Devising a Plan to Keep On Giving

ANDREW ALLENTUCK

In Ottawa, a couple we'll call Irene and Mel, both 56, are thinking about retirement. Senior civil servants in the federal government, their combined income last year was $249,500. They have a house they estimate is worth $750,000 and financial assets that total $741,600. They want to devise a way to give half their estate to charity one day and the other half to their nieces and nephews. They have no children of their own.

"We believe in giving back," Irene says. "In the past, we have volunteered extensively, helping persons with disabilities, coaching sports and giving money to medical relief in the developing world. Now we want to arrange our estates so that we maximize what we give to our extended family for scholarships and what we give to charity."

What our expert says:

Facelift asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Mel and Irene to devise a plan for a secure retirement and a method for transferring funds to charity.

"This ought to be an easy case," Mr. Moran says. "The couple is already well-set for retirement. From their government pensions alone, they will have a six-figure income indexed to inflation."

Irene and Mel will have nearly earned maximum Canada Pension Plan credits entitling each to receive as much as $10,615 a year at age 65. Their Old Age Security benefits are likely to be clawed back quite substantially, Mr. Moran notes.

If the couple can earn a 6-per-cent return on their financial assets, they should be able to draw $36,375 a year in 2008 dollars in retirement from an anticipated age of 58 to 90. This would bring their total income to about $175,000 a year in retirement, some of which will be a return of capital. They estimate their living expenses in retirement to be $72,000 a year. Their wealth will continue to grow. Orderly disposal of this wealth and conservative tax management is their challenge.

There are several paths to take. First, they could begin with major donations. They already give $5,000 a year to charities. They could boost this substantially. They would get hefty tax credits with unlimited carry-forwards for future tax deductions. Even so, a donation of half or more of their wealth seems premature, given that Irene and Mel are just middle-aged and could need a good deal of money one day for what could be the costly treatment of an illness or some other problem. Indeed, Mel has a chronic illness, which, though treated and controlled, limits his ability to buy life insurance. Irene, however, could buy life insurance with a view to funding her good deeds. Life insurance distributions to beneficiaries are generally not subject to tax and policies provide substantial protection from creditors.

An alternative to giving a large fraction of their wealth today is to draft a will that would create an irrevocable testamentary trust and then appoint a trust company to carry out their wishes after the death of the first or second spouse. On estates of the size that Irene and Mel plan to leave, trust companies tend to charge fees related to receiving funds, administering them and writing cheques to beneficiaries. The fees may total 5 per cent of the estate's value each year, an amount that can impair the growth of funds held in trust.

An alternative would be to use a lawyer or an accounting company to handle the duties of executor and trustee.

Another alternative is to appoint family friends or relatives as executors and trustees with fees set in advance or waived by agreement. Trustees can then appoint a trust company to act as agent.

The power to appoint an agent should be accompanied by a power to discharge the agent without cause. This would provide a bargaining chip in cases where a trust company or investment dealer appointed as agent raises fees or provides bad service.

Establishing a trust is a way to ensure that money can be kept at work doing good things for the beneficiaries long after Irene and Mel have died. There are setup costs for lawyers that may be in the neighbourhood of a few thousand dollars. There are also annual requirements to file tax returns for the trusts and pay accounting costs.

A well-structured testamentary trust, with a series of trustees who can take over if one or more of the first appointees should die, will minimize the chance that the trust could collapse for lack of a trustee.

Mel and Irene need to make up lists of relatively young family friends competent to act as trustees as much as 30 years from now. They should also create a list of others to succeed their first trustees and consider whether to give those first trustees the power to appoint their own successors. The process is complex, but it is the only way to ensure long-term administration of their fortune when they are gone, Mr. Moran explains.


Client situation

The Couple

Senior federal government employees with high six-figure salaries.

The Problem

Find a way to donate their money to charity.

The Plan

Create trusts for long-term care of money.

The Payoff

Decades from now, the couple's money can do good deeds.

Net Monthly Income

$11,670

Assets

House $750,000, financial assets $741,600. Total: $1,491,600.

Monthly Expenses

House upkeep $375, property taxes $583, food $700, entertainment $650, newspapers $100, pet $150, clothing $700, grooming $150, RRSP contributions $200, car gas, repairs $435, car, home insurance $200, travel $835, charity, gifts $416, utilities, phones, cable $720, miscellaneous $1,000, savings $4,456. Total: $11,670.

Liabilities

Nil

© The Globe and Mail Used by Permission