Train of life | How can we leave as much money as possible to our son?

Many parents are happy to find that they have saved enough over the course of their working life to be able to inherit a good sum for their offspring. This is even more true when they know their children really need it. But how can we prevent a large part of it going off in taxes?

The situation

Alain and Nicole * are both 61 years old, in good health and have been enjoying their retirement for five years. Married for 38 years, they have accumulated assets throughout their lives and want their child, the head of a single parent, to benefit as much as possible.

While their savings are mainly in registered accounts – Registered Retirement Savings Plan (RRSP), Locked-In Retirement Account (LIRA), Life Income Fund (LIF) – the amounts withdrawn are taxable, and so on. will stay there when they die too. However, they never contributed to their Tax-Free Savings Account (TFSA), whose withdrawals are not taxable.

“Would it be better to maximize our TFSAs over a 10 year period by withdrawing from RRSPs, or withdrawing from our RRSP annually to give it directly to our child to take to pay off his mortgage?” Alain asks.

The solution

This type of questioning about the tax payable on death is more and more frequent, realizes Simon Préfontaine, financial planner at Lafond Services Financiers. To make an informed decision, it is essential to make a retirement plan in order to assess the surplus that can be bequeathed.

“What if the couple start giving their child money every year, but they have poorly planned their affairs and eventually run out? Will he ask her to give them some money back? This would risk creating uneasiness, and on top of that, perhaps that money would no longer be available. ”

For Simon Préfontaine, it is therefore essential to create a retirement plan that also includes space for the unexpected.

Assess your needs by leaving the game

Considering the annuities from the pension fund ($ 60,000), the QPP ($ 18,000) and the $ 20,000 out of savings, Alain and Nicole currently live on $ 98,000 gross per year. With income splitting, they pay around $ 20,000 in taxes. They therefore have $ 78,000 left to live on, whereas they indicate that their standard of living is $ 70,000.

Simon Préfontaine invites the couple to reassess the total amount of their expenses by leaving the game.

Then there is the car. “She is currently paid, but the couple are only 61 years old, so they have time to change cars two or three times and will have to dip into their savings,” he adds.

Rebalance the portfolio

Looking at the composition of the couple’s portfolio, Simon Préfontaine is concerned. “There is $ 190,000 in GICs, a type of investment that takes no risk, therefore gives very little return and does not offer flexibility for withdrawals. ”

Then, most of its portfolio ($ 316,000) is in stocks, including $ 260,000 in two Canadian railway companies, resulting in an undiversified portfolio sectorally and geographically.

“Probably these companies were employers for the couple, so he received all these shares,” he explains. Their mutual fund representative could reduce the volatility of their portfolio and increase returns by moving towards a more balanced and diversified portfolio that will also eliminate the problems with cashing out GICs. ”

How much to give to his child?

Simon Préfontaine made a projection at retirement with the figures provided by the couple. He concludes, considering inflation and taking an average rate of return of 4%, that the couple could have a net annual lifestyle of $ 83,000 if Alain turns 94 and Nicole 96 (they are 25%). chances of reaching these ages, according to the standards of the Quebec Financial Planning Institute.)

If their average rate of return is 5%, they could have a net lifestyle of $ 87,000 per year. But if it’s 3%, it would only be $ 79,000. “It’s very close to their current cost of living, so there would be little left for the inheritance, hence the importance of reviewing their portfolio,” says Simon Préfontaine.

Withdraw amounts from registered accounts

The couple could therefore, if they have an average rate of return of 4 or 5% on their investments, afford to take more money out of their registered accounts to reduce the tax bill on their estate. In addition, Alain and Nicole have one element that works in their favor: they are only 61 years old. They therefore have time to take money out of their RRSP to invest it in their TFSA before age 64, the year in which the income is taken into account to calculate the Old Age Security (OAS) pension paid. from 65 years old.

“Alain and Nicole currently have a marginal tax rate of 37.12% and they can have up to $ 90,200 each as income to keep the same tax rate. They could therefore take the opportunity now to withdraw $ 29,000 each per year from their registered accounts in order to maximize their TFSAs, the maximum contribution of which will reach $ 87,500 in 2023. ”

But they have to hurry, because if they wait until next January, they will only have two years left before they turn 64.

Paying that much tax in just a few years can still be a tough choice. “But if the couple dies prematurely and leaves a large amount of inheritance to their child, the tax rate will be much higher,” says Préfontaine. And if they continue to gradually take out what they have in their registered accounts, the couple will have the same tax rate as if they take out more to maximize their TFSAs. ”

TFSA, mortgage or life insurance?

For Simon Préfontaine, it is obvious that for the couple, reinvesting the amounts withdrawn from accounts registered in TFSAs is the most financially advantageous option in the long term. Thus, this money will continue to grow tax free.

In addition, he considers that taking these sums to help the child pay off his mortgage is questionable.

“But, from an emotional point of view,” he continues, “I understand that it allows you to help your child right away and that it is more acceptable for the money given to be used to pay off the mortgage rather than to do anything. ”

What if the couple decided to take out life insurance with their child as beneficiary instead? “They are in good health, so at first glance, it seems to me to be a good idea since the amount received by the beneficiary will not be taxable,” says Simon Préfontaine. The couple should discuss this with their financial planner to see if it’s really a good strategy considering all the details of their situation. ”

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

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