— ANONYMOUS, CALGARY

A: Be it for a mistress or a love child, these kinds of arrangements are more common than you think, says Toronto estates lawyer Martin Rochwerg. One option is transferring funds to a trust company, which would administer the money to a chosen beneficiary when you die. Because the money is considered a lifetime gift, the trustee would not transfer any annual income back to you—meaning no paper trail. A simpler option is a secret trust where you leave money to a person in your will with the prearranged instructions that they will confidentially give the money to someone else. For example, you could leave money to your good buddy Jim, with the understanding that he would give the funds to your secret beneficiary behind closed doors.

So the question becomes, do you have a back-up plan? Most people don’t. And yet, it is only those who take the time to create a Plan B that weather storms well.

Remember the ice storm of 1998? Maybe not if it didn’t affect you. But people were without electricity and the basics of life for many days. Do you live in a tornado zone? Does your river overflow its banks? Is it likely that you roof might blow off in a windstorm?

Equally as important as the whims of weather are the whims of life: You could lose your job, get sick or worse.

Here’s what you’ll need to prepare yourself:

• An emergency fund that would take care of at least six months’ worth of essential expenses.
• A curve ball account for those little missteps that can throw even the best budget into the wind.
• A will, financial and personal care powers of attorney as well as a named a guardian for your children.
• Enough life insurance so those financially dependent on you won’t be left homeless in case you die young.
• Disability insurance because one in three people under the age of 65 become disabled and the average long-term disability in Canada lasts just 3.1 years.

Without the above, how long could your family last if the worst did happen?

It’s not a waste of time and effort to turn your mind to the what-ifs of life. It’s a good way to know that should the worst come a’knockin’ on your door, your family will be safe. Like the saying goes, “Fail to plan and you plan to fail!”

But with TFSAs, the devil is in the details. When you complete an application to open your TFSA, there’s a section where you can fill in the name of your “successor holder.” Only your spouse or common-law partner can be your successor. Like the “successor annuitant” on a Registered Retirement Income Fund (RRIF), the successor holder replaces the TFSA holder upon death and the plan continues with all rights passing to the successor. That means your TFSA continues growing tax-free until your successor dies.

“If you aren’t sure you checked the successor holder designation on the application form when you opened the account, catch up with it at your local institution and do it now,” says Gordon Pape, author of Tax-free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich. “It could save you and your family thousands of dollars in taxes.”

If you’re helping set up a TFSA for a young adult who doesn’t have a spouse or common-law partner, complete the beneficiary section of the application. That means you’ll name the person who will own the TFSA proceeds after death. At that point, the account ceases to be a TFSA and any income earned from the date of your death is subject to taxes in the hands of the beneficiary. Your child should go back and name a successor annuitant if he or she gets married. For more, go to Canadian Revenue Agency.

Take the idea of holding assets jointly. There are two ways to do this. The first option is to hold it jointly as “tenants in common,” in which case you each own exactly half, and when one dies, that person’s half would go to the estate. Option no. 2 is to own it jointly “with rights of survivorship.” This is the option people are seeking out in droves. With this option, you have simultaneous rights of ownership of the asset and upon death of one joint owner the interest in the asset automatically passes to the surviving joint owner(s). This works well for straightforward families where a hubby and wife hold everything jointly to simplify their estate. But the world’s changed a lot, and nuclear families are a rarity these days.

So what’s wrong with joint ownership? Well, it’s not the ownership, per se. It’s the implications involved in putting someone else’s name on your assets.

First, there’s the control you’ll give up. Since you’re no longer the only one with an interest in the asset, you don’t get to make all the decisions. That can be inconvenient. And it can cause a real conflict once you step off this mortal coil if you’ve named only one of your children jointly with rights of survivorship since the asset will pass directly and solely to that child, regardless of what your will says. Ditto if you’ve remarried and hold an asset using option no. 2 with your new spouse: upon your death, the asset will pass directly to your partner, leaving your children completely out of the mix. And since assets held jointly with rights of survivorship may form part of a creditor proceedings, if one of the owners becomes insolvent, the other could be affected.

