Afshin has finished his education and has been working full-time for 3 years. His parents are encouraging him to start an RRSP – but why – what’s the big deal – and why the rush, he is only 26. Registered Retirement Savings Plans (RRSPs) are not new having been introduced in 1957 and the purpose has remained true to its roots – encouraging people to take responsibility for their own future financial independence. The Government does this in two ways. First, it allows taxpayers to deduct (up to the annual and cumulative maximum limits) RRSP contributions from our taxable income which reduces our taxes owing by our marginal tax rate.
Afshin asks the logical question: what is a marginal tax rate?
Each person has a marginal tax rate that is calculated each year based on the combined top tax brackets (Federal and Provincial) based on their taxable income. For Afshin, who’s current income from employment is $52,500, his top combined tax rate or marginal tax rate (MTR) is 20.5% Federal (2016 rate) and in BC, his Provincial rate is 7.7% (2016 rate) for a total of 28.2% – his MTR. This means that on the last dollar Afshin earned, the Governments keep 28.2 cents and he keeps 71.8 cents. Since RRSP contributions are deductible from our last dollar earned, he will save $282 in taxes for every $1,000 he contributes. If he wanted to save $1,000 per year outside the RRSP,
Afshin would need to earn $1,393, pay 28.2% tax ($393) and have $1,000 left to invest. By using the RRSP, he only has to earn $1,000. On to the second key point about RRSPs – the Government does not tax growth in the fund as it occurs – only when you finally choose to withdraw the money – normally as a retirement income of some form. What does this mean to Afshin? Normally investment income or growth is taxed each year at his MTR.
So for every $1,000 of investment growth each year, Afshin would pay an additional $282 is taxes. Let’s look at this another way – if Afshin’s investments earn 6% a year outside his RRSP, he will only keep 71.8% of that or 4.31%. Contributions of $1,000 per year grow to $104,623 by the time he is 65 years old. But inside his RRSP and growing at the full 6%, the $1,000 per year grows to $159,428 at age 65 – an INCREASE of 52.24%! The cost of waiting 1 year to start his RRSP is $9,998 since he only has 38 years to age 65, his fund will be $149,430 rather than $159,428 by starting today – nearly $10,000 for waiting one year.
|Income required per $1,000 contribution
|| $ 1,000
|| $ 1,393
|Tax Paid before net contribution
|| $ 0
|| $ 393
|Gross investment earnings
|Tax on investment earnings
|Net investment earnings
|Value at age 65 of $1,000 saving per year
|| $ 159,428
|| $ 104,623
Would you benefit from assistance in exploring your RRSP options?
Money on deposit with a life insurance company is treated the same as a life insurance policy. This means that a beneficiary can be named and proceeds will be paid directly on death without the need for probate or the services of a lawyer. A beneficiary designation can be changed at any time avoiding the cost of re-writing a Will. Deposits with a life insurer can also be protected from creditors by using certain beneficiary designations. Pat died in mid-2015 and most of her assets passed by her Will and were therefore subject to probate. More than $200,000 was in GICs and a fairly rapid transfer of this money to her heirs would be expected.
Unfortunately, they had to wait until the spring of 2017 to receive the funds. Not only did the GICs attract legal and probate fees in excess of $10,000, but while they were waiting for their share, her kids had to pay income tax on interest earned on the money. This proved to be a hardship for some of them who were of limited means or single parents.
Pat also had two life insurance policies. The claim forms for the insurance were sent to the insurer on within 2 weeks of her passing and cheques were delivered to the named beneficiaries less than 4 weeks after her death. What a difference.
Ban used named beneficiaries as part of his estate plan to ensure that his money went where he wished without the need for legal fees or probate costs and delays. When he died, his wishes were granted within a matter of a few weeks with no cost to his estate or beneficiaries.
A couple had to file for personal bankruptcy and most of their assets were seized including bank accounts and GICs. Their life insurance policies and investment plans (both RSP and non-RSP) were safe since they were with an insurance company. As life insurance policies with each other named as beneficiary, they were protected in this circumstance. As husband and wife, they are “preferred” beneficiaries, which is one of the reasons their plans with the life insurance company were protected from seizure.
Hussein has other concerns. He worries about his beneficiary’s ability to manage money and wants to make sure that the insurance proceeds will last. He also wants to avoid the cost and potential tax issues of establishing a trust after he dies. Hussein was able to address his concerns by utilising special beneficiary arrangements. He directed that the death benefits would be paid out over a period of years in equal monthly instalments – no management costs, no trustee or legal fees and no ability for the beneficiary to get a lump-sum.
The option to provide income rather than a lump sum may be more appropriate in many situations. Another option is a lump sum for part of the proceeds (to provide for the immediate cash needs) and the rest paid out as a lifetime income.
Would you like assistance in protecting your assets and reducing estate costs?
Many people ask this question but the answer is far from simple. Every individual has unique circumstances and therefore there is no one answer that fits everyone. There are two types of life insurance – “if insurance” and “when insurance”.
“If insurance” is used to cover needs that have relatively short durations – typically 20 to 25 years or less. Needs such as Debt Elimination – don’t leave your heirs with debts to pay – mortgage, car loans, lines of credit, credit cards – you get the picture. If you have children, then both child and home care together with education funding come into play. All of these are usually for a defined period of less than 25 years unless you have a special needs dependent.
