Lifestyle | Blended family: be sure to bequeath an inheritance to your children

While the nuclear family is now one model among many others, you have to make sure, when you remarry, that your children will not be forgotten in the inheritance.

Martine Letarte
special cooperation

The situation

Lise* and Daniel* have been married since 2012. She has children, he doesn’t. The couple own rental properties. A big question concerns Lise: “How do I write my will to bequeath an inheritance to my children without, however, if I die first, depriving Daniel of the income from the buildings he will need to live in retirement? »

Everyone will have a pension from the Government and Public Employees Retirement Plan (RREGOP) in addition to savings in the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA), invested approximately 60% in equities and 40% in fixed income. “Is it realistic to retire at the end of the year? asks Lisa.

She wonders when the buildings will have to be sold so that the couple has the necessary funds to meet their retirement needs. The couple thinks of delaying the request for their government pensions as much as possible in order to obtain more money monthly, and this, until the end of their days.

analysis

A more comfortable retirement than expected

Thinking about the cost of living for the retired couple, Lise put a figure of around $75,000 per year. But she wonders whether this is realistic with the many variables to consider: investments to be made in buildings, inflation, health care needs, etc.

Simon Préfontaine, financial planner at Lafond Services Financiers, has good news for the couple. He made forecasts according to the standards of the Quebec Institute of Financial Planning (IQPF) with a return of 5.1% per year and it appears that the couple can retire at the end of 2022 and live on 110,000 $ per year throughout his life without having to sell his buildings.

“We are clearly in front of a couple who are financially worried when, after having accumulated their money all their life, they have reached the stage of spending it,” he says.

The financial planner also specifies that his estimate of the income from the buildings is extremely conservative and that he did not consider in his forecasts that one day the mortgages for the house and the buildings will be repaid, so the couple could have even more in his pockets.

“Lise and Daniel could therefore increase their lifestyle by 46%, which is good considering that they are not sure that they have correctly assessed their expenses,” he explains. They therefore have enough surplus to think they can retire without worrying, while keeping their buildings. »

Bequeath half of the buildings to the children

Lise can therefore consider different scenarios for the inheritance of her children without worrying about the comfort of her retired husband. For example, she could bequeath her share of the two income properties to her children. This avenue, however, means that they will be co-owners with Daniel, so that they will have to make decisions relating to the buildings together. “For this to be a viable option, they need to have a good relationship,” says Préfontaine.

But Daniel could live without financial hassle with this option, assesses the planner.

“All of Lise’s other assets, so 60% of her RREGOP pension, her RRSP, her TFSA and her half of the house, would go to Daniel,” he says. He could thus live until the end of his days on $90,000 a year, which is still more than Lise predicts they will need per year together. »

Lise will however have to specify an important thing in her will: “She must say that she bequeaths her half of the buildings to her children and the tax bill associated with it, because otherwise, she will go to the estate, therefore to Daniel”, explains the financial planner.

And the tax bill of this legacy is likely to be salty. “It depends on the capital gain, taxed at 50%, specifies Mr. Préfontaine. It is already more than 1.4 million in total and it will be necessary to see what the value of the buildings will be in the year of death. »

To avoid her children having to pay the tax bill, the financial planner indicates that Lise could shop for a life insurance policy if her state of health allows it.

“There are specialized products for cases like this,” he adds. Because if the kids don’t have the cash to pay that tax bill, what will they do? They might have to sell the building, or remortgage it, but for that they would need Daniel’s consent. »

Other solutions to consider

If Lise prefers not to bind Daniel to her children in this way, there are a variety of other possible solutions. “Lise could decide to bequeath everything to Daniel, but to take out a large life insurance policy, for example $2 million, with her children as beneficiaries, and pay for this policy with income from buildings,” he says. But, again, she must be healthy for this to be possible. »

The couple could also decide in the coming years to sell their income properties. “Thus, they wouldn’t have to take care of it anymore and Lise could bequeath the amount she wants to her children,” says Mr. Préfontaine. But, unless there is a big change in their circumstances, they won’t need to sell to support themselves. Instead, they need to find ways to spend their money. »

He advises them to consult a financial planner to make a projection for the estate in order to make the best choice according to the details of their situation and their desires.

* Although the case highlighted in this section is real, the first names used are fictitious.

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