The news is chilling, almost anesthetic, and the last thing you’re thinking about are dollars and cents. But as reality sinks in, many are able to be practical and can plan for the future. You or a family member just received bad medical news, the doctors call it a terminal disease with an exceptionally low probability of survival, what do you do next?
Your doctor delivers the bad news and advises you to put things in order. Do you know what to do? Do you even know where to start? If you’re reading this, it probably means that you or a loved one has received some very bad health news, possibly a terminal diagnosis, and you’re wondering what must be done from a financial perspective. This article goes over all of the financial planning steps we took as we planned the end of her life.
Wills
Angus Reid Institute poll finds that half of Canadians (51%) say they have no last will and testament in place, while only one-third (35%) say they have one that is up to date and 15% say that their will is not up to date.
In Canada, if you die without a will, the law assumes that you die intestate and your assets are distributed according to the laws in the deceased’s home province. Usually, the assets go to the legal spouse and the children, but the laws are different for each province and things get complicated if you do not have a spouse and/or kids. Here are the rules if you live in Ontario.
An end of life checklist begins with a review of the will assuming it exists. If you don’t have a will or it is outdated, it’s critical to sit down and prepare one immediately. It means an appointment with an estate planning lawyer. Many of will that were drafted a log time ago. Without going into the fine detail, the most critical issues are: beneficiaries, executor, guardian for our young children and a secondary will for corporate assets.
In most cases, on first death, all assets are inherited by the surviving spouse and on the second death, assets are inherited equally by the children. In order to bypass probate, a secondary will is prepared for corporate assets. We understands the need to separate personal and corporate assets in the estate planning process.
Wills and secondary wills are very complicated documents and prone to disputes by beneficiaries and potential beneficiaries, for this reason, we suggest hiring a professional (e.g. an estate lawyer) to prepare the legal forms.
Powers of attorney
If an illness prevents you from making financial or health care decisions, you’ll need to appoint someone to act on your behalf, which is known as a Power of Attorney (POA). In Ontario we have two POAs:
- Personal care: for medical treatments, and
- Property: for financial assets.
If you don’t have POAs and become incapacitated, your spouse or family may not be able to make financial and medical decisions on your behalf. They may need to apply to the court to become an appointed guardian. In our case, we selected each other as our Attorney and selected our children (with equal rights) as alternate Attorneys, in the event of a common event.
It’s simple, your end of life checklist must include POAs and they’re usually completed together with the Wills.
Life insurance policies
The next step of the end of life checklist is to locate your life insurance policies, to discuss the death benefit with your beneficiaries (spouse) and to store them in an easily accessible location.
Life insurance policies aren’t as simple as they may seem. Often, they’re in plain sight, however, sometimes life insurance coverage is hidden. For instance:
- Mortgage or line of credit insurance.
- Employer’s basic life insurance coverage (1-3X salary) for you and your spouse.
- Premium credit cards offer basic life insurance coverage.
- Affinity or alumni groups may cover members for basic insurance coverage.
In many cases, people may not have had life insurance other than a small group insurance policy offered by their employers. In hindsight, we recommend buying personal life insurance policies on the parent’s lives.
Critical illness insurance
You may have purchased Critical Illness (CI) insurance directly or through your employer’s group plan. If so, a terminal illness (such as cancer) will most likely qualify as a CI and you will be entitled to a payout for the amount insured.
The benefit from the policy may be used to help fund the cost of drugs or treatments that aren’t covered by your Ontario Health Insurance Plan (OHIP) or group private health insurance etc.
In some cases, for those who do not have CI, they may be fortunate that, other deductibles, their expenses may be covered by her OHIP and group benefits.
Disability Insurance
If you are unable to work because of illness or the side effects from the treatments (or for any other medical reason) you may be eligible for disability insurance (DI). This usually entitles the employee to continue receiving income (usually 67% of pre-illness income) for the foreseeable future.
If you’re self employed, you may have purchased a DI policy and the inability to work should entitle you to DI benefits.
However for most, some who work part time and income is inconsistent, they are unable to qualify for DI. In hindsight, the lack of DI does not make a significant difference in our financial planning decisions,
Health insurance
During a treatment phase, you may be advised by your doctors to take specific drugs that are not covered by your provincial health plan. These drugs will be your financial responsibility unless they are covered by any employer or private health insurance. Your employer or your spouse’s employer may offer health insurance covering the cost of catastrophic drugs.
End of Life resources may be significantly affected by the cost of experimental drugs, so it’s important to check your coverage before agreeing to take drugs that are not covered by the provincial health insurance or private insurance.
Registered retirement plans
The next step in determining your end of life wishes is to determine who inherits your Registered Retirement Savings Plans (RRSPs). In Ontario, RRSPs may pass tax free to the following people:
- A spouse or common law spouse,
- A financially dependent child or grandchild under 18 years of age, or
- A financially dependent mentally or physically infirm child or grandchild.
However, the above individuals must be named as beneficiaries in the RRSP.If the plans do not have a beneficiary, or the beneficiary is a person other than a person listed above, the after-tax assets will be distributed according to your will.
If your goal is to defer tax, select one of the three options above. In most cases, the beneficiary of RRSP accounts, as such, is the surviving spouse who inherits the tax-free RRSP and spousal RRSP. If you die with unused RRSP contribution room, the unused amount may be contributed to your spouse’s spousal plan.
Tax-free savings accounts
Any Tax-Free Savings Accounts (TFSA) are the next item on your end of life checklist. You may select your spouse or common law spouse as your beneficiary or as your designated successor.
We suggest designating the spouse or common law spouse as the designated successor. This allows you to combine the TFSAs into the surviving spouse’s TFSA and continue growing funds tax free. If you select the beneficiary option, the beneficiary receives the funds outside of a TFSA.
Joint ownership of personal assets
The biggest asset owned together by most people is the family home. If this is not the ownership structure, such as in second relationships, the house passes to the surviving spouse but you may have to probate the home and the cost would be 1.5% (for assets above $50,000) of the value of the home. Inheriting children would also have to probate the home again after the death of the surviving spouse.
An uncomplicated way to avoid probate is to place the principal residence in joint ownership with rights of survivorship with your spouse. This allows the home to pass automatically to the surviving spouse on first death. Hiring a real estate lawyer is required to transfer the principal residence to joint ownership with right of survivorship and later, upon the death of the first partner, transferring to the surviving spouse in name only. The same applies to bank accounts, non-registered investment accounts and other real-estate assets.
So, as part of your end of life planning, it’s important to evaluate whether each personal asset should be moved to joint ownership with rights of survivorship or left in your name.
Employer pension plans
Most employers offer a pension plan for their employees and the plans often include survivor pensions in the event that the employee dies while married. The survivor pension usually ranges from 60% to 70% of the full pension entitlement and is payable for the remainder of the spouse’s life.
If you are part of an employer pension plan, ensure your spouse is chosen as your beneficiary of the plan. This ensures that he/she will receive the survivor portion of your employee pension.
CPP survivor pension
Under certain circumstances, a widow or widower is entitled to a Canada Pension Plan (CPP) survivor pension. The calculation is complicated, but it’s important to note that the maximum CPP benefit you can receive is the maximum personal CPP benefit allowance, no doubling up of CPP entitlements.
In most case, they receive about $500/month of CPP survivor benefit until age 65, and afterwards, a personal CPP benefit to equal the maximum allowable CPP benefit.
Retirement projections
After the death of the first spouse, the surviving spouse’s financial life will change. For many spouses, their financial life is not as rosy after the passing of their spouse. In fact, without careful planning with a certified financial planner, income can be extremely tight.
Firstly, do not expect a 50% drop in lifestyle expenses instead, from our experience, a 30% reduction is more reasonable. Secondly, some sources of family income may stop or be reduced such as a lower survivor employer pension, a lower combined CPP, the loss of one Old Age Security, the loss of one or both salaries etc.
Given the spouse’s new financial reality of living alone, as part of end of life planning, we suggest reviewing the retirement goals and recalculating the retirement income projections. If you’re not sure how to recalculate your retirement income. Consult a financial planner.
In most cases, the loss of a spousal income causes the death of many retirement dreams and completely changes retirement income requirements.
The bottomline
If you or a family member received bad medical news, we’re sorry! We understand that end of life financial planning isn’t at the top of your ‘to do’ list. When you are ready, and we truly hope you will be, we recommend visiting your estate lawyer, your accountant, and your financial planner.
If you do not have such representation, you may want to start with a financial planner. Our team of professionals, discuss your wishes and organize your financial life affairs to ensure a simple transition and maximum financial benefits to your family moving forward in Keeping Life Current.