Divorce can create both financial and emotional turmoil, and often these issues are intertwined. As financial planners, our job is often to assist in helping our client navigate through these issues without the raw emotion overly influencing the decisions.
Edward has a number of priorities that he needs to deal with in relation to this significant transition to his lifestyle. It seems evident based on Edward’s goals that his top priority is the well-being and the future of his children.
Based on his focus on his children at this time, I would start with the planning around this area to help alleviate some of the stress Edward might be encountering.
I would begin by recommending a new will, power of attorney, health directives and estate plan that takes into account his current situation to ensure that the assets in the estate are used to benefit his children. The recent budget announcements have diminished the value of testamentary trusts; however, in Edward’s case, they are still of value in protecting minor children. I would definitely recommend seeing a lawyer who specializes in estate planning to ensure the most beneficial structure. Once his children reach the age of majority or any significant life change happens, such as re-marriage, it would be advisable to once again update his will.
On the insurance front, I would suggest he may look at disability and critical illness for himself. However, his assets are significant enough to mitigate any serious risks to his net worth and his children’s future. Edward likely has life insurance through his employer that would cover his basic estate needs such as funeral costs. He may want to explore additional insurance to cover tax issues upon death, particularly the capital gains on his non-registered investments and deregistration of any RRSP funds. A conservative estimate would be a tax liability of $200,000 to the estate at age 90.
The second area I would discuss is education planning. Based on Edward’s own profession, his commitment to private school and his focus on his children’s post-secondary education, it seems likely that this is a significant consideration for him.
He should definitely contribute enough to generate the maximum grant annually for each child. In this situation, with the balance being $25,000 in the plan and based on the age of both children, we can surmise that Edward has yet to maximize the RESP contributions for both children. Based on the children’s ages, the maximum contributions should be $45,000 (Josh $2,500 x 10 years and Emily $2,500 x 8 years) plus grants worth $9,000.
Edward can catch up with missed contributions by contributing $5,000 for each child annually at this time plus earn $1,000 in grant money (20% CESG to a maximum of $7,200 per child). He should confirm with his ex-spouse that there are no other plans open and no other contributions on the children’s behalf as well.
He would be able to do these additional contributions for approximately four or five years to catch up on the grant money. This would provide enough capital to pay for tuition and books for four years for both Josh & Emily provided they live at home while attending school. (This assumes a 5% rate of return and the cost of tuition rising at 6.4% basis, annually.)
If they plan to attend school outside of the province the costs could be considerably higher. In any event, Edward should not expect his monthly expense obligations to decrease over the next 15 years if he plans on assisting his children through their post-secondary education.
Edward also needs to ensure in his will that he indicates who will be the successor subscriber to the RESP plan should he pass, to minimize estate tax implications. If possible, his ex-spouse or another trusted family member would be a good choice.
I would then want to discuss Edward’s cash-flow plan and his needs over the coming years.