“Financial Checkup” is an ongoing series that discusses financial planning options. In this issue, Investment Executive speaks to Assante Wealth Management Canada Ltd. registered financial planners Michael Berton, Catherine Hurlburt, both in Vancouver, and Ivar Grimba in Toronto.

The Scenario: a 45-year-old woman with two children aged six and eight was suddenly widowed this past November. Her husband had been the manager at a small manufacturing company, earning $100,000 a year.

The husband’s salary covered the family’s living expenses and allowed him to maximize RRSP contributions each year. He had no pension but left $2 million in term life insurance and $300,000 in personal RRSPs.

The widow is also insured, with $500,000 in term insurance to age 65. She has $150,000 in personal RRSPs and $200,000 in spousal RRSPs. She hasn’t worked for nine years but was previously a journalist in Ottawa. She plans to work part-time as a freelance journalist and thinks she can earn $15,000 a year now, $25,000 in today’s dollars when the children are in high school and $30,000 a year when they go to university.

Having lived in Vancouver for the past five years, she has a home worth $800,000, with a $400,000 mortgage. She plans to move back to Ottawa, where she has family and friends. She believes she can buy a suitable house there for $500,000 and estimates the cost of the move — including real estate commissions, moving expenses, and renovations and decoration of the new home — at $100,000.

Her income goal is $50,000 a year in today’s dollars after taxes to age 95, excluding the costs of university for the children, for which she would like to pay. She has no estate goals.

The Recommendations: Berton and Grimba say the client could meet her annual income goal of $50,000 even if she doesn’t work. Assuming an average annual return on the $2.3 million in financial assets of 6% after fees and 3% inflation, both advisors project that the client would have almost $2 million in 2067 dollars at age 95.

This factors in increasing withdrawals to $90,000 from age 85, which would cover the cost of a nursing home, if needed, and the $50,000 for moving expenses, renovations and decorating.

Hurlburt thinks the client will spend the first year settling the family into a new school and neighbourhood and suspects it will take another year or two to get enough work to make $15,000. Normally, Hurlburt would advise against a move so soon after a spouse’s death; but, in this case, a move makes sense, given that the woman has family, friends and work contacts in Ottawa.

All three advisors consider it very important that the client make a new will, as well as designate financial and health powers of attorney. Because these are provincial in their applications, the widow could wait until she is in Ontario. Grimba, however, cautions that it’s best to do this immediately, then redo it in Ontario. The client doesn’t want any problems if something unfortunate happens before she moves.

Also, because the client is now a single parent, it’s critical that she appoint guardians for the children, trustees for the children’s money and backups for both. She also needs to decide how much money the children would get at particular ages. “People rarely manage the first lump sum they receive brilliantly,” Hurlburt points out. She recommends graduated disbursements for the children.

Grimba and Hurl-burt both recommend setting up a separate testamentary trust for each of the children. Such trusts are taxed individually, keeping the applicable tax rate lower than if there was just one trust. It’s also “cleaner” to have separate trusts for the children, says Hurlburt, particularly as they are not the same age.

Berton suggests that the widow purchase a registered life annuity that would pay her $2,000 a year and enable her to use the $2,000 pension credit before she’s 65.

The client doesn’t need term insurance, given her level of assets. But, Grimba says, the client could change the policy to a form of permanent life insurance so it can be used to pay any taxes payable after her death. Hurlburt notes that if the client keeps the insurance policy, either as term or permanent life, she should make an insurance declaration that establishes a trust for the money. Because only $500,000 is involved, one trust for both children should be fine.

@page_break@The client also needs to change the beneficiary on her RRSPs. Grimba recommends the client’s estate become the beneficiary. Otherwise, the children will receive the whole amount when they are 18 in the event of the client’s death.

The client should also submit a change in marital status report to the Canada Revenue Agency as of the date of her husband’s death. This will trigger the payment of all the social benefits due to her new, single/widowed status. These are based on her previous year’s income; payments received from July 2007 to June 2008 will be based on the 2006 tax return.

Berton estimates that the family would have been receiving only $19 a month for the Canada child tax benefit, given the husband’s taxable income of about $82,000. The client is now eligible for $526 a month for the CCTB, plus the national child benefit supplement until June 2008, when her entitlements will be recalculated based on her 2007 income. She will also automatically get 11 months of back payments and can apply for further back payments.

