Lifestyle | How to manage a large sum after selling your house?

The situation

Francine*, 73, has just moved into a new home after selling the family home.

This recent resale brought him a net contribution of $450,000 in cash to his already well-stocked balance sheet of financial assets.

Budget-wise, despite the increase in her housing costs, Francine remains in a favorable position thanks to her retirement and investment income, which totals some $65,700 per year.

In addition, his life annuity income comes from government pension plans: the RREGOP of the Quebec public sector, the provincial RRQ and the federal PSV.

At the same time, Francine holds some $235,000 in personal financial assets in her registered savings accounts (RRIF, TFSA), from which she can adjust withdrawals according to her budgetary needs and tax obligations (RRIF).

It is in this rather favorable context that Francine seeks advice on the best way to manage the “nest of $450,000” collected from the resale of her house.

“I want to make wise investments, with minimal risk, with the aim of eventually being able to leave a certain amount among my three children in their forties and my seven grandchildren aged 13 to 17,” says Francine during a discussion with The Press.

“I also hope that the management of this nest egg will be optimized from a tax perspective, both for my income and my lifestyle as a healthy senior citizen and in anticipation of a possible legacy to my loved ones.”

Regarding her estate, Francine is seeking advice on the possibility of making contributions to the family budgets of her three children and seven grandchildren.

“If I keep all my savings with the aim of leaving them more after my death, would my heirs be disadvantaged from a tax point of view?” asks Francine.

“As an alternative, if I increase my contributions to their current family budgets, how can I go about optimizing the financial and fiscal impact for them and for me?”

Francine’s situation and questions were submitted for analysis and advice to François Bernier, a notary by profession who heads the tax and estate planning services in personal wealth management at Sun Life Financial in Montreal.

Advice

“Francine’s financial questions are common among older people who find themselves with a large amount of cash after selling their house,” François Bernier notes from the outset.

That said, Mr. Bernier prepared his advisory report in two parts corresponding to Francine’s main questions: investment suggestions, and suggestions for contributing “while still alive” to the family budget of her children and grandchildren.

In terms of investment suggestions, Mr. Bernier has selected three options for Francine to consider.

The first: purchasing a life annuity with a good portion of your available capital. “A life annuity allows you to secure additional income until the end of your life, and your annuity income also benefits from tax advantages. In return, the capital used to purchase a life annuity then becomes inaccessible until the end of your life,” summarizes François Bernier.

In Francine’s case, because she already benefits from good life income from retirement plans, and she wishes to increase her financial assistance to her close family members in the form of pre-inheritance gifts, Mr. Bernier advises her against purchasing a life annuity.

He suggests looking at more flexible investment products such as “segregated funds”, i.e. investment funds with protected or guaranteed capital, as well as “corporate investment funds”.

What is it? “Unlike traditional funds that are set up as trusts, and whose gains are distributed as taxable income for investors, funds set up as corporations have more flexibility to distribute their gains in the form of dividends or capital gains. And investment income is tax-advantaged compared to other forms of income,” explains François Bernier.

As for segregated funds with guaranteed capital, they are particularly interesting for older investors who are looking for both an adequate return and security of their capital. “The management fees for segregated funds are increased by 0.1 to 0.9 percentage points compared to those for ordinary investment funds, depending on the level of guarantee on the capital invested (from 75% to 100%). In return, this capital guarantee makes it possible to secure the base value of a potential estate, while continuing to grow it over the years,” explains Mr. Bernier.

“Segregated funds with guaranteed capital are usually available from financial companies in insurance and investment products for individuals. As for investment funds incorporated in a stock company, they are more accessible from investment advisors and brokers independent of financial institutions.”

Financial donations?

The second part of Francine’s financial questioning concerns her intention to contribute more and “while she is alive” to the family budgets of her children and grandchildren. François Bernier indicates from the outset that this can be a good way to better spread out financial gifts or bequests among her loved ones, while limiting their tax implications for her and her heirs.

However, before arranging these gifts, Mr. Bernier warns Francine of the importance of keeping her financial planning up to date in anticipation of possible additional costs for assistance or care services that she will need at a later age.

“At 73, this lady still seems healthy, active and, above all, still independent in her lifestyle. But in ten years, will she still be in such a good situation?” emphasizes François Bernier. “When she needs assistance at home, or has to move into a residence for seniors who are losing mobility or autonomy, it could significantly increase her lifestyle budget. Hence the importance for Francine to preserve a good reserve of financial resources until a later age, and to carefully measure her gifts or bequests in money to her loved ones.”

That said, Mr. Bernier examined two options to help Francine plan and organize her future contributions to her loved ones’ budgets.

The first – cash donations as needed by loved ones – is the easiest to set up. On the other hand, notes Mr. Bernier, it can be the least judicious in terms of financial planning and tax optimization.

The second option, more relevant according to Mr. Bernier, consists of establishing a RESP (registered education savings plan) type savings account for each of the grandchildren under 16 (eligibility age limit), and into which Francine can then make contributions up to the annual tax limit.

By doing so, Mr. Bernier summarizes, Francine will be able to contribute to the budgets of her loved ones by contributing to her grandchildren’s RESPs in place of their parents.

In addition, these parents will then be able to benefit from tax subsidies – up to a third of the annual allowance amount – linked to contributions to RESPs.

As for Francine’s eldest grandchildren, who are past the RESP eligibility age, François Bernier suggests that she open a tax-free registered savings account for them – such as a “TFSA” and “TFSAPP” (access to a first property) – as soon as they reach the age of majority (18 years old).

She will then be able to make gifts or bequests in cash to them by means of contributions to their CELI and CELIAPP accounts, allowing them to initiate the accumulation and appreciation of tax-free capital which could facilitate the financing of their future adult life projects.

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