The Debits and Credits of Divorce

The financial aspects of a divorce can play out differently for every divorcing couple.  At a time of high emotion you may want to protect yourself, financially by making some prudent choices.  Your bank ~ you want to make sure that they know about your situation.  Any money held in joint accounts likely only needs one signature to withdraw so you want to ensure you take your half out and place it in an account in your name only.  Ensure the bank also puts a hold on any credit cards that you jointly share.  Those country songs about seeking revenge and making the other spouse pay through reckless credit card spending came from somewhere.  You want to make sure that it doesn't happen to you.  Remember, you are still jointly responsible for that debt.  That means that even if your spouse is not paying the monthly payments on those credit cards...you should.  Any repayment can, hopefully, be settled through the separation agreement as part of the negotiation.  It's better to do it that way than end up alone with bad credit.  Another good exercise would be to close any credit cards you don't need. 


Remember those investment accounts, especially the registered ones?  Registered Retirement Savings Plans and Registered Pension Plans (as well as Tax-Free Savings Accounts) often ask for the account holder to determine a beneficiary.  If you chose your spouse you may want to contact the financial institution managing these accounts to change your beneficiary.  


Now that you have looked after the registered savings what about the regular savings investment s that you have?   Those assets and their distribution are covered in your Will so you will want to re-write that too. 


Your not finished yet....while you are re-writing your Will  you may want to consider re-writing your Powers of Attorney (PA).  Your PA covers both medical and financial matters should you become incapacitated. The last thing you want is your spouse to be calling the shots with the doctor as to your care, if you can't speak for yourself!!!  

Jewelery ~ From an Estate Planning Point of View

One of my clients is aging.  OK, we are all aging but she is aging to a point where she wants to be responsible for what happens after she leaves us.  Her name is Edith.  Edith has accumulated many things during her tenure, here, on Earth, and she has given much thought as to who she would like to see get which trinket or object of perceived value.  To her beneficiaries the value may be extrinsic as it will always produce a fond memory of Edith, herself, but does the object have any intrinsic value?  How can Edith divide her wares on an even basis to her beneficiaries from an Earthly value perspective?

This weekend I was in a business coaching session and I happened to be sitting next to a woman who would provide a perfect resolve for Edith's dilemma.  Barbara is her name and Barbara's specialty is to value vintage jewelery.  I thought of Edith right away.  What a perfect solution to have such an expert peer through Edith's jewelery collection and make note of any hidden gems?!

Personal Effects Memorandum's are often attached to Wills.  They are not legally binding but they do disclose a 'wish' on the part of the deceased to have certain items go to particular people.  With full knowledge of her hidden gems and their approximate value Edith could write her own Personal Effects Memorandum and also ensure she is being fair about the value of her gift far beyond the memory of Edith, herself.

If you are interested in getting in touch with Barbara about her specialty, please let me know I will put you in touch!

Happy Planning.

A Legal Means to Avoid Paying the Tax Man.

Who wants to pay tax when you don't have to, right?

I know I certainly do not so as soon as the clock struck midnight on December 31 I sent a message to my administrators asking them to transfer $5,000 from my non-registered accounts to my Tax-Free Savings Account (TFSA).

I really do not like the name the government gave to this tax-free haven as it's title often misrepresents the benefits.  It's not a savings account, per se.  It can be an investment account so that you can put any stocks, bonds or mutual funds into your TFSA and any interest income, dividends and capital gains you receive are not subject to tax!  Calling it a 'savings account' has led clients to believe that you have to put the funds in a 'savings account' at the bank earning today's low rate of interest rather than use a more effective investment strategy and they tend to dismiss this strategy all together.  What a missed opportunity!!!

What's even better is that if you have come into a windfall in 2011 and have not been contributing over the past 3 years you can catch up and put in $15,000 all at once!  The rules are that you can contribute $5,000 per year from 2009.  Unlike a RRSP you will not receive a tax deduction for your contribution but when you take the money out it isn't taxable income either (which it would be if you took it out of an RRSP).  You can also replace the money you took out.  Let's look at this example.