Hurlburt notes that for the client to get the CCTB and NCBS, her children need to be registered. That’s easy to determine: if they were registered, she would have been receiving the $100-a-month child benefit for each child as long as the child was six or younger.

As well as social benefits, the client will now get a Canada Pension Plan widow’s pension of $800-$900 a month, and her children will each get a pension of approximately $200 a month to at least age 18, or age 25 as long as they are full-time students in an accredited institution.

The client can also get a tax credit of $9,600 for one of the children as an “amount for eligible dependent.” This is in addition to the $2,000 tax credit for each child born in 1990 or later.

Further, RESPs should be set up immediately. Hurlburt suggests maximum current and catch-up contributions. She notes that if the client’s taxable income is less than $74,357, which it should be from 2008 onward, the RESP grant on the first $500 in each RESP will qualify for an additional 10% grant. She adds that as the grant is based on the previous year’s income, the client will qualify for an extra 20% rather than 10% this year because her income for 2007 will be less than $37,128.

Private extended medical and dental insurance, such as Blue Cross, may be a good idea, as well. It depends on whether the client feels it is important to have these benefits. Pre-existing conditions may be excluded from the medical insurance.

Hurlburt makes an argument for purchasing a $25,000 or $50,000 critical illness insurance policy. Although the client would have enough assets to cover the costs associated with a serious illness, she may be “reticent” about spending capital and depleting the estate in the event of illness.

Grimba recommends $100,000 in CI insurance because of the tests and medications not covered by the Ontario Health Insurance Program. Both he and Hurlburt believe it is too early to buy long-term care insurance, but agree it’s something that could be considered in another five years. Longevity risk is an important factor; Hurlburt points out that one out of two Canadians over the age of 80 lives in a nursing home for seniors.

It’s also important that the client keep all medical receipts in case she qualifies for the medi-cal tax credit. She should also keep receipts for physical activities to qualify for the $500-a-year children’s fitness tax credit per child.

Moving expenses are tax-deductible, but only if you have earned income in your new location. But, Grimba says, the expenses can be carried forward indefinitely, so the client will eventually get all of the deduction — assuming she earns enough.

One area in which the advisors disagree is the RRSPs. Berton thinks the client should start withdrawing money now. Otherwise, the RRSP will be so big when the client gets to 71 that the required withdrawals will push her into a high tax bracket. She will be in a clawback position with her old-age security payments as well. He suggests withdrawing as much as the client can while still keeping her income less than $74,357, the threshold of the next tax bracket, each year.

Grimba, however, thinks the client should leave the RRSP alone until she is 71 because of the tax-deferral benefits.

Berton also suggests putting $100,000 into informal trusts for each of the children. The capital gains would be taxed in the children’s hands, which would result in further tax savings. The money could be used for a down payment on a house down the road. Grimba agrees this is worth exploring.

Berton is also enthusiastic about the tax-free savings program proposed in the recent federal budget. The widow would be able to put $15,000 into TFSPs each year — $5,000 for herself and $5,000 for each child. The resulting tax savings on the income from this money will result in big tax savings down the road.

As for investments, Berton thinks the client would be more comfortable with a fixed-income portfolio initially, but suggests a 40% fixed-income/60% equity asset allocation when the client has made the transition emotionally.

Grimba also recommends a similar 40/60 asset allocation, unless the client is a sophisticated inves-tor — in which case, he would discuss a 70% equity allocation because of the client’s long investment time frame.

Both advisors recommend that two-thirds of the equity be in foreign equities because of the much wider choice of investments outside Canada’s resources-based economy. Most of the fixed-income would be in Canadian instruments, but about 5% could be in global bonds. Neither advisor recommends alternative products because they can be risky.

Grimba recommends multi-manager managed money solutions, such as wrap accounts, with a “value” tilt in investment style. His research suggests that value investing fares better over the long run. But the client should also minimize volatility with a diversification of styles. Grimba notes that Assante offers multi-manager solutions, which can include tax optimization, rebalancing and consolidated reporting.

Berton notes that the equity portion of the portfolio should be in a non-registered account because of the lower tax rate on dividend and capital-gains income. He suggests corporate-class funds, which are usually more tax-efficient. When the client starts withdrawing money, she could consider T-series funds because return of capital, which is not taxable, is distributed before capital gains. IE