Do I have enough money for my children's inheritance?

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Q. My wife and I are wondering whether we are on track to leave each of our three children an inheritance of $250,000. I’m 63 years old, retired and receiving a monthly OPTrust pension (a type of defined benefit pension) of $3,400 net. When I turn 65, this pension amount will be reduced to about $2,700 net monthly as it is integrated with my CPP. I plan on taking my CPP and OAS at 65, which I estimate will be $750 and $425 net a month respectively. I currently work part-time, earning about $1,300 net monthly. I plan to keep working part-time until my 58-year-old wife retires in May 2022. She currently nets $3,000 per month from her employment. She has a defined benefit pension with OMERS, which is estimated to pay her $1,900 net monthly until she turns 65, and then will be integrated with her CPP, reducing her pension to about $1,400 net monthly. She also plans on taking her CPP and OAS at 65, which are estimated to be $550 and $425 net monthly. We own our own home, estimated to be worth $200,000. We have no debt. Our joint chequing account has $5,000 in it, which we try to maintain at this level. We have a joint non-registered investment account, to which we contribute $150 per month; it’s worth $222,000, all invested in equities paying $6,000 annually in dividends. We also have a joint cash savings account of $13,000 earning 2% interest, to which we contribute $1,500 monthly. We use the money in this account to make our yearly January 1 $6,000 lump-sum payment to our TFSAs. My TFSA is currently worth $48,300, all in cash earning 2.1% interest. This account acts as our emergency fund/large purchase account. We have budgeted $35,000 to come from this account for a new vehicle purchase within a year or two. Last August, I withdrew $22,000 from my TFSA (which was worth $70,000 at the time) along with $18,000 from our joint savings account, and loaned this money to our daughter towards paying off her $40,000 in student loans. This loan is at 2.5% for a term of 84 months. Our plan is to contribute her monthly loan payments of about $500 to my TFSA until I’ve paid back my $22,000 TFSA withdrawal. My wife has maximized her TFSA contributions. She currently has $14,200 in cash earning 2.1% interest in one TFSA, and a second TFSA worth $79,700 that’s invested entirely in the Successful Investor Growth and Income Fund (which has an MER of 1.5%). Once her cash TFSA reaches $25,000 we transfer that amount to her equity TFSA. She also has an individual RRSP and a Spousal RRSP invested in the same fund, worth $58,700 and $192,200 respectively. I have a self-directed RRSP account all invested in equities worth $49,900, which pays about $2,000 in yearly dividends. I also have an equity mutual fund RRSP account worth $50,100, with an MER of about 2.5%. As DIY investors, we don’t have a financial advisor, but have used planners in the past and often refer to their recommendations to see where we are according to their projections of income. We’d appreciate your take; are we on track to leave an inheritance of $250,000 to each of our three children? –Bob and Janet A. Janet and Bob, you’ll have no trouble leaving $250,000 to each of your three children. To show this, I’ve prepared your net worth statement, identified your after-tax spending, projected your net worth into the future, and offered some planning ideas followed by an investment suggestion.

Calculating net worth

Your current net worth, as seen in the table below, is just shy of $1 million dollars with no debt and about 80% is held in liquid assets (money you can access right away), which is excellent!

Assets and Liabilities		Bob	Janet	Total
Assets
Real estate	Home	$100,000	$100,000	$200,000
Banking accounts	Chequing account (joint)	$2,500	$2,500	$5,000
Non-registered portfolios	Non-registered portfolio (joint)	$110,000	$110,000	$220,000
	Savings account (joint)	$6,500	$6,500	$13,000
Other accounts	TFSA (Bob)	$48,300		$48,300
	TFSA cash (Jill)		$14,200	$14,200
	TFSA growth and income mutual fund (Jill)		$79,700	$79,700
Pension plans	RRSP (Bob)	$50,100		$50,100
	RRSP (Jill)		$58,700	$58,700
	SDRRSP (Bob)	$49,900		$49,900
	SRRSP (Jill)		$192,200	$192,200
Other Assets	Loan to daughter (Bob)	$38,250		$38,250
Total assets		$405,550	$563,800	$969,350
Net worth		$405,550	$563,800	$969,350

How to add spending to your net worth

The next step is to figure out what you are spending so we can project your net worth into the future to see how much money will be left for your children. If I take your total income and subtract tax and your investment contributions, you’re left with about $70,000 per year, which is what I’ll assume you need to maintain your lifestyle. Ideally, you should itemize what you’re spending it on and note how that spending may change over time.

Predicting assets growth

Your projected net worth, below, shows the growth of your assets over time as you continue to draw $70,000 per year indexed at 2% to age 95, plus withdraw funds for the purchase of four new vehicles. I have assumed your home will grow at 3%, and your investment portfolios at 4% after fees. Even though Bob has a more aggressive portfolio, he is also paying 1% more in fees, which offsets the potential higher return when I apply the FP assumption guidelines from page 13 of this document. Other accounts are TFSA and Pension Plans are your RRSP/RRIF.