Let's say in 2009 I put in the allowable $5,000 and then again in 2010 so now I have $10,000 in the TFSA (I'm not going to add any returns for the purpose of this example).  I decide I want to go on a vacation and take the money out so I take out the whole $10,000.  In 2011, I win the lottery and I can put in $15,000!  That would be the $5,000 amounts I am replacing for the 2009 and 2010 tax years as well as the new contribution for 2011.

Sometimes it is more important to use the TFSA for a savings vehicle rather than contributing to a RRSP!!!  It can also be used as a tool for income splitting.    If you want further information or clarification please feel free to comment or contact me @ kjankowski@tewealth.

Negotiations for the Right Reasons in Divorce

Sometimes divorcing people seek to covenant certain assets for the wrong reasons, typically fueled by anger.  "She cheated on me so I want her favourite......"(fill in the blank) is common.  When looking at the financial aspects of divorce, however, emotions should be negated in favour of logic.  Easy to say and hard to do, I realize.  I know my example is stereo-typical but all too often this is the scenario.  Wife wants to keep the house.  Why?  One reason is the way that women perceive money.  Studies have shown that women equate money with security.  A house has bricks and mortar and it provides shelter, after all.  Another reason may be that she does not want the children to experience too much change, all at once.  Dad is no longer at home and changing schools and the pressure of creating new friendships may prevail.  Although this reasoning may have a lot of validity, is it reasonable.  Maybe the house means a lot to him and she is angry but can she afford to keep the house?  Will she deplete all her assets held outside of the home to try to keep the house, finding out a few years later that she is house rich and in debt?

Maybe more logical choices are available keeping in mind the reasons stated for wanting to keep the house.  Perhaps less costly housing alternatives are available in the same neighbourhood so that that kids can go to the same school and have the same friends.  Maybe the newer housing alternative may be a benefit from other points of view like, no memories of married life and less upkeep.  Perhaps less expensive housing alternatives can also give her the opportunity to save for retirement, as well.

 In my example, I talked about the wife wanting to keep the house but men have other challenges in their financial decisions, especially if they are paying child and/or spousal support.  A little less often but becoming more common place that in past years is the issue of the wife paying support to her husband, especially since women have been advancing in their business careers and the same types of issues need to be considered in this scenario.  

The power of the financial neutral in a divorce situation is to draw out these conclusions before the financial errors are set in motion.  Often clients do not want to pay an additional professional (other than their lawyer) to help with the divorcing process but my argument is, "How can you afford not to?"

Life should be stop and go!

When all systems are a 'go' you have to sometimes stop and look out the rear view mirror.  Often, I see clients who are so busy chasing future dollars but they don't stop to look after the wealth that they have already created.  Remember, life is dynamic not static, so once you have your financial plan in place it doesn't mean that task should be off your radar forever.  As we chug along we should stop, at intervals, to re-assess the validity of our previous financial commitments.   A few things to reflect are:

1)  Is my Will still up-to-date?  What about my Power's of Attorney, both financial and medical?
2)  Is my portfolio working for me?  If not, is it time to consider a different strategy....????
3)  Is my retirement planning in place?  Will my pension be enough?  If not how much do I have to supplement?
4)  What will happen if I die tomorrow?  Do I have enough insurance to ensure my family is not hit by financial hardship?  How much is enough?
5)  Do I want to help my kids with the cost of post-secondary education?  Are they thinking of going to school and staying home or are they planning to leave the family home to attend school?
6)  Do I have elder care issues?  What is going to happen to my aging parents/grandparents?

So how often is reflection required?  I advise my clients to reflect upon these issues on an annual basis.  Pick a birthday, end of the year, June 1st (half way through the year), anniversary or some other date that is going to trigger you to remember.  All too often these questions get ignored and then when we are faced with issues we are often ill-prepared.  After all, spending a few hours every year ensuring the wealth you have already created is  well looked after is worth putting aside the potential for a few hours worth of potential future value, isn't it?

The Secret of How to Negotiate the Waves of the Stock Market

Many people are already doing this, either directly or indirectly.  Maybe they're doing it but they don't know they're doing it.  The secret of how to take the nervousness out of investing is to make the conscious decision to allocate your investments in a strategic fashion. 