Second, there’s the tax implication of adding an owner. If the Revenue Canada believes there has been a change in “beneficial ownership” when you execute option no. 2, then in the case of a non-registered investment portfolio, adding a child would be tantamount to selling half your portfolio to your kid. Even though no money changed hands, the tax man would be looking for his share of your capital gains. In the case of a home, the consequences are even more grave since the co-owner of the home may jeopardize his access to the principal residence exemption if he already owns a home. If he doesn’t, he’ll negate his ability to participate in the RRSP Home Buyer’s Plan.

In determining whether “beneficial ownership” has changed, Revenue Canada looks at such things as whether the account was initially set up jointly, there’s evidence that the transferor plans to gift the account to the transferee, both parties are using the income generated, and the transferee exercised any control over the account.

Some people go with joint title because they don’t know another option exits. Most people don’t realize that if you leave something to a person in trust through a will—or in the event that it is insurance proceeds, if you set up an insurance trust—you can establish a “testamentary trust.” That’s the legal term for a trust set up through your will, and it can be for the benefit of a partner or children, whomever you like. The great thing about a testamentary trust is that it’s perceived by Revenue Canada to be a separate entity. That means it enjoys a graduated tax rate similar to a living individual, sans the personal exemption amount. So by setting up a testamentary trust you have two streams of income that are being taxed all at the lowest marginal tax rate on their earnings.

Opting for the ease of joint ownership as opposed to doing a detailed estate plan may be cheaper in the short run, but often means you miss out on a long-term income-splitting opportunity. And it could cause aggravation even while you’re still alive. So while there may be instances where joint ownership does make good sense, doing it simply to avoid probate is a fool’s game.

There may be a lesson for boomers contemplating their own mortality and the timing of when they pass their own wealth on to their offspring. Hamilton notes that such windfalls may be more welcome earlier in the life cycle when kids are still in debt and trying to find their place in the world.

The noted retirement expert at Mercer’s ends with some comments about his relationship with the media and his own pending semi-retirement.

As executor of Aunty Maud’s estate, you’ll be called upon to manage everything from her funeral arrangements to locating her assets, paying her bills, filing her tax returns (yes, there will be more than one), and divvying up the remains to the heirs, along with advising them what’s taxable and what’s not. So the job of executor carries important responsibilities. And it demands attention to detail. Mess up and you could be held personally liable.

You’ll need to present the original will and notify all the beneficiaries under the will. Having sworn an affidavit of service, which you’ll file with the court, about six to eight weeks later you’ll receive a certificate that gives you the authority to act so that anyone who needs proof—the bank, the brokerage house, the credit card company—knows you’re “legal.”

Your first step even before you’re certified should be to read the will to see if there’s anything that needs immediate action such as specifics for the funeral. While you’re not bound by Aunty Maud’s wishes, following through is preferable to being haunted. Are minor children left orphaned? If so, apply to put designated guardianships into effect quickly.

Take an inventory of the deceased’s assets and debts. You’ll be responsible for safeguarding and valuing the assets, dealing with banks, brokers, and insurance companies, and arranging for the investment or liquidation of assets.

Don’t rush to pay out Aunty Maud’s bequests too soon, no matter how much pressure your cousins are putting on you. If you do and then don’t have enough left to pay debts and taxes, the money will come out of your own pocket unless you can persuade beneficiaries to give back some money. Fat chance!

The tax man will want his pound (or six) of flesh too. You’ll have to file tax returns for any years for which returns haven’t been filed both in Canada and wherever else the deceased may have held assets. And you’ll have to file a return for each year the estate exists and earns income. Get a clearance certificate from Canada Revenue Agency to ensure no future disputes over property valuations and deductions claimed before you distributed the estate. Also make sure you’ve taken steps to uncover all debts owning. Advertisements to creditors that include a fixed date for distribution a month or two from the advertisement date followed by payment of all debts that have come to light should do it. Skip these steps and you could find yourself on the hook personally for unpaid bills or taxes.

For your time and trouble, you may bill the estate between 3-5% of the estate’s value, or more if the will specifically says so. Keep meticulous records of the time you spend and expenses you pay out of your own pocket so that if must you can prove your worth.

If the going gets tough, you don’t have to go it alone. Hire a professional to step in and be your guide. A lawyer, estate administrator or accountant can help. Be careful whom you choose. You can never give up your discretionary responsibility for how those assets are handled, so if your “helper” does a terrible job and the estate suffers losses as a result, you can be held liable for those losses. While the estate pays these blokes, it’ll be your responsibility to make sure their fees are reasonable.

Just because you’re named doesn’t mean you’re stuck with the job. You can say no.

Canadians aged 85 and over represent the fastest-growing segment of the senior population. Eventually many of us are going to have to come to terms with parents who have fallen prey to the ravages of age. Our first instinct may be to bring them into our own homes. That’s the way it was when I was a girl growing up in Jamaica. My great-grandparents lived with my grandparents. Home care worked well because there were always bodies available to help. Here in Canada, where my grand aunt lived with my aunt and uncle, they eventually ran into the problem of having a parent who needed constant supervision when they both worked outside the home.

If you accept the responsibility for home care and you have siblings, you’ll not only have to deal with caring for your aging parent, you’ll also have to manage your brothers’ and sisters’ expectations, comments and involvement (or lack thereof). This can be no small feat. Some experts recommend that the sharing of the costs include a “salary” for the caregiver. So, the sibling with whom mom lives would pay nothing, while the others would chip in for support, medical care and the like.

Full-time care giving is not a responsibility to be assumed lightly. It is stressful. It is emotional. At times it can seem arduous. Ask for and accept support from family and friends. And watch for signs that you are burning out: changes in personal habits, depression and insomnia. You’ll be no good to a parent if you crack and then break.

Assuming you’re not prepared to give up your career, you’ll need some help. Paid-for home care can be very expensive—upwards of $5,000 a month for 24-hour a day care. While the government may cover a percentage of the cost of in-home nursing, when it comes to personal care—bathing, meal preparation and the like—you’ll have to foot the bill.

To prepare for the day when your parents may need your help, make sure they’ve executed durable powers of attorney for both financial and personal care. As your parents’ legally assigned representative, you’ll be able to access their bank accounts to pay for their expenses. You’ll also be able to make decisions about their long-term maintenance and health care.

You should also prepare for the day when at-home care is no longer a reasonable alternative. People tend to move to institutions as their metal and physical conditions deteriorate. To get your head wrapped around this option, visit your local seniors’ facilities so you know what’s out there, and if necessary, put your parent on the waiting list. Costs vary dramatically so make sure you have a back-up plan in case your first choice is too expensive. RBC Insurance has a list of long-term care provisions available by province.

If you’re worried about how you’re going to pay for all this, then you may want to look into long-term care insurance. Premiums aren’t exactly small change, but if you think your parents will live long and even slightly unhealthy lives, the premiums look like a drop in the bucket when compared to the out-of-pocket cost of long-term in-care.

Today, four years after Jim’s death, Lisa is still feeling the emotional pain of losing her partner. Adding to the burden is her anxiety about her financial situation. During their 23-year marriage, Jim, a self-employed accountant, handled all the finances. (We’ve changed their names to protect their privacy.) “Jim looked after all our investments and I just let him,” says Lisa, who ran her own menswear shop. “I did ask at one point while he was sick, ‘Can we discuss the finances? Can you help me understand this?’ But he was too sick to do it. He just told me not to worry—that all the important papers were in a file. So I was left alone to sort out the pieces.”

Lisa has been steadily educating herself about money for a couple of years now, but she often feels overwhelmed. That’s because she wants to handle the money wisely so there will be enough left to carry out Jim’s final wishes. His dream was to leave a huge legacy to prostate cancer research, as well as $100,000 to each of his two sons from his first marriage. “It’s the only request Jim made before his death and I’m determined to fulfill his final wishes,” says Lisa. “He was a good man and left me in charge to do the right thing,” says Lisa. “I plan on doing just that.”

Her investment portfolio is substantial and varied. Besides her $500,000 condo, there is just over $1.1 million in RRSPs, TFSAs and GICs, and $260,000 in a holding company—an overwhelming amount for a frugal woman who grew up dirt poor. Lisa’s biggest fear is that she’ll squander the money—not by overspending, but by making bad financial decisions. “Jim and I worked so hard for this money and I want to make sure it keeps growing as tax-efficiently as possible.”

Right now, Lisa lives on about $26,000 a year, made up of Canada Pension Plan benefits, $7,500 in dividends from the holding company and $7,700 annually from a Life Income Fund (LIF) that Jim had built up from a job he held in his 20s. She’s living comfortably on this income for now—mainly because she’s debt-free—but soon her income will increase substantially when forced withdrawals from RRSPs kick in, meaning higher tax bills. Between her CPP, Old Age Security payments that start at 65, upcoming RRSP withdrawals and liquidating her holding company, her taxable income will remain high for years.

Lisa has two main goals: to create a plan for withdrawing her RRSP money as tax-efficiently as possible, and to take out the money from her holding company with minimal tax consequences. “I want to make Jim’s dream of donating to cancer research a reality,” she says “I think I can do a good job with a bit of guidance.”

One thing is sure—Lisa is a hard worker. She grew up outside Edmonton, the only child of two workaholic parents who owned a local diner. “My mom and dad worked from 6 a.m. to midnight, seven days a week. Dad was sick a lot so Mom ran the show. I pretty much took care of myself from the age of 10 because they were never home.”

In her 20s, Lisa got a job as a secretary at a local mining company, and at age 35, she met Jim. The accountant was 38 at the time and going through a nasty divorce. Jim was honest with Lisa from the beginning. “He told me he had nothing—absolutely nothing. He had given everything to his ex-wife and two sons and was basically left with four spoons, four forks and four knives. We always lived so tight because we started from scratch.”

Jim took his parental responsibilities seriously and always made sure his kids were well cared for. “In those days, a father was responsible for his children until age 18,” says Lisa. “Jim crossed that out on the divorce papers and wrote in ‘21’ instead. For years, we paid child support and made sure those two boys had everything they needed. We also saw them regularly.”

In 1986, Jim and Lisa bought a small house outside Edmonton for $71,000. In 1987 Jim left his full-time accounting job and started his own business, while Lisa opened a menswear shop. Over the years, Lisa spent most of her days at the shop as she worked hard to grow the business. She devoted every waking moment to it. “The store was my baby. I practically lived there and didn’t take more than two weeks off in 15 years.”

All along, Jim handled their finances and Lisa credits him with growing their nest egg substantially in only 23 years. In 2007, knowing they had enough money for a comfortable retirement, they sold the menswear shop and the couple retired permanently. They sold their home and bought a large three-bedroom condo right downtown.

Lisa’s largest asset is her condo, worth $500,000. Her liquid assets include an RRSP worth around $1 million, $260,000 in shares in the holding company, $46,000 in a LIF, $26,000 in a TFSA and another $31,000 in cash and term deposits. The total? Around $1.4 million in liquid assets. Lisa will need to grow that money, partly to make sure she doesn’t outlive her investments, but also because she wants to leave the Prostate Cancer Canada Network at least $500,000 when she dies.

Right now, her RRSPs and holding company shares are invested in mutual funds and several blue-chip stocks, and are averaging 4% annually. Lisa is happy with that, as well as with the help she’s received at the bank from managers who continue to make her investments run smoothly. She’s more concerned about the company shares, which she hopes to cash in all at once without taking a tax hit. But her biggest task will be making sure she withdraws money from her RRSPs as tax-efficiently as possible over the next few years, and she says she has no clue how to do that.

Lisa currently spends most days living a simple life. She walks her two Boston terriers, Lila and Jackie, in the local park, and goes on the odd outing for lunch or shopping with friends. “I have to learn how to enjoy my money more. I want to do some volunteer work and a bit of travelling,” she says. “A trip to Italy for two weeks may be a good place to start. All I want is to do is settle my finances and move forward.”

