Rita, 56, and her husband Ivan, 50, have been together 11 years and married for 4. It is a second relationship for both of them. Rita has a son, now 27, and a daughter, now 23, from her first marriage for whom she was solely financially responsible since her divorce 13 years ago. Ivan has shared custody of his son, now 19.
Rita runs a successful business and Ivan is a music teacher.
We worked with Rita and Ivan to put in a plan that is both tax-efficient and protects Rita, once bitten, twice shy, and her children, given the disparity of the financial circumstances coming into the relationship in the event of marital-breakdown. While Ivan was not part of her life during the blood, sweat and tears stage of Rita building her business, she does want to provide for Ivan in the event that anything should happen to her.
- We advised Rita to have her lawyer register her home in a trust. Doing so, not only provided creditor protection for Rita with respect to her business but also meant Ivan did not have any right to the house if their relationship were to break down. Rita brought the house into the relationship and having been blindsided by the breakdown of her first marriage, after 25 years, she wanted to protect herself and her children.
- To reflect her goals, Rita’s term life insurance policy with a $1M death benefit, through her business, has Ivan as the beneficiary, ensuring that he will be taken care of in the event she predeceases him.
- Given that her financial situation was stronger than Ivan’s, as well as his ex-wife’s, Rita committed to provide $5000 a year to her stepson’s RESP. Since Rita is the contributor to the RESP, the capital is hers and she maintains control of the distribution of the funds.
- Rita has also put in place a spousal loan for Ivan. By loaning him capital, and charging the prescribed rate of interest currently at 1%, Ivan earns and includes the investment income, net of the interest paid on the loan, in his hands and includes it in his tax return. As a loan, however, Rita has the right to demand repayment of the capital should the relationship dissolve.
- Rita contributes to a spousal RRSP and Ivan withdraws those funds and includes the amounts in his income, once the appropriate delay to avoid the withdrawal being attributed back to Rita has lapsed. In doing so, Rita and Ivan hope to avoid having large required RRIF payments in the future that would result in OAS claw-back or put them into higher tax brackets at that time.
- Rita’s net worth is fairly significant and she hopes to pass on considerable capital to both her son and daughter. As such, she purchased a Whole Life Policy on both children to allow for significant tax sheltered growth.