For example, I'm a Balanced investor.  What does that mean, for me?  That means that my asset allocation is 60% equities (or stocks) and 40% fixed income (or investments with a stated rate of return).  I stick to this asset allocation through good markets and through bad markets.  If my equities become 65% of my portfolio then I take 5% out and allocate it to the fixed income component, and vis versa.  This keeps me disciplined in my approach with my investment portfolio.  It also does something else ~ it keeps me disciplined in the 'sell high' and 'buy low' strategy that tends to bring about successful investing.

Currently earning an income, I may not be so worried about the fluctuations of the market as I will be when I am retired.  Without income replacement it is challenging to watch those dips in the market but my strategy of keeping 40% in fixed income will help me.  While equities are out of favour the less volatile fixed income component of my portfolio can become my major source of cash flow.  This way I can wait for the equity markets to return and I will not be forced to sell them while they are at their all time bottom price levels.

Having my portfolio balanced, from an asset allocation perspective, is the first step in negotiating the waves of the stock market.

Teaching Kids About Money ~ I'm not kidding!!!

It's interesting that I have been hearing a lot about how to teach kids about money.  I know that when I counsel couples about budgeting I usually begin with how they think about money and what it means to them.  Most of the psychological issues with money stem from our up-bringing.  Typically, one person in the couple is the 'perceived' spender.  I say 'percieved' because they may spend more than their partners but they can also be good savers and have a very disciplined saving and spending philosophy.

So, as parents or grandparents what can we do to ensure that we are instilling the "good" philosophies about spending money.  Keep in mind that money is just paper.  What we want to teach our children is the work ethic, the sense of constraint and the freedom of enjoyment in a healthy balance.  That's the real lessons to be learnt.

Typically, we can start our very young off with the piggy bank and teach them how to save and how the savings add up, if not spent.  I think it is important to let children spend their money, if they wish, so that lessons can be learnt about how things cost money and how we can make conscious decisions as to whether we want to budget for the bigger ticket items or whether some smaller ones are justifiable along the way.  Letting children make their own decisions is a good one...but some guidance along the way is also important.  "You sure you want to spend that money on a new toy instead of saving a little more for that teddy bear that you saw at the store with Grandma?"  Remember, kids have short memories, especially when something immediately gratifying can be right in front of them.  Allowing them to make their own choices will also give them a certain amount of independence and neither choice should be deemed a 'good' versus a 'bad' choice.  Children must learn on their own, within limits.

Generally, after the age of about 5, it would be a good idea to set up a spending and a savings plan.  This shows kids that they can still make the independent choice to spend but saving money is also important. Perhaps, some small chores can be incorporated, just enough to ensure that they understand that money must be earned.  Of course, light chores are recommended at this age.  You don't want an over-stressed child..but rather, something that is befitting their age and capabilities.

Once children are in their mid-teens you may want to add a little 'credit' to the situation.  Give them a leeway of about $50 to 'over spend' with the intention of paying it back within a reasonable time frame.  This will teach them that they can have that immediate gratification but the work must follow and payments must be made.  You can even have the payments in increments.  It is important, however, that you child gets 'paid' even though they owe you money because they may chose to only repay half instead of the whole 'pay-check' and this also helps them to manage their funds in a responsible way.  Perhaps minimum payments should be understood and a 'credit' document be written up for them so they know their limits and expectations. 

Once your children have entered their 20's they may well be ahead of their peers and they will make financially healthy decisions with their childhood experiences and your guidance, behind them.

Does September mean turning over a new leaf?

As autumn approaches and we all have a renewed spirit of digging in our heels and approaching daunting tasks that we put off during the summer months we may also be thinking of the financial drain, if we are paying, or helping to pay, our children's tuition fees.  These expenditures can really help with the 'digging in our heels' feeling when discretionary funds are so minimized that we have little else to respond to other than those daunting, inexpensive chores. 

If the kids have been home for the summer or if the step children have been visiting more often during their summer vacation then entertainment, dinners out as well as clothing needs for our youngsters have already tapped into our 'fun' funds during the hazy days of summer. 

What does it really cost to educate them?  Well, of course, each university or college is different.  Prices depend on whether your protege is going to attend school and stay at home or whether they will be going away for their education.  If they stay in the country it is much less expensive than the hefty international tuition...unless your child has had the fortune to be born in France and returns for their free post-secondary education needs. 