This projected net worth graph (above) is important: It shows your net worth going from about $1 million to almost $5 million by the time you reach age 95.

Do you believe those figures?

I recommend that you repeat this exercise each year, to take into account changes in your life, keep assumptions on side and become confident in your numbers. Confidence in your numbers will let you spend or gift more while you are younger. Wouldn’t it be better to know today that you can comfortably spend more money and enhance your lifestyle, than when you reach that age when you have trouble climbing the stairs and you can no longer do the things you enjoy? Okay, that takes care of your initial question: Yes, you will be able to leave your children an inheritance of $250,000 each. But now let’s think about some things that improve on an already good situation.

How taxes can affect inheritance

You have three different investment accounts and a goal of leaving money to your children:

Non-registered: Taxable dividends and capital gains, subject to probate.
TFSA: Tax-free growth, no probate with a named beneficiary.
RRIF: Tax-sheltered growth, taxable withdrawals, no probate with a named beneficiary.

What can you do to reduce the amount of tax on your non-registered accounts? You could invest for capital gains rather than dividends, but I suspect you will maintain your dividend strategy. The other way is to reduce the amount of money you have in your non-registered account by using this money to:

Top up your TFSAs.
Fund future loans to children.
Fund future vehicle purchases.

Remember to pay close attention to your tax brackets when you draw large lump sums from non-registered accounts. To avoid being pushed into the next tax bracket, you may want to draw from a combination of non-registered and TFSA accounts. The TFSA is probably the best account to leave money to your children because the funds are paid out tax-free, and if your children are named beneficiaries there is no probate. How can you increase the value of the TFSA?

Consider not withdrawing money from your TFSA, and instead use your non-registered account to fund expenses.
Rather than accumulating $25,000 of cash in your TFSA and then investing in the equity markets, why not make monthly contributions into the equity markets from day one?
Consider holding your cash in your non-registered account and your equities in your TFSA. Remember, you are only saving tax on the interest you earn; if you don’t earn much in interest, you don’t pay much tax, so there is a small tax benefit to holding cash in a TFSA.

Now let’s think about tax and building family wealth. You will build more wealth for your family if you involve everyone, rather than doing it on your own. Gifting money to your children while you are alive may:

Reduce your lifetime tax.
Increase your family’s government benefits.
Reduce your children’s current money worries.

Things you can do include:

Contributing to your children’s RRSP accounts. This will help them with their retirement planning, and give them a tax deduction, increasing their present-day disposable income. Those with children may receive more of the Canada Child Benefit, and they will have more peace of mind over their future retirement.
Making RESP contributions for your grandchildren, when the time comes, so you earn the 20% grant on contributions up to $2,500 per year.
Using your children’s TFSA contribution room for yourself. Ask your children if you can borrow their contribution room. When you want the money back, they can return it to you with no tax implications. If you never need the money you can leave it with them. Just be aware that the kids don’t have to give the money back, so if there is a divorce you may lose a bit. Good relationships are a requirement of considering this move.

When it comes to your investments, I’m not sure why you are paying MERs of 2.5% when you are a DIY investor. It may be that your fund pays a trail commission, even if you are not using an advisor. The same fund is often offered in different classes. Go to your fund provider and ask what different fund classes are offered for your existing fund and compare the MERs. Generally, a DIY investor will want the F class version of the fund. Finally, when a financial goal is to leave money to children, there has to be some mention of life insurance. Have you ever checked the price of a joint last-to-die policy? Using insurance is one way to make sure your loved ones will receive a specific amount. Bob and Janet, you are in good shape and you have the funds to leave your children $250,000 each. I have provided you with some general ideas, but I haven’t modelled them to test the outcomes. Before implementing anything you read, or anything you think of yourselves, visit a planner so they can model your full situation. Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected] This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.

Comments Cancel reply

Gruff403 says:

June 1, 2020 at 10:08 am

Would you not consider drawing down the RRSP/RRIF early before the taxable account to fund the TFSA, gift to the kids etc… Start drawing out the RRSP/RRIF once retired age 60 and 65 since every nickel is taxed at marginal rate while non registered is taxed at 50% of marginal rate. Move the excess into TFSA and non registered.
Love the ideas for distributing wealth before you pass.
I have always felt that was the best way to do it rather than let your net worth continue to accumulate. Well done.

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Laura Teich says:

September 18, 2020 at 8:26 pm

It would be useful to “run the numbers” assuming at least one spouse needs to be in long term care. The cost of private, long term care can be $100,000 per year.

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Kate Thom says:

November 3, 2020 at 10:36 am

Well done with your savings and planning. I see no mention of travel or fun in your senior years. You have worked hard and you deserve to enjoy some of that savings. It’s great you want to provide for your children but remember to enjoy your retirement with your spouse. Also, long term care can throw a wrench into the best of plans.

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