Although the nuclear family is now a model among many others, when you remarry, you must ensure that your children are not forgotten in the inheritance.
Posted at 6:00 am
situation
Lise* and Daniel* have been married since 2012. She has children, he doesn’t. The couple owns rental properties. A big question concerns Lis: “If I die first, how do I write my will to leave the inheritance to my children without losing Danielle’s income from the buildings to live in in retirement? »
Each has a pension from the Government and Public Employees’ Retirement Plan (RREGOP) with around 60% invested in equities and 40% in Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA). Fixed income. “Is it realistic to retire at the end of the year? asks Lisa.
She wonders when the couple will have to sell the buildings to ensure they have the funds they need to meet their retirement needs. The couple will consider delaying their request for government pensions as long as possible to get more money each month, and this is until the end of their days.
numbers
Daniel, 65 years
Annual salary: $87,000
RRSP: $275,000
TFSA: $64,000
Annual RREGOP pension: $23,000 if retiring at age 65, which is added to the pension from the Quebec Pension Plan (QPP).
Lisa, 60 years old
Annual salary: $87,000
RRSP: $158,000
TFSA: $79,000
RREGOP Annual Pension: $42,400 if retired at age 60, adjusted to $31,800 after age 65 with QPP pension.
The real estate is in equal shares
Estimated value of principal residence: $500,000
Mortgage: $140,000
Appraised value of first income property: $1,800,000 ($672,000 paid)
Mortgage: $652,000
Annual rental income: $90,000
Annual expenses including mortgage repayments: $75,000
Appraised value of second income property: $1,000,000 ($692,200 paid)
Mortgage: $436,000
Annual rental income: $64,000
Annual expenses including mortgage repayments: $51,000
Estimated cost of living in retirement for a couple: $75,000
Analysis
A more comfortable retirement than expected
Thinking about the cost of living for a retired couple, Liss calculated about $75,000 a year. But she wonders if that’s realistic with so many variables to consider: investments in buildings, inflation, health care needs, etc.
Simon Prefontaine, a financial planner at Lafond Services Financiers, told the couple the good news. He projected a return of 5.1% per year according to the Quebec Institute of Financial Planning (IQPF) standards, and it seems that the couple will retire at the end of 2022 and live on $110,000 for the rest of their lives. to sell his buildings.
Photo by Hugo-Sebastian Aubert, La Presse Archives
Simon Prefontaine is a financial planner at Lafond Financial Services
“We’re clearly in front of a financially worried couple when they’re at the point of spending their money after saving it all their lives,” he says.
The financial planner stated that his estimate of the income from the buildings was very conservative and that he did not consider in his projections that the mortgages for the house and buildings would one day be repaid, so the couple may still have more in them. Pockets.
“Lise and Daniel could have increased their lifestyle by 46%, which is good considering they didn’t know they had correctly estimated their expenses,” he explained. So they have enough surplus to feel like they can keep their buildings and retire worry-free. »
Hand over half of the buildings to the children
So Lise can consider different scenarios for her children’s inheritance without worrying about her retired husband’s comfort. For example, she can give her share of two income assets to her children. However, this avenue means that they will be co-owners with Daniel, so they will have to make decisions about the buildings together. “For it to be a viable option, they have to have a good relationship,” says Prefontaine.
But Daniel can live with this option without financial hassles, the planner predicts.
“All of Lis’s other assets, so 60% of her RREGOP pension, her RRSP, her TFSA and half of her home belong to Daniel,” he said. That way he could live on $90,000 a year until the end of his days, more than Lise expected. »
However, Lise has to specify one important thing in her will: “She has to say that she is donating half of her buildings to her children and the related tax bill, otherwise, it will go to the estate, so to Daniel” , explains the financial planner.
And this inheritance tax bill is likely to be salty. “It is based on capital gain, taxed at 50%, states Mr Prefontaine. It already totals over 1.4 million and it remains to be seen how much the buildings will be worth in the dead year. »
To avoid her children paying the tax bill, the financial planner suggests that Liz shop around for a life insurance policy if her health permits.
“There are special products for cases like this,” he says. Because if the kids don’t have the cash to pay that tax bill, what are they going to do? They would have to sell the building or remortgage it, but they would need Daniel’s agreement for that. »
Other solutions to consider
If Lise prefers not to bind Daniel to her children in this way, there are several other solutions. “Lise could decide to leave everything to Daniel, but take out a large life insurance policy, say $2 million, with her children as beneficiaries and pay for the policy with the proceeds of the buildings,” he said. But, again, she needs to be healthy for this to be possible. »
The couple may also decide to sell their income assets in the coming years. “That way, they don’t have to take care of it anymore and Liz can pass on whatever she wants to her children,” said Mr. Prefontaine said. But unless there is a great change in their circumstances, they will not need to sell to support themselves. Instead, they have to find ways to spend their money. »
He advises them to consult a financial planner to make a projection for the estate to make the best choice as per the details of their situation and their wishes.
* Although the case highlighted in this section is real, the first names used are fictitious.
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