Financial Divorce and Re-Marriage

Seems interesting that the subject about re-marriage has been top-of-mind this week.  Perhaps my recent article in Bank Rate and an interesting lunch with family law lawyer, Jeff Rechtshaffen, helped to pave the way.

Jeff and I spoke about remarriage and he re-directed me to an article on his web site.  I thought to share it with you as I think it definitely has a lot of salient advice.  His article is entitled, "When Should You Get a Pre-Nup?"

http://www.torontofamilylaw.com/article_When_to_Get_Pre-nup.php

http://www.bankrate.com/can/news/rrsp-rrif/Apr11_remarriage_tips_plan_1can.asp

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.

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?

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

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.......