Advisor analysis – Cory Papineau

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.

Although Edward will have a significant income for the next seven years that will exceed his current expenses, we need to plan for the change when spousal support ends.

Edward’s net monthly income, after taxes, is approximately $5,848 (employment and spousal support) + $1,800 for child support for a total of $7,648 monthly. Edward’s budgeted expenses are currently $4,800, so this leaves him with surplus income of about $2,850 monthly.

This could be used to fund his travel goals ($750) and contribute to his RRSP ($500), TFSA ($458) and RESP ($833) on a monthly basis. He could allocate up to $300 monthly for the critical illness, disability and life insurance premiums he may incur.

With regards to the $1.2 million remaining from the divorce settlement, I would suggest we redeploy some of the capital as follows: maximize his TFSA for $28,000, set aside six months of income for emergencies ($45,000) and $10,000 to his children’s RESPs.

I would also check to see what, if any, RRSP carry-forward room he may have and maximize his RRSP contributions. The case scenario makes no mention of RRSPs so I would assume he may have some room. As part of the review of these accounts, I would ensure that the beneficiaries are updated to indicate the estate, and that through the will Edward identifies who would manage the assets for his minor children. He will also need to ensure that the beneficiary instructions on his pension plan are also updated.

This would leave over $1.1 million still in his non-registered account to grow for the next seven years before he would need to draw any income to replace the spousal and child support. Based on a 5% annual return, his portfolio would be worth over $1.5 million. Edward would likely need to draw down capital for eight years to see both children through school, but this would not have any significant impact on his retirement goals. The non-registered portfolio would likely drop to $1.4 million because of these withdrawals but using the 5% annual return, the portfolio would rebound prior to age 65 to more than $2 million, leaving Edward with a significant nest egg.

Edward’s retirement will be well-funded through multiple sources as outlined below. Assuming that he remains in his current job of teaching until age 65 and has a defined benefit pension plan replacing 50% of his current pre-tax income, his retirement income looks strong through to the age of 90. Add in his CPP benefits at 65, his OAS at 67, RRIF income and additional lump sum supplements from both his TFSA and non-registered investments his estate at age 90 could potentially be worth in excess of $2 million excluding the value of his home.

Edward will need to review on an annual basis his financial goals and priorities to ensure that his future needs and wants are addressed.

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