A top priority for Edward should be cash flow planning. This will require a close look at his post-divorce expenses, sources of income and acquired assets and liabilities.
Based on the case study numbers, his annual taxable income is $92,000—$62,000 per year in salary and $30,000 per year in spousal support. His net income after considering only the basic non-refundable tax credits is $70,941, plus the non-taxable $21,600 child support. So for the next seven years, his net annual income, after taxes, is at least $92,541, or $7,711.75 per month.
The numbers also show Edward’s total expenses to maintain pre-divorce lifestyle are $4,800, which leaves him a monthly surplus of $2,911.75 to be allocated to achieving his goals.
Notably, childcare expenses in shared custody situations are deductible if paid directly to the provider. Edward should make sure his payments are structured that way. Currently, one can claim up to $7,000 per child of childcare expenses. If there were childcare costs, Edward would pay only 24% of those costs, but could claim those costs on his tax return.
All of this will be a consideration when determining his after-tax cash flow.
To meet his goals, Edward will need to allocate some money towards vacations and towards his children’s post-secondary education. I would recommend the minimum contribution required to obtain the maximum Canada Education Savings Grant for each child—he can always gift additional money to the children later.
Edward has $1.2 million from the divorce settlement, in addition to the $1.41 million mortgage-free home. So, to preserve his nest egg, I would recommend maxing out contribution rooms for both RRSP and TFSA, paying off the car loan and topping up the emergency fund to $4,800 x six months or $4,800 x nine months—between $28,800 and $43,200—in a high-interest rate savings account. The point of socking away money into an emergency fund is to have enough cash and easy access to it.
A $194,400 Term 10 policy could be adequate to only cover the child support obligation. This is just a lump sum estimate, but we would want to look at the child support guidelines to see what the required support would be and to get to exact numbers.
If Edward became critically ill, this could erode his nest egg. I’d advise him coverage for one year’s salary at the least, with coverage lasting to age 65. As for child critical illness, some insurance companies cap the amount, so he should go for the max or one year’s worth of his salary.
Edward’s situation calls for proper estate planning, too. He has assets of more than $1.2 million in addition to his home, which means he is certainly at the asset level to consider trusts.
That the kids would inherit from both parents is another key consideration. Trusts in this case would be great as there will be quite a bit of cash, especially from Gwen’s side.
Other than the more obvious consequences of assets passing to the kids in a way that is not intended, or if either parent enters another relationship (either by marriage or common-law), and has children, this could prove to be messy in the absence of solid estate planning.
That said, this is not a straightforward estate planning case. With a huge company, divorce, minor kids, etc., it’s advisable to consult a qualified estate lawyer.
As a final note, because issues surrounding divorce can be complex, I recommend that advisors who aren’t specialists consult an accountant, an estate planning lawyer and an advisor specifically trained in the financial consequences of divorce.