How to save for retirement and ensure care for a disabled child.
With files from Vern Lunz, Insurance Specialist, Manulife Securities Insurance Inc.
If you have clients who have a disabled child, proper planning can help them maximize their retirement savings while making sure their child will be taken care of.
Consider the example of Neil and Diane, who are in their early 50s. They have two children: a 16-year-old daughter who is on the autism spectrum and a 13-year-old son. They want to save for their retirement and make sure their daughter will be taken care of after they have passed away.
The couple have been maximizing contributions to their Registered Retirement Savings Plans (RRSP) and company pension, and also contributing to a Registered Disability Savings Plan (RDSP). However, they estimate they will reach the RDSP’s contribution limit in about five years. Given the limitations of the RDSP, RRSP and their pension, Neil and Diane want to explore other alternatives to ensure their daughter’s needs will always be looked after.
The challenge
The biggest challenge they face is accumulating and leaving assets for their daughter in a tax-efficient manner without affecting her government disability benefit payments. Most provinces have an asset or income test to determine personal eligibility for disability benefits. If a disabled person has assets or income above the maximum allowable level set by the province, they could be deemed financially ineligible for provincial disability benefits.
The options
As a starting point, Neil and Diane need confirmation that their retirement fund is secure. After completing a financial plan, including some retirement projections, the couple discover that they were saving more money than they needed to retire comfortably. They could reduce their savings by about $1,500 per month and still reach their goals. The extra money could be redeployed into an instrument that could be left for their daughter’s use if they could no longer care for her.
Option 1: Continue making contributions to a registered investment account or TFSA
Neil and Diane could continue to accumulate money in an RRSP or another registered investment account, such as a Tax-Free Savings Account (TFSA). Since growth in a TFSA is tax-free and the couple has a lot of cumulative contribution room, this was an attractive option. However, the insurance policy allows them to contribute $18,000 per year based on the death benefit. They could use their available TFSA contribution room but are then limited to only $6,000 per year.
Option 2: Contribute to a non-registered, taxable investment account
Neil and Diane could accumulate funds in a regular, non-registered, taxable investment. However, the growth of that asset could have considerable tax consequences.
Option 3: Set up an “in-trust” account for their daughter
Neil and Diane could set up an “in-trust” account on behalf of their daughter, although it could impact her eligibility to receive disability benefits.
Recommendation: a permanent whole life policy
Neil and Diane could reallocate their excess retirement savings into a tax-exempt, permanent whole life policy based on a joint last-to-die basis.
They could also establish a Henson trust through their wills and name the trust as the policy’s beneficiary. This would help address the issue of their daughter potentially becoming disqualified for provincial disability benefits. The trustee of the Henson Trust has absolute discretion as to when and how much money will be received by the trust’s beneficiary. Since the beneficiary has no control over the capital or income from the trust, their eligibility for the provincial disability benefit is not impacted.
Neil and Diane could deposit funds into the policy and increase the cash value on a tax-free basis. Dividends paid into the policy would purchase paid-up additions, growing the death benefit each year and maximizing the amount that could be left for their daughter via the trust.
At the current dividend scale, deposits of $1,500 per month for 10 years would create a tax-free death benefit (projected amount) of more than $1.1 million after the second of the two parents passes away. Even at the current dividend scale, minus 1 per cent, the death benefit would pay out nearly $850,000. That capital, along with the savings the couple have already accumulated inside the RDSP, would help ensure their daughter’s needs would be addressed after their death.
10 advantages of using a Henson trust along with a whole life policy to build savings
- There is an immediate benefit of the insurance proceeds if the couple die prematurely.
- The death benefit from the policy pays out to the trust tax-free if the trust is named as the policy’s beneficiary.
- The insurance proceeds flow outside the estate and, therefore, will not be taxed or attract probate fees.
- While either of the couple is still alive, he/she will own the policy and control the funds.
- The cash value of the permanent whole life policy accumulates tax-free.
- The couple can access the cash value of their policy in a tax-efficient manner by establishing a collateral loan against the policy, if needed.
- If their daughter predeceases the parents, they can use the policy’s cash value to supplement their retirement.
- The Henson trust doesn’t need to be set up immediately. It can be established through the couple’s wills after they both pass away.
- The Henson trust will not impact any disability benefits for the daughter.
- Other assets can be left to the Henson trust through the couple’s wills, if they want.
This is an example of the many creative ways that insurance products can be used to help your clients achieve their goals. Reach out to your insurance representative to learn more.
