policy through his employer while Michelle has a $25,000 term policy through her employer.

Besides their mortgage, they owe $18,000 on their two vehicles and owe an additional $3000 on credit cards.

Marc and Michelle would like to plan for the future for their future retirement and also for their daughter’s financial security for when she is an adult.

Developing a Plan for Marc and Michelle

Marc and Michelle are on the right path. Like so many young families they have started planning, but lack the formal plan that ties everything together. Financial planning discussions with this family would follow the following format.

Marc and Michelle will be asked to complete a budget to determine cash-flow constraints in the household today. This exercise will allow the advisor and family to determine the amount of funds that can be allocated to the family’s goals of retirement and security for their daughter Nicola.

A retirement analysis will be completed to assess the family’s goal for retirement. The age at which Marc and Michelle wish to retire and the required income needed in retirement will be determined with consultation with the family. The advisor will then project the future income generated from the existing programs (RRSPs, pensions, government programs) to see if there are any gaps in their retirement goals. Should there be a gap, and if cash-flow permits, a recommendation including allocating additional resources to RRSPs and Tax Free Savings Accounts (TFSAs) is often a solution.

The purpose of the GIC portfolio must also be determined. Are these funds set aside as a “liquidity” account, or are they to be considered for long term planning? Which-ever the answer, additional planning should be discussed.

An RDSP would be an excellent choice of a program to provide security planning for their daughter Nicola. Marc and Michelle will first need to determine if Nicola qualifies for the Disability Tax Credit (DTC). If so, and considering the 2011 family income is less than $83,088, Nicola would be entitled to receive a Canada Disability Savings Grant (CDSG) of $3,500 if Marc and Michelle could budget an annual contribution of $1,500 into the RDSP. Their $1,500 contribution combined with the CDSG would result directly in a total portfolio value of $5,000. This strategy can be continued annually over the long term to help provide for Nicola. The amount of the annual CDSG will depend on their yearly family income (until Nicola reaches 19) and the amount they can contribute.

If Nicola qualifies for the Disability Tax Credit, the credit can be transferred to Marc or Michelle as Nicola’s caregivers as Nicola does not have any income of her own. The tax savings from transferring the DTC can then be used to make contributions to Nicolas’s RDSP, or for other purposes.

There was mention that Nicola’s grandparents are very active in her life and would be interested in providing for her future. Perhaps the grandparents would wish to assist in the annual contributions to the RDSP, as anyone can make a contribution to an RDSP provided they have written permission from the holder of the account. Certainly an area of discussion for all involved.

A detailed insurance analysis should be completed for the family. Best laid plans for retirement and their daughter’s future could be in serious jeopardy if Marc or Michelle where to pass away. Given the family’s current income and debt loads, an advisor would work with them to determine the coverage required to give them piece of mind of knowing the survivors would be able to still reach their goals if either Marc or Michelle were to pass away. In this case, a 20 year term contract for several hundred thousand would likely be a recommended strategy.

Lastly, Marc and Michelle will need to consult with a lawyer who provides services in estate planning to complete Wills (and Powers of Attorney). As Nicola is still young and the only child, a trust fund that will have the ability to last into her adult years should be considered. A lawyer can provide advice on the best type of trust to use. While Nicola is under the age of 19, the Wills can also be used to appoint a guardian for Nicola in case both Marc and Michelle were to pass away.

If Marc and Michelle have other children, their financial and estate plans should be reviewed to ensure that all children will be looked after.

Scenario 2 – Ed, Joan and Alexander

Ed and Joan are 56 and 53 years old respectively and are parents of three children. Their oldest child John is 25 years old and has just started working as an accountant with a firm in Halifax. Their 20 year old daughter Emily is in her 3rd year of a B.A. program at Mount Allison University in Sackville where she lives in residence. She hopes to continue her education to become a teacher. Their youngest child, Alexander, is 18 years old and still attending high school. Alexander has been diagnosed as having autism and has been on a modified program at school since elementary school. Ed and Joan hope that Alexander will be able to work in the community when he finishes school but his employment prospects are uncertain. They hope to work on some transition to work planning with his high school over the next year.

