It's Your Money  

Consider the implications

I hear from many retirees who want to add their children onto the title of their home so that it bypasses their estate and probate.

In their minds, it is as simple and easy as signing a few forms and with all the potential benefits, is considered a no brainer. 

Joint ownership of property is a popular estate-planning tool, but many don’t understand how much potential risk it involves. Unfortunately, like many aspects of financial planning, it is just not that simple.

Anyone considering transferring a house or any other asset such as an investment or bank account should first consider all the legal and tax implications of such a move. 

Matrimonial claims

If an asset is transferred to joint ownership with your child, their spouse or common law partner now has a potential claim against that asset since their partner (your child) is now an owner of said asset.

No matter how strong you feel their marriage might be, people split up for various reasons and your house could now be part of the assets that are divided up in that divorce. 

Exposure to creditors

Much like matrimonial claims, your child could end up facing a personal or business debt or liability from any number of things, even something like a car accident.

Your home or investment account is now considered one of their assets and creditors would have the ability to come after it. 

Immediate tax consequences

A transfer to joint ownership with another person can result in an immediate disposition of property for income tax purposes.

This triggers any unrealized capital gains which will result in immediate tax. If a house is a primary residence, it likely won’t trigger any taxation but a family cottage or an investment account being rolled into a joint ownership position could result in a big tax bill. 

Loss of control

One of the biggest risks of transferring to joint ownership is the loss of control of the asset by the original owner.

In the case of an investment or bank account, the new joint owner can drain funds or otherwise misuse them. Many people considering such a move will wave it away since they trust their child so much, but the risk cannot be ignored.

Unfortunately, people do change and a mental breakdown or substance abuse problem in the future could cause them to act quite differently from the way they do now.

As a parent ages, a child may think that they know what is best and a difference in opinions can lead to disputes on when the timing is right to sell the home and move into assisted living facilities. 

Incapacity complications

A joint owner of a property does not automatically have the right to make decisions regarding the asset on behalf of another joint owner who becomes incapable due to dementia or other reasons.

If a proper legal framework is not in place, the joint owner (child) may end up having to make decisions regarding the property with some appointed as the incapable owner’s attorney or legal guardian.

This appointee may have a legal obligation to liquidate the property which might not be in everyone’s best interest.     

The above is just a sample of the many legal and financial complications with transferring your home or other assets into a joint ownership structure.

A decision to transfer property into joint ownership is far more complex than many realize and should not be done is haste to simply save on some probate fees.

Be sure to seek out professional advice if you are contemplating such a move so that your unique circumstances can be considered.      


Is fear your investor guide?

Is a fear of the stock markets going to ruin your retirement?  If you’re under the age of 40, it just might. 

Canadians at all stages of life can struggle to adequately prepare for retirement, but the younger generations are at particularly high risk right now; and if something isn’t done to change this soon, the retirement world in another couple of decades will be far worse than it is now. 

There are a lot of reasons why the Gen Xers and Millennials (those Canadians aged 18-40 right now) are falling behind in retirement planning including far fewer defined benefit pension plans being offered and more choosing to work freelance or start their own companies.

But the biggest reason of all may just be plain and simple fear. 

You see, the Baby Boomers retiring today have been through several stock market cycles and have become a little less phased by the ups and downs of market turmoil.

Those who stayed invested through 2008 have seen tremendous gains in the extended bull run that we’ve enjoyed since.  

The younger generations however began their investment careers shortly before 2008 or even just before the dot.com bubble burst in the spring of 2000. 

They experienced two “once in a century” market events inside of their first decade as an investor and many don’t have the stomach for it anymore.

Although many of these same younger investors may not have been seriously hurt in 2008, they were likely affected by their parent’s experiences and depressing economic news while they were beginning to launch their own careers and become financially independent. 

A study last fall found that 80 per cent of those aged 18-35 saved regularly, but only 47 per cent of them invested their savings. Many of those that were saving were putting their money into low risk vehicles like GICs and high interest savings accounts. 

Sure, a small group of these savers might put away enough on their own to retire, but the clear majority will need to rely on investment growth to fulfil their retirement needs. 

A 25-year-old investor putting away $500 per month until they reach 65 would have a nest egg of $1.31 million if they were able to average a seven per cent per year rate of return. 

That same 25-year-old would only have $463,000 at age 65 if they earned an average of three per cent per year. 

You really have two choices to make with your retirement savings. You can accept lower rates of return or you can adjust your risk tolerances to accept some level of market risks. 

There is a huge cost to not starting to invest your savings at a young age and the fear surrounding market volatilities is setting up the next generation of retirees for a big surprise.

The key of course is to build an investment strategy with a tolerable amount of market risk and volatility and not go into something that your fears will force you to sell out of at the wrong time.

Riding out the inevitable ups and downs and not investing in anything too high risk is a key component of a well-rounded retirement savings plan.          

Be sure you're covered

A few years ago, a good friend had a brain aneurysm that nearly cost him his life.

While the road to recovery has not been easy, I’m happy to report he’s doing quite well these days and is able to be there to for his wife and two young kids.

I was excited to see him post on social media recently that after four very tough years, they were going on their first family vacation to a resort in Mexico for two weeks.

But that same post got me thinking. What would happen if he had a medical event while in Mexico? Would he qualify for any type of travel medical insurance? 

After reaching out to him, I found out that he had been told the optional travel insurance offered with their vacation package would be just fine, so he had planned to use that.

A quick scan through the fine print told me that he would not be protected at all. Fortunately in this case, we were able to catch this serious risk in time and found an insurer who would provide suitable protection that covered his previous medical conditions. 

There are far too many Canadians who pack their bags and head outside the country without realizing how much financial risk they are being exposed to without proper medical insurance.

It does not take long to rack up a $1 million hospital tab and the inability to pay this bill could lead many families to bankruptcy.

Many of these travellers have travel health insurance plans and incorrectly think they’re protected.     

The single biggest risk group I see is those who choose to travel while pregnant. For example, a few years ago a couple from Saskatchewan decided to go to Hawaii for one last trip before their first baby arrived. 

The wife was about 25 weeks pregnant and their insurance policy stated that a pregnant woman is covered for out of country travel up to the 32-week mark.

They even went so far as to consult with their family doctor who assured her that she was OK to travel still before they left. Their doctor however, could not speak on behalf of their insurance provider.    

While they did have insurance, they neglected to read the fine print. The same fine print that exists in every major travel insurance policy that I can find.

While the expectant mother was possibly covered, a policy I read from the same company stated, “If a dependent child is born while the child’s mother is outside of her province of residence, the dependent child will not