IG Wealth's head of financial planning shares insights ahead of Mother’s Day
Becoming a parent is life changing whatever your gender, but for moms it means some unique financial challenges and priorities.
As Canada celebrates Mother’s Day this weekend, Wealth Professional has been speaking with Christine Van Cauwenberghe, head of financial planning at IG Wealth Management about one of the major concerns for moms, leaving their children a legacy.
With women controlling an ever-increasing share of wealth, passing it on to their children in the most tax efficient way is paramount, and this should not stop at avoiding probate, which can be quite low. The proposed changes to capital gains taxation with a higher inclusion rate could be a costly blow to the estate and requires careful consideration about how to plan for the tax at the time of death.
“Although there are a couple of things that can be done to minimize the tax (for example, maximizing the use of the principal residence exemption and making charitable donations in the most tax effective manner), the best way to plan for taxation at death is to fund the projected tax liability with permanent life insurance,” said Van Cauwenberghe. “It is recommended that you speak with a financial planner who can calculate the amount of tax your estate may be required to pay using financial planning software, and then review whether or not insurance will be the most cost-effective way to fund this liability.”
A will is one estate planning tool that, while well known, are not always considered early in parenthood. Nobody wants to think about the possibility of not being around to see their kids grow up and often people believe they do not have enough property to necessitate a will. But Van Cauwenberghe highlights that a will is not just about financial assets.
“It is recommended that you nominate a guardian for your children, as well as an alternate, so that the family knows your preference as to who will become the child’s parent in your absence. Be sure to speak to your proposed guardian in advance so that you can discuss your parenting philosophies and ensure that they are willing to take on this extremely important role,” she said. “Choosing an executor is also important, as they will be responsible for administering your estate, and potentially managing any trusts that are created. In addition to being responsible and good with managing administrative tasks, they should also be a resident of Canada (and preferably a resident of your province). Again, speak to your proposed executor in advance to ensure they are willing to take on this responsibility and also choose an alternate if possible.”
Using a trust
Another consideration is whether to set up one or more trusts for children, but there are certain circumstances that make them more important.
Van Cauwenberghe explains that trusts are recommended in any cases where it is anticipated that a child would not be capable of managing their portion of the estate if they were to inherit the funds today.
“If children are young, a parent should consider creating a trust in their will that distributes the funds over a period of time (for example, part at age 18, part at age 21 or 25, and then the remainder at age 30 or 35). Trusts are also often recommended for persons with a disability, in some cases because the beneficiary will not be capable of managing the assets, or in other cases to maximize entitlement to social assistance benefits,” she said.
She added that the children’s guardian will not have authority to manage the assets in a trust unless they are also appointed as trustee.
“In the same manner as choosing an executor, it is usually recommended that the trustee be a resident of Canada and they need to be comfortable with managing administrative tasks, including keeping track of all of the funds that go in and out of the trust, filing trust tax returns and giving investment instructions,” she said.
Insurance options
Life insurance, whether used as a tax strategy or not, is often considered by parents. Working with a financial planner can help moms determine how much is needed and the term, by considering factors such as the lifestyle they would like their children to have and whether milestone financial events should be covered, such as post-secondary education. Paying off a mortgage is also a common focus for life insurance.
“The amount of insurance required will depend upon how much you have already saved, and how long your children will continue to be financially dependent upon you or your estate,” said Van Cauwenberghe. “Future expenses and the impact of inflation also need to be in factored into the calculation, through the use of financial planning software.”
Other insurance products may also be appropriate such as disability and critical illness cover.
Education costs
Saving for a child’s education is another major financial priority for moms.
“Registered education savings plans (RESPs) are usually the best way to save for post-secondary education, as the government will match your contributions up to certain limits (the amount of the grant depending upon your family income), and in some cases also pay a Canada Learners Bond to the plan even if you are very low income and are not able to make a contribution,” said Van Cauwenberghe.
Other things to think about include having a power of attorney in place to empower someone to make financial and health care decisions in the event of the parent not being capable of doing so, and ensuring that they claim all the benefits and tax credits or deductions that they are eligible for.