Ed works as a Middle School teacher and Joan works part time as a bookkeeper with a small business. They have net family income of $85,000 per year. They own their own home that is currently valued at $220,000 and have an outstanding mortgage of $65,000. Ed has a pension plan as a teacher and expects to retire at age 60. He also has $75,000 saved in an RRSP. Joan does not have an employer sponsored pension but has saved $70,000 in an RRSP. She would like to retire in 4 years when Ed retires, but may have to leave work earlier when Alexander finishes school in the next year or two.

Ed and Joan have a few other assets. They have both set up Tax Free Savings Accounts (TFSAs) and have $8000 in savings in these accounts. They have $3000 in GICs and $4000 in their joint savings account.

Ed has $50,000 in term life insurance through his employer and a $100,000 whole life policy on which he no longer needs to pay premiums. Joan has a $25,000 term life insurance policy.

While their two youngest children were growing up, Ed and Joan invested in Registered Education Savings Plans. Emily is still using the proceeds from her Plan to help pay for her university costs.

Developing a Plan for Ed and Joan

Ed and Joan are nearing retirement and like so many others in the same situation they are concerned about having allocated enough to their retirement. They also wish to assist their son Alexander in the future in any way they can.

An advisor must first complete a detailed analysis of the family’s income needs in retirement. Then a plan will be introduced as to how the family will coordinate the funds in their RRSPs and TFSAs to augment the pension and government programs that will start in retirement. A test should be completed to assess the strain on the retirement goals in the event that Joan leaves the workforce early when Alexander finishes school.

Alexander is at an age when he can apply for income support benefits from the government of New Brunswick as a person with a disability. This will require that he be certified “disabled” for the purposes of the income support program. If he qualifies, he will be entitled to receive a monthly cheque but the amount may be reduced while he is living at home (because of his parent’s income). If he qualifies for the disability benefit, he can also earn up to $250 per month before seeing any reduction in his monthly benefit. If Alexander is able to find full time work after he finishes school he will not likely qualify for income support benefits, but he will have more income to look forward to.

An RDSP would be a prudent decision for Ed and Joan to consider for Alexander. If they have not yet applied and been approved for the Disability Tax Credit for Alexander, this step will have to happen before they can consider opening an RDSP. Given that Alexander is currently 18 the Canada Disability Savings Grants would be determined based on the household income of his parents. As Ed and Joan’s 2011 family income is currently above $83,088 the CDSG would match the first $1000 contributed to the program. As such a $1,000 deposit would generate a $1,000 grant for a total of $2,000 in the first year. At age 19 and every year there after the income used for the grant contribution will be that of Alexander’s which will likely lead to higher grant levels and perhaps also the inclusion of the Canadian Disability Savings Bond.

If Alexander qualifies to open an RDSP, unused funds remaining in the RRSP portfolios of Joan and Ed can be transferred to the RDSP of Alexander upon their passing away without triggering any deemed disposition or tax consequences. This tax-free “roll-over” can be up to the $200,000 RDSP contribution limit less any contributions previously made. If this is to be considered as an option, the family will likely want to plan to ensure their two other children are also treated fairly and equitably with the proceeds from the estate.

As with all families, a detailed insurance analysis should be completed for Ed and Joan. Given the family’s modest debt load and timeframe to retirement it is not unrealistic to assume that they have adequate coverage in-place. Caution must be exercised as the term contract of Joan’s and Ed’s employer sponsored coverage is likely to not continue in retirement. Additional questions must be asked to determine Ed and Joan’s goals for their estate and how they wish to leave their assets to their 3 children.

A detailed Will with Ed and Joan’s intentions should be drawn up to assist with the planning goals. As Alexander has an intellectual disability, a trust arrangement for his share of the estate assets will likely be necessary. If he qualifies for provincial disability income support benefits as a person certified as “disabled”, he will be able to have up to $200,000 in a trust fund and receive payments of up to $800 per month without affecting his income support benefits. An RDSP can provide similar benefits, so Ed and Joan will need to decide how to best use both of these options if Alexander is eligible. If Alexander is able to work full time, a trust for him will still make sense, but the amount and terms of the trust will not be restricted by income support rules.