“When insurance” is available to cover those costs that will be around for 20 years and longer. Items such as Final Expenses in settling your estate, special needs, charitable bequests and life-time survivor income requirements all fall into this “when” category since they never go away and usually increase in cost due to inflation if for no other reasons.
Needs such as continuing income for a surviving spouse, actually need some of both types of insurance. Some “if insurance” to provide income up to the spouse’s retirement age and “when insurance” for the rest of his or her life.
Our most insidious heir – the Canada Revenue Agency (CRA) – never relinquishes its’ hold on our financial legacy (unless we die completely broke) so “when insurance” is best suited to cover their claims.
What is “if insurance”? “If” you die within a specific period, the insurance is available. It is generally the least expensive type since the level of risk to the insurance company is constantly decreasing the longer we live. Available in terms from 5 years to 30 years – or to some fixed age such as 75, this is more commonly called term insurance. It gets its name from the fact the coverage is only in force for a specific period or term. Premiums increase periodically depending on the type of term insurance chosen.
So what about “when insurance”? This provides benefits “when” you die, regardless of your age – more often this is called permanent insurance or whole life insurance since it last for the whole of your life. It is more expensive than term insurance and the reason is the coverage never runs out, so it costs more. This type of insurance generally has level premiums and includes the option of increasing the death benefit each year so it can offset some higher costs and inflation adjustments.
Would you benefit from assistance making the best choice for you and your family?
A friend in the funeral industry shared some interesting information with me recently – the difference in costs between a funeral for a child in 1920 versus 2014. While there is no exact comparison of all services and items, I have illustrated the similar items today.
|Burial Case or Vault
|Grave Plot *
|Opening and Closing of Grave
|Funeral Home Attendants & Professional Services
* If available – costs vary widely!
Using the Bank of Canada’s Inflation Calculator, $33.50 in 1920 should cost $357.43 today – here is a screen clip – a 996.95% increase with an average annual inflation rate over 94 years of 2.55%! However, funeral costs have risen at a much greater rate. I will leave you to figure out the rate at which those costs have increased over 94 years.
Have you considered your wishes for the future – and do you have resources (read cash) set aside to handle your passing? And don’t forget to add something for catering, flowers and the no-host bar along with meeting your cultural, faith, community and family expectations. It is not unusual today to see funerals and memorials cost more than $100,000!
Is it time to review your plans?
I know this sounds a bit irreverent or flippant however it is meant to stimulate some hard thinking about the real costs of dying. Sure, there are lots of lists around, but I haven’t found one yet that covers everything I have seen in years in this industry. Is this list perfect? Absolutely not, but it will get you thinking about your own and your family’s situation. Remember, not all of these will apply to you – but some will – and the costs range widely.
||Copying and certifying fees
|Paid searches for titles, etc.
||Legal notification to potential heirs
||Legal notification to creditors
|Asset Transfer fees
||Estate Accounting fees
||Terminal Tax Return fees
|Estate Tax Return fees
||Rights & Things Tax Return fees
||Ongoing tax Return fees if estate not settled within 12 months
|Testamentary Trust Tax Return fees
||Preparing and filing tax election fees (estate and personal)
||Executor and Trustee fees (annually until Estate and all Trusts closed)
|Executor and Trustee disbursements – Required Bonding costs, copying, telephone, faxing, certifications, mileage, parking, travel expenses
||Valuation fees – real estate, listed personal property, personal property, real estate and other capital and/or depreciable property
||Transfer costs for title transfer to Executor and/or Trustee and eventually to residual beneficiaries.
|Commissions paid for asset sales: real estate, estate sale, sale of listed personal assets as necessary
||Commissions paid to investment advisors for selling stocks and bonds not held in managed-money accounts
||Income taxes payable – terminal tax return, estate tax return(s), Rights and Things tax return, Trust tax return(s)
|Tax due on transfers of pensions and registered assets to other than spouse
||Shrinkage of realisable asset value due to urgency of sale – tax paid on FMV not $ received – must replace lost $
||Account closing fees on nominee and self-directed investment accounts
|Court Fees for Probate
||Court costs if you die intestate
||Property Transfer Taxes
|Rental fees – safety deposit box or other secure location and Bank fees – estate and trust bank accounts
||Funeral, memorial and related costs – cultural, faith-based, community or family expectations. Wake or similar
||Costs to collect promissory notes owed to deceased – loans to family members and businesses
|Terminal health care costs not covered by Government, group or personal plans
||Legal and Court costs to defend will is challenged or contested
||Payment of all legally enforceable depts. – including ones you guaranteed or co-signed
|On-going pet care
||Costs of care for children and other dependents (maybe your parents!)
||Costs to close your social media accounts and profiles
|Payment for ongoing business management until it is sold
||Short-term emergency funds and ongoing income for survivors
||General insurance costs for vehicles, property, valuables, etc.
||Contract cancellation fees – vehicle lease, cell phones, internet, television, etc.
||Murphy is alive and well – expect a visit along with family discord!
I can promise a few things about this list:
- your estate will have at least one cost not included here;
- you will be very unpleasantly surprised at the total amount of money (and time) involved;
- your estate will be cash-poor – not enough cash in the bank to pay these costs when means that;
- the net value of your estate, without proper planning and a source of replacement tax-free cash, could even be bankrupt which means your family and heirs would get zero.
Would you benefit from assistance in planning your estate?