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How to bypass the tax man when you pass on your money
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Q: I am a 64-year-old widow with two adult children who are the beneficiaries of my estate. My pension is adequate for my living expenses. I have $380,000 in RRSPs, which will be taxed at 40% upon my death. I plan to convert a portion of my RRSP to a RRIF and withdraw $10,000 annually starting 2019. I would rather pay tax on this additional income every year.
As I don’t need the money, I plan to open an investment brokerage account with my kids and transfer the assets in kind equivalent to $10,000 annually. This way, upon my death, my kids can divide the investment assets in the account equally without having to pay tax. Whatever is left in my RRSP/RRIF will be subject to 30-40% tax, which I am aware of. Is this a good strategy? Am I missing something?
– Alex
A: Well done, Alex. A+. You have clearly done your homework. The strategy is reasonable, says Kurt Rosentreter, Senior Financial Advisor at Manulife Securities. But he does highlight a few areas to consider, for bonus marks.
First. Take another look at the math on how much to withdraw, factoring in the amount of your pension and any other income you have. Rosentreter says, “The $10,000 withdrawal amount is not so large that it will result in a smaller RRIF at her death. But if she withdraws more the government may claw back her OAS. She needs to look at the number and find the happy middle ground.”
Second. Consider your financial needs through the different phases of retirement. Your life at age 64 may be quite different than your life at age 94. Rosentreter cautions that you, “Don’t give away so much that you don’t have enough for healthcare at 90! It could cost you $8,000 per month.” Sure, that figure may be at the high end of the range. But his point is to take the scenario out far enough so that you consider a period of high-cost care.
Third. Think about how this strategy might affect your kids. Rosentreter has been in the business for a long time and has seen it all. He warns that “Giving legal ownership of your money to your kids means exposing the money to the kids’ issues: lawsuits, bankruptcies, stealing, divorces and influential spouses.” My kid is perfect and I’m sure yours are too. But take a minute to pause and reflect on any potential risks.
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