Scenario 3 – Dawn and Robert

Dawn is a 48 year old single mother of two children. Her daughter Annie is 25 years old and his married with a two year old child. She works as a hairdresser in the same town as her mother. Dawn’s son Robert is 26 years old and lives at home with his mother in a two bedroom apartment. Robert has an intellectual disability and works 15 hours a week at a local restaurant where he earns minimum wage (about $550 per month). He was helped by an employment agency to find his job. When he is not working he spends most of his time at home, but he does like to walk around town and visit the near-by Tim Horton’s each day.

Robert qualifies for the federal Disability Tax Credit, but as he does not have enough income to pay income tax Dawn is able to claim the DTC in order to have her own income tax reduced.

Dawn works full time in a department store where she has been working for 15 years. She earns $26,000 per year. Her main assets include her household items, a 6 year old car, and a bank account with a balance of $1500. She does not have any life insurance nor does she have any pension savings outside of her contributions to the Canada Pension Plan.

Robert receives disability income support benefits from the government of New Brunswick ($618 per month in 2011). Because he earns $550 per month, his income support cheque is reduced by $300 as he his allowed to keep $250 per month from employment wages before his benefits are reduced. Between his disability income support benefits and employment income he brings home $868 per month. He is also eligible for the provincial disability supplement of $83 per month bringing his total income to $951 per month. Although Dawn would like to see Robert set up in his own apartment, she is concerned that she and Robert would both have a reduced standard of living as Robert’s income (combined with her own) helps to maintain a decent place to live and other amenities for both of them.

Developing a Plan for Dawn and Robert

Dawn’s concerns are valid and the assistance of a financial advisor would be of great value. Dawn would like to assist her son Robert today and in the long term. The goal of having Robert have a home of his own has been discussed. She does not know if she has the cash-flow to assist.

An advisor would work with Dawn to determine the cash-flow she has to maintain her current home and to help determine if Robert has sufficient funds available to maintain a place of his own. A decision on whether or not there will be any changes to their living arrangements should be made after all options are considered. They will need to consider the impact of Robert moving out on both his and Dawn’s standard of living.

Regardless of the outcome of the housing concerns, the recommendation of the introduction of the RSDP should be made by the advisor (Robert is already eligible for the Disability Tax Credit). As Robert is over the age of 19 he would be the holder of the account and his income would be the considering factor for the grant contributions and the availability of the Canada Disability Savings Bond. As Robert’s 2011 income is below $24,183 per year the government will contribute $1000 per year into the account without any contribution from Robert or his mother.

The cash-flow analysis that helped the family determine how to proceed with housing can also assist to determine if there are funds available for contribution to the RDSP. A $1,500 annual contribution would generate $3,500 in additional grants. It is conceivable that a $1,500 contribution from Robert and Dawn would lead to a total portfolio value of $6,000 (once all available grants and bonds are claimed). Any contribution under $1500 per year will still allow Robert to claims some of the government grants. This strategy can be repeated yearly.

If cash-flow does not allow for contributions another strategy that can be considered is having Dawn purchase an insurance contract. Preferably, this would be a level cost term to age 100 contract. The annual costs of this program would be relatively affordable and the proceeds payable upon Dawn’s passing can flow directly into the RDSP (up to $200,000) and/or a trust fund for Robert. This would maximize resources allocated to today’s challenges while also ensuring that Robert’s financial security is maintained after Dawn’s passing.

Although Dawn does not own many assets, she should still make a Will. This will ensure that any assets she does own at death can be divided among her two children in a way she deems fair. Any share that Robert might inherit should be placed in trust for him to protect his interests. If she is willing and financially responsible, his sister Annie could be a trustee for Robert’s trust fund.

Scenario 4 – Charles, Annette and Arthur

Charles and Annette are 69 and 67 years old respectively and are retired from employment. They have two children – Daniel who is 42, married with 3 children and a real estate agent; and Arthur, who is 37 and still lives at home. Arthur has a mild intellectual disability as well as a physical disability that makes walking difficult for him.

Arthur does not work at present, but receives 20 hours of support funding per week that allows his family to hire a support worker to help him be involved in his community through volunteering at a local soup kitchen and some leisure activities such as swimming. He also receives disability income support benefits of $463 per month (he would other wise be entitled to the full 2011 benefit of $618 but his cheque is reduced by 25% because he lives with his parents and their family income is above $40,000 per year). Arthur also receives the disability supplement of $83 per month.