If they stay at home and go to school, in Canada, the average cost for tuition and books is in the $5,000 to $6,000 range.  Of course, this does not include their housing or food requirements.  If they go away to school then you are looking at an average of $20,000 which includes tuition, supplementing their food bill, books and rent.  If we dare to add it up then the stay-at-home kid's 4 year degree is about $24,000 and the go-away-kid is costing about $80,000.  Keep in mind that this is after-tax money!  If you are paying tax according to Ontario's highest marginal tax rate then you have to make about $117,000, before tax, to fit this bill.  ....   and that's for one child!!!

Some children want to go on to graduate studies.  If you are thinking to help out here, then consider that professional designations can be much more.  Have a look at the link to Osgoode Hall's projected budget.
http://www.osgoode.yorku.ca/financial_services/enough_sample_budget.html

My advice?  Start saving early for your children's RESP.  It may be a drain on the pocket book when they are smaller but you will appreciate it when the times comes.  If you happen to run out of RESP funds after they turn 21 years of age remember that they can apply for student loans as, once 21, parental income is no longer a factor in the application process.  This allows you 'free' use of government funds until the child graduates and must commence repayment after 6 months.........maybe you can even save a little to help out!

OSAP

Divorce? Remarriage?

Remarriage? Who wants to think about the legalities of anything past signing the new marriage certificate when you are getting married again?  For most, remarriage is a significant turning point of a renewed beginning with all the hopes and dreams that most of us lost during divorce or widowhood, hopefully, with the lessoned learnt from the first experience.

Who wants to think about legals issues and considerations of the impact on others when we want to be selfish and focus on our 'special day'?   Before walking down this isle or, if you prefer, standing on a beach or overlooking a volcano to say your wedding vows you may want to consider the complications that might arise which may cloud your bright, shinny future.  Ben Franklin said, "An ounce of prevention is worth a pound of cure".  In this case having your remarriage legal issues well in place before you promise the rest of your life to another may add to the relief allowing you to actually enjoy your 'special day' and save you a lot of money should the unthinkable come to fruition.

Here's the link to my story......it may save you a fortune and your family many headaches to ensure you have everything well plannned out beforehand and that your estate is actually handled in the way you had intended it to be handled.

http://www.advisor.ca/advisors/news/industrynews/article.jsp?content=20100712_093205_4840

The Collaborative Movement in the GTA

Collaborative divorce sounds like a juxtaposition of terms but this divorce process can save lives!  OK, that may sound a little dramatic but, in reality, it is the quality of life going forward, especially for children.  There are many different divorce processes which I have explained in an early blog so I won't g through the detailed description of each but rather focus or highlight what the collaborative process is all about.

Each couple must sign the collaborative agreement or a participation agreement. In the agreement each spouse promises to be upfront, honest, respectful and most importantly not go to court.  Both spouses must retain a collaboratively trained lawyer and, initially meet with their newly retained legal council.  The first 4-way meeting which consists of both spouses and their lawyers discusses the process, how it works and the rules of conduct.

At the second meeting the issues are brought forward.  Every divorce is different and some couples may agree, for example, on the financial issues and custody issues but not on access issues (access to the children).  Wherever there is disagreement that is where the couple and their lawyers work to some form of resolve.  The reason the lawyers are there is to ensure that the spouses are being fair to one another from a family law perspective.  Sometimes people feel they will give away everything to make the divorce issues go away but later live to regret the decision.  Lawyers help to ensure the fairness prevails and also correct any misconceptions.  Collaborative divorce embraces the interdisciplinary model which simply means that other professionals may be invited to join the group.  Often family professionals are necessary when access issues are at the forefront.  They can work out parenting plans with the couple.  Often times financial professionals can be brought into the group to help with budgeting issues and also to ensure that the assets you want to keep are the assets you can afford.  Sometimes spouses will give away retirement funds, for example, to keep the house but they can't afford to keep the house and they have to work all their lives as they cannot afford to retire.  Often there are solutions available at the beginning of the divorce that would negate these future issues.