What the experts had to say

With a net worth of almost $2 million, Jim and Lisa did a great job of preparing for retirement. But even though Jim planned their finances well, he made the crucial mistake of not communicating with Lisa about how to manage their money if something should happen to him. “With Jim, Lisa had her own personal accountant and adviser,” says John Mott, a chartered accountant in Toronto. “Even though Lisa is willing and able to do a lot of the money management herself now, she still needs to make sure she has an adviser—either at the bank or elsewhere—that she trusts and can communicate with going forward.”

Based on her budgeted expenses, Marc Lamontagne, a fee-only adviser with Ryan Lamontagne in Ottawa, reassures Lisa she will not run out of money before she dies. “In fact, she could easily increase her spending by $20,000 a year and still have $1 million at age 90,” says Lamontagne, after running the numbers. So here’s what Lisa should do to accomplish her financial goals and enjoy her life.

Wrap up the holding company. The experts say there is no way Lisa can take the money out of her holding company tax-free. “People have holding companies to defer taxes, not avoid them completely,” says Mott. “I’m sure Jim knew taxes would have to be paid at some point. And while Lisa could keep the company until she dies, her estate would still owe taxes at that time.” The experts say a sale of the company or a loan based on the assets could work in some cases, but these options aren’t suitable for this kind of holding company.

Most people would simply withdraw the funds from the holding company as ordinary dividends, which are taxed at a lower rate than regular income. But in Lisa’s case, closure of the company is her best option. She should take the full $260,205 out of the corporation this year. “It will cost her about 25% in taxes on average, but then she’ll no longer have the trouble and expense of maintaining a corporation,” says Lamontagne.

Have a systematic RRSP withdrawal strategy. Lisa does not need to withdraw money from her RRSPs right now, but she will have a tax problem once she turns 72. (RRSPs have to be converted to a Registered Retirement Income Fund or annuity at age 71, meaning you need to start taking out the money the following year.) The minimum withdrawal at age 72 is 7.5% of the balance, a percentage that rises every year. The problem is not just the taxes paid on higher incomes. Once her net income is above $69,562, she will also be hit with the Old Age Security clawback. “The clawback essentially adds another 15% tax on top of your regular rate for every dollar above the threshold,” says Lamontagne. “Lisa can reduce the overall tax bite throughout her life by starting to make RRSP withdrawals now. This will decrease the balance in her RRSPs and reduce the chance of being hit with the clawback.”

How much should she withdraw? Lamontagne proposes increasing her annual taxable income to about $83,000 prior to age 65. This would keep her marginal tax rate at about 32%. “Once she turns 65, her taxable income cap would be the OAS clawback threshold,” says Lamontagne. To make this strategy worthwhile, Lisa would then take the after-tax funds and invest them in a non-registered account. “If she’s happy with the returns from her investment portfolio, she should adopt the same strategy with her non-RRSP investments,” says Lamontagne. “She should focus on building a low-volatility portfolio of 60% equities and 40% fixed-income securities that includes blue-chip stocks, exchange-traded funds (ETFs), mutual funds and real estate investment trusts.”

Make the charitable donation tax-efficient. Because she has such a large RRSP, Lisa’s estate will be subject to significant taxes when she passes away. The RRSP will be deemed fully withdrawn on the day before she dies. Lamontagne figures that with her modest spending, she’ll still have at least $1 million left at age 90. “Unfortunately, that means she could face a final tax bill of about $500,000,” says Lamontagne.

There are a couple of strategies people use when faced with such a large tax bill. The first is a large charitable donation. “If Lisa donated $1 million upon her death, that would reduce her estate’s tax bill by about $400,000,” says Lamontagne. A second strategy is to buy a life insurance policy to cover the estate taxes. “A $500,000 term life insurance policy would cost her about $12,000 annually, but the premium would not be tax-deductible.”

To fulfill Jim’s wishes and make her charitable donation tax-efficient, Mott suggests Lisa buy a $500,000 term-life policy and declare Prostate Cancer Canada as her beneficiary “If she does this, then the $12,000 annual premium will be tax-deductible—making her final gift of $500,000 truly tax-efficient.”

Would you like MoneySense to consider your financial situation in a future Family Profile? Drop us a line at letters@moneysense.ca.