Charles and Annette own their own home valued at $225,000 which is mortgage free. They would like to “down-size” as they are finding maintaining the home a lot of work.

Charles receives a pension from the provincial government for his 35 years of service as a Department of Transportation employee. This pension provides him with $30,000 a year in benefits. He also receives Canada Pension Plan benefits of $11,000 per year plus Old age Security benefits of $6200 per year. Annette worked sporadically outside the home and receives $1800 per year in CPP benefits plus $6200 per year in Old Age Security benefits. Charles and Annette’s total yearly income is $55,200.

In addition to their home, Charles and Annette have other assets. Charles has $70,000 saved in an RRSP which has not yet been converted into an RRIF. They also own a summer cottage on a lake but are unsure about its value. They have $12,000 saved in short term GICs.

Arthur is eligible for the federal Disability Tax Credit. As he does not have taxable income of his own, his father Charles claims the credit on his own tax return.

Charles and Annette are concerned about what will happen with Arthur when they are no longer able to look after him. They would like to see him living in another place in the near future but are uncertain about how to proceed.

Developing a Plan for Charles, Annette and Arthur

The situation that faces Charles and Annette is a common one for families of a child with a disability. They are concerned about what will happen to Arthur when they are no longer able to support and care for him and would like to make living arrangements for him that would benefit all parties.

A first consideration would be the goal of downsizing their current home to determine if this is a viable strategy. With there other son working in the real-estate industry plans should be made to show options for such a down-size. Would the smaller house, condo, or apartment still support Charles, Annette and Arthur or would they have to consider a secondary residence for Arthur? Charles and Annette should also consider if they want to keep their cottage of sell it to help meet their retirement needs and their desire to look after Arthur. At the very least, they should determine the value of the property.

A budget should be completed to ensure Charles and Annette’s retirement income and Arthur’s government benefits are sufficient to support any changes in living arrangements in the short term.

As the existing home is clear of any mortgage, if they did downsize it is realistic to assume that there would be surplus retained after the down-size. Depending on the size of the surplus and type of housing they choose with their new place, planning should be considered.

Arthur should open an RDSP. As he is over the age of 19 he will be the holder of the account and his income would be the considering factor for the grant contributions and the availability of the Canada Disability Savings Bond. As Arthur’s 2011 income is below $24,183 per year, the government will contribute $1000 per year into the account without any contributions. He would be able to claim grants and bonds until he reaches age 49, and would also be entitled to claim grants and bonds back to 2008 (the grants from previous years would require contributions to be made for those years).

Should there be a lump sum available from the proceeds of the down-sizing of houses, Charles and Annette may wish to consider some options that will benefit Arthur. One would be to deposit the total into the RDSP in year one. While Grants of $3,500 are only payable on the first $1,500 deposited, the long term benefits of tax sheltered growth inside the RDSP on the surplus may be worth considering. Averaging in the proceeds over the course of a number of years should also be considered to maximize the grants eligible.

Another option would involve using some or the entire surplus from down-sizing (or selling the summer cottage) to acquire a home for Arthur. Depending on Arthur’s wishes and needs, a small home or condominium may be suitable to meet Arthur’s needs for housing (including accessibility needs arising out of his physical disability). If a home were acquired for Arthur, Charles and Annette would need to seek legal advice to determine the best way to leave the home to him (for example, a housing trust). If Arthur were to move into his own home, he would be entitled to receive the full monthly income support benefit of $618 (in 2011) plus the monthly disability supplement of $83. The cost of maintaining the home will need to be considered as would strategies for meeting his monthly expenses (such as sharing the home with someone else who could share expenses or setting up a small trust fund to flow money to Arthur as is permitted under the income support rules). Access to support services would also need to be considered to ensure that Arthur has the support he would need to live in his home.

Lastly, Charles and Annette will need to make sure that they have current Wills and Powers of Attorney. As Arthur is receiving income support benefits, any assets left to him will need to be placed in a trust or an RDSP to protect his benefits.

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