What is really important in the collaborative process is that despite the bad feelings each spouse has for one another during this time because they have treated each other respectfully they can continue to co- parent after the divorce is over.  There are studies that show that affectively co-parented children grow up to be just as stable and 'normal' as children of couples who remain together.  High conflict divorces always create problems for children.  Sometimes they are manipulated by one parent or the other and grow up to resent the parent who did so when they are old enough to understand.  These children often end up with issues that they grapple with well into adulthood.  So, therefore, my statement that collaborative divorce can save lives.

If you are going through a divorce or thinking about it here are some links to the GTA lawyers, family professionals and financial professionals who are collaboratively trained in this area.

www.peelcollaborative.com

www.collaborativepracticetoronto.com

If you are out of the Toronto area there is an international association that provides names of professionals as well as links to local groups.

www.collaborativepractice.com

These website also have a large amount of information available about the collaborative process.

Spousal Loans ~ Potentially saving Thousands!!!

I saved a client over $23,000 a year employing this strategy, a YEAR, in taxes!!!!!

OK, so....this is how it works.  You have to be married.  Your spouse has to be unemployed or have a big variance in income to employ this strategy.  It's a form of income splitting that is a way to avoid paying taxes that is completely legal.

Canada Revenue Agency (CRA) rules that a higher income earning wife, for example, cannot gift her husband a large sum of money to invest to take advantage of his lower marginal tax rate. Any investments made on his behalf must come from his earned income, otherwise the income (in the form of interest, dividends and capital gains) is attributable back to the wife.  If, however, the lower income spouse does the savings and the higher income spouse pays the bills then it's OK to attribute any income from investments to the lower income earner PROVIDING that he does not invest, annually, more than her makes net of taxes.

If, however, you have a spouse who has no income then you can lend that spouse money at CRA's prescribed rate (currently 1%) and then that spouse can invest and any growth attributed from the investments are taxed at their lower marginal tax rate.  Because the spouse is borrowing to invest and is earning income from the investment then the spouse can also write off the cost of borrowing (ie:  the interest charges) on their income tax return.  The lending spouse, however, must claim the interest as income but at the low rate of 1% the cost is more than offset by the spouses lower marginal tax rate.

Really want to help your kids understand how it all works?

OK, so you're getting closer and closer to retirement and maybe it's a fleeting thought or maybe it's outright panic but....have you saved enough?  Thinking that most of us do not want to be living in our children's basements at retirement perhaps we can also help our kids to have the answers earlier in life, rather than have history repeat itself.  The moment your young one comes home and says they have a job take 18% of their income from them in a form of savings.  Open a RRSP for them and make a contribution, annually or monthly if there is enought to work with.  There is no age limit to RRSP contributors.  There may be limits on what types of accounts they have in that they cannot 'trade' in the market until they reach the age of majority but they can have a deposit type RRSP at your local bank as long as they have earned income. 

Effective parenting comes from two different directions.  One, you are 'forcing' your children to take an interest in learning about investments.  Believe me, if it's their own money they will soon be asking about mutual funds, stocks, bonds and the like.  The biggest effect, however, is their savings at retirement.  OK, so what 17 year old is thinking about saving for life after 65 especially when there are so many things a young person wants to do NOW!  If you save earlier it is much better than starting later.  For example, a person age 25 saving $5,000 per year will have $1,000,000 at age 65 compared to a 45 year old saving double the amount ($10,000) which will end up with $400,000 at the same age (both based on a consistant 7% return).  That's a valuable difference.  But wait...there's more.  Because your impressionable youngster does not have a big marginal tax rate you needn't deduct the RRSP contribution amount until they start working full-time in their future careers.  You can carry-forward the contribution so that once they start working they can use all or some of all the accumulated contributions when they will receive more of a return for their money.  Also, it may motivate your youngster to contribute to their own RRSP's if they are aware that they can use those funds towards a down payment for their new house.

Now wouldn't that be kinda cool?   Down payment for their new house???? A RRSP account and a learning lesson about how to invest..........???   I think so.......

Tax Strategies

Ok, so last week's bad word was debt and this week is 'taxes'!

I thought this may be a timely post considering that April 30th is fast approaching. So let's discuss a tax strategy that may save you money.

