Advisor analysis – Zena Amundsen

By Zena Amundsen | March 17, 2014 | Last updated on March 17, 2014
4 min read

One of Edward’s first steps would be to update his estate plan, starting with a new will, power of attorney and health directives.

He has acquired wealth with the $1.2 million divorce settlement and he owns a $1.41 million home outright. His estate planning will change after the divorce and I’d start with setting up a family trust for his children within a will.

A testamentary trust would become effective upon his death. Edward would name his children as the trust beneficiaries and appoint a trustee to manage the trust and distribute the proceeds to the beneficiaries. This trust would be funded from the proceeds of Edward’s estate. The purpose of it would be to protect his assets, to manage the distribution of money if the children are still minors, to act as a shield from creditors of the beneficiaries when they are older, and for protection from any possible ex-spouses if there is a marriage breakdown when the beneficiaries are adults.

Edward has investable assets worth $1.2 million, and it can be assumed they will grow over time at a projected 5% annually. This growth will be taxable at the time of his death and could be offset by a permanent insurance policy of approximately $200,000. This policy, paid to the estate, could provide enough wealth to fund the testamentary trust and reduce some of the taxes owing. The funds to cover the policy premiums initially can come from the proceeds of the settlement and later paid from the non-registered account annually until the amount is paid up.

It’s also important to protect Edward’s spousal and child support payments with insurance on Gwen’s life (with Edward being the beneficiary). Edward can own the policy and ensure the premiums are paid and that the insurance isn’t allowed to lapse. It would require Gwen’s approval, as she would need to provide a medical and signatures. A settlement agreement can have these details included. I would recommend a Term 10 life insurance policy for $500,000, which would be close to the total value of the spousal and child support payments. In 10 years’ time, the child support payments will most likely end when the children are adults.

With regards to saving for the kids’ education, the couple has saved $25,000 in RESPs, which means they probably didn’t maximize their contributions. Edward can top up the accounts with $5,000 per year, per child, and attract prior years’ Canada Education Savings grants to a lifetime maximum of $7,200 per child. The available grant room per child would need to be confirmed, but $5,000 a year per child until age 18 would probably bring them close to the maximum amount. The $5,000 contribution for each to catch up on the grants would come from the settlement money. Thereafter, annual contributions could comefrom monthly cash flow savings or could be transferred from the invested settlement amount.

That brings us to the key area of monthly cash-flow planning. Edward’s monthly expenses, as per the case study, appear to be $4,800. His monthly income is $4,300 from his ex-spouse and a net employment income of approximately $3,000, which means he has some additional unallocated money each month. He can use it to fund the family summer vacation and monthly RRSP savings.

After pension adjustment, his annual RRSP room will be about $5,000 a year. It appears realistic, therefore, that Edward could contribute $500 monthly to his RRSP and put the remaining $2,000 per month into a high-interest account for summer holidays and household expenses.

Edward should also make the most of opportunities to shelter investment growth from taxes. So in addition to an RRSP, I would recommend long-term growth investments to maximize the tax-saving opportunity in a TFSA.

His timeline of needing to draw income from his registered savings is approximately 20 years. Hence, both his RRSP and TFSA accounts should act as long-term savings vehicles that are based on 80% equity assets. As he gets closer to his retirement age, the equity would change proportional to more fixed income.

The remaining amount from the $1.2 million settlement can help build a diversified non-registered portfolio for his emergency fund comprising high-liquidity, low-risk securities geared towards the longer term. The fund could have less than 5% of his settlement—about $50,000—put into a money market fund and another $50,000 invested in a low-risk laddered bond fund.

Edward’s home, even though it’s mortgage-free, probably has high property taxes. But I wouldn’t recommend him to downgrade just yet. He appears to be engaged in his financial well-being and has the means, at least for now, to stay in the house.

In comparison to most divorced people, Edward is in a solid position.

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Zena Amundsen