Financial Challenges in Adversity – A Case Study

Todd, an engineer, and Margo, a part-time daycare worker, are 54 years old, live in Vancouver, and have two adult children. Joseph is 25, lives with his parents, and hasn’t shown the ability to hold down a job or save money. Selena is 27, married, and is financially stable in her own home.

Todd found out in August he has an illness that will rob him of the ability to walk in the next six months and he will most likely not survive three years. He and Margo have spent most of their income raising the kids and paying for their home, now worth $2.6 million, with a mortgage of $200,000. Todd has $450,000 in an RRSP, Margo has $250,000 in her own RRSP, and they have $50,000 in savings. Their plan was to pay off the mortgage and accumulate enough money in the last 10 years of work, retire at age 64, and stay in the house they had renovated over the years to raise their family.

Todd had done most of the work regarding their finances, and Margo understood only the outlines of the plans to save heavily after the kids left home and retire in 2033. After Todd’s diagnosis, they realized they needed professional help to navigate their new future and sought us out.

The first thing we did was to advise them to engage a counsellor to help them with the emotional fallout of the diagnosis, acknowledging that having a cohesive family was paramount to coping with the coming changes.

Next, we had Todd tell his employer of his illness and his intention to apply for Long-Term Disability benefits. Since he was physically able to work, Todd elected to accept an unpaid leave of absence until the illness disabled him. We made sure Todd would not quit his job, as staying employed ensures the retention of the disability benefit as well as the group life insurance policy that covered him for $280,000 (twice his salary).

We started documenting their finances so that Margo could assume full control. First, a detailed Net Worth Statement to list all their assets and the mortgage, as well as credit cards and line of credit. It was important to automate all payments and ensure that the bank account would have sufficient funds when Todd died, so that Margo could mourn without worry.

Margo started creating a list of all their subscriptions and memberships, making sure she had all the usernames and passwords.

We started a discussion about how to get through the last few months of the year without income, and determined that Margo could draw from her RRSP with very little tax since she had only earned $15,000 to the end of August. The additional $20,000 they would need would only be taxed at 20%. In January, we could draw from both RRSPs at a low tax rate, as Todd and Margo would both have no other taxable income (Margo quit work to spend time with Todd), and the monthly disability benefit of $6,000 (non-taxable) would start likely in March or April and last for the remainder of Todd’s likely lifespan – two more years.

They would have enough income to pay increased medical expenses and modify the home for Todd’s time in a wheelchair.

Now that we had taken care of the very short term, there needed to be a serious estate planning discussion. Their wills had not been updated since they were drafted, shortly after their marriage 30 years ago, before the kids arrived.

Margo was to inherit everything, and we ensured that she was a joint owner of all bank accounts, the home, the cars, and that she was the beneficiary of his RRSP and life insurance.

We counselled them to have new wills that reflected the children’s situations. Todd and Margo concluded that at the second of their deaths, Joseph’s inheritance would not be in cash like Selena’s but would instead come 25% in cash and 75% in the form of a trust that would pay him a steady income for 10 years, after which he would receive the residue. The idea was to provide Joseph additional time to learn about financial responsibility.

After several weeks of working together and a few counselling sessions under their belts, we had a frank discussion about Margo’s life after Todd’s death.

Margo said she would likely sell the home, pay off the mortgage, and move back to Calgary where they had grown up and their siblings lived. She’d only need a small place and would net roughly $2 million from the move.

Margo said she would probably continue to work part time, maybe earning $30,000 annually to age 64 to keep herself busy and build a new community around herself.

We conducted projections showing Margo could afford a lifestyle she would be happy with, and still leave the value of her home and $400,000 of investments to her kids. This lifestyle affordability calculation will be produced every two to three years for the rest of Margo’s life, to ensure she remains on track.

A very difficult moment in our new relationship was telling Todd that he should borrow $40,000 in order to maximize his Tax-Free Savings Account (TFSA) contribution (along with some of their cash) before he dies, and ensure that we contribute the maximum early each year. Margo will maximize her own TFSA either from the eventual life insurance benefit or from the house proceeds. They can pay off the loan over the next year or two.

There were many other considerations to discuss and handle. Most important was for us to document everything for Margo in a format she could understand and reference, and to reassure her we are an ongoing resource for her. This life change is a major undertaking, and she’ll need to read and absorb information at her own pace, when time permits. A well-documented plan and regular meetings will help her accomplish that. ■

Alain Quennec

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