This particular strategy works if you have a large disparity of income between spouses because one spouse will have a higher marginal tax rate than the other. CRA rules dictate that if you have investable assets they must be derived from your income. In other words, a wife (assuming she is the higher income earner) cannot gift her husband monies to invest and take advantage of his lower marginal tax bracket. If she did then the interest, dividends and capital gains would be attributable back to her which defeats the purpose of changing ownership of the funds. If he is working she can pay all the bills and have her lower-income spouse do all the investing with the income that is attributable to him. This must be tracked carefully for CRA to legitimize this strategy.

If however, he is not working, she can loan her husband the money at the CRA perscibed rate of interst (currently 1%) and he can invest it and any returns would be taxable to him but she must also include the interest portion of the loan as income on her tax return. This strategy must be evidence by a loan document and the interest portion is payable to the wife by January 31 of any given year. Because the CRA perscribed rate is so low, at the moment, it would be an opportune time to utilize this income splitting strategy, if it was beneficial to do so. The question remains ~ what is the optimum amount to lend to your spouse??? Well, that question could be answered by your accountant or tax preparer by either assessing your 2009 filing or by doing a pro-forma tax calculation after the fact.

If this strategy does not affect you then stay tuned as next week's topic will also be about taxes and strategies to ensure CRA doesn't get more than it should.

Leveraging? Debt?

Bad words, right? Most of us struggle a good portion of our working lives to pay off debt whether it be in the form of car loans or mortgages so the word tends to have an air of negativity surrounding it. Debt, however, is a great enabler of our economy. Without it most of us could not afford the nice homes we live in or the opportunity to own our own vehicle.

What about the financial planning debt consideration "borrowing to invest"? If you borrow to invest Canada Revenue Agency allows you to write-off the interest charges. Sounds great, eh? Like 'free' money almost....but wait! There are risks associated with this strategy that you must know before you put this consideration into practice. Most of the pitfalls and, conversely, the potential gains, are all based on market timing and performance. If you borrowed, let's say, $100,000 back on March 10th of last year and invested it in almost any market then you, most likely, would have seen this strategy work wonderfully for you. With the market at it's all time low (in the most recent of years) and the exact day of the turnaround you may have fared....as an example....10% and the loan was, maybe 5%. Of course, dependant on your marginal tax rate, you still would have done more than OK.

The pitfall, however, is if you borrowed to invest that $100,000 and the market drops. Even with the advantage of being able to write-off the interest on your annual tax return you would still be paying for a loan (less cash flow) to pay for an investment that was devalued considerably. Then, my guess is, you would not be too happy with this strategy.

Borrowing to invest is OK for people who understand the potential pitfalls and how are willing to take on the additional risk associated with this strategy. For those who are good at market timing it can be very rewarding...

Timely Considerations

With the new year well upon us we welcome new opportunities. If you haven't contributed to your Tax-Free Savings Account (TFSA) for 2010 it may be a good time to do so. Every year Canadians are allowed to shelter $5,000 in a TFSA. The name, however, is a source of confusion. I think the government should have called it a Tax-Free Investment Account as the words 'savings account' has led to a lot of confusion. The funds you place in your TFSA can be invested just the same as your regular investments. Whether you invest in GIC's, bonds coupons or if you are a stock-affectionato you can hold many of these options in your TFSA potentially earning more than a regular savings account. Much like a RRSP where income is sheltered the TFSA is different becasue you will not receive a tax deduction for your personal income tax filings but you will not receive any T3's or T5's (for dividends and interest income) from income generated while the funds are in the TFSA. The account is also accumulative so if you missed putting the maximum in for 2009 you are able to put in $10,000 in 2010. Conversely, if you take out the $5,000 you put in in 2009 you can replace it and also add another $5,000 for 1010. Also, unlike a RRSP, if you take the money out this year you do not have to include it as income in your 2010 tax year's filings as you never received a deduction for it (a tax advantage) in the first place.

If you are thinking that you cannot make a RRSP contribution and a TFSA contribution at the same time then consider a couple of options. You can make the RRSP contribution and with any refund monies you can place it in your TFSA. Also, if you have any current non-registered investments you can always move existing investments over to your TFSA without adding any new funds.