Q: This year, my 80+ year old mother had to move to a 24-hour care facility and I invoked the power of attorney for property. I am now selling the house and there will be a modest amount from the proceeds of about $140K net.
I do not want to leave the money in a bank account paying little to no interest knowing that the value of the funds is decreasing due to inflation. I was thinking about opening up a TFSA and moving a chunk of money over to it to max it out. Some eTFSA’s are paying 1.95% currently.
Is this a good choice? Are there other options? I am also the co-executor when the time comes, if that makes any difference.
A: It’s refreshing to have a question from someone who is looking to invest money as a power of attorney rather than divvy it up amongst the beneficiaries, Frank. Far too often, I find children treat their parents’ money as their own in a case like this. Of course, your role under power of attorney is to manage the money for your mother, until her death, at which point your secondary role as executor will begin.
Given your mother’s situation, it sounds like it may be as expensive as it’s going to get if she is currently receiving 24-hour a day care. I’m going to assume that she has sufficient pension income to cover her expenses in the facility.
If that is not correct and there’s a chance you may need to draw down on these monies in the coming years, I think you need to take a conservative position and consider a combination of savings accounts, GIC’s, bonds and so on.
If she is unlikely to need to draw on this money, I think you can take a more aggressive stance and consider exposure to stocks, which may be the best inflation hedge in a low-rate environment where fixed-income is barely keeping pace with inflation. Is it a 10% exposure? 50%? It depends in part on your mother’s potential future care costs and in part on your family’s collective risk tolerance.
Either way, maxing out her Tax-Free Savings Account (TFSA) is a good idea, Frank. Assuming she has not contributed before, she should have $46,500 of TFSA room and will have another $5,500 in January.
On the risk scale, if you have an eTFSA option at 1.95%, that’s not a bad low-risk choice. Remember, some e-savings options are limited time, so consider this before you go through the hassle of opening an account. There are a number of GIC issuers paying more than 2% currently. As of today, I see rates starting at 2% for a 1-year GIC and up to 2.5% for a 5-year GIC.
Since I gather you are not inclined to be a DIY investor, Frank, going up the risk scale from savings accounts and GICs into bonds and stocks might be tough with the amount of money you have to invest. Most mainstream options with an investment advisor would involve mutual funds and if you’re going to be a conservative investor, mutual fund fees of 2-2.5% may be too high a threshold to exceed to earn a significantly better rate of return than GICs.
If you went with mutual funds, you should ensure you are open to some stock exposure. I’d suggest you need to be fee-sensitive and ensure low-cost active mutual funds or passive index funds. I would target mutual fund management expense ratios of under 1.5% on an active fund and under 0.75% on a passive fund.
Another option is a robo-advisor or online advisor. Fees are generally in the 0.5-0.75% range all-in on a potential account the size of your mother’s account.
Depending on your mother’s income tax situation, it may not make much of a difference where you hold which investments, but that’s something to consider, Frank. Canadian dividends are generally taxed more favourably in a non-registered (non-TFSA) account, but if her income is low enough or her medical expenses are high enough to negate any tax payable on interest income, you may try to grow any stock exposure in her TFSA.
Probate fees become a consideration for someone in their 80s. If your mother’s only assets are the $140,000 house proceeds, provincial probate to settle her estate won’t be significant regardless of where she lives.
Becoming a power of attorney involves a degree or responsibility and decision-making that can be stressful and onerous. But as our population ages, no doubt more Canadians will take on this role. Powers of attorney generally evolve into executors on the death of a loved one, so children owe it to their parents to learn a little bit about money management and estate planning when they take on such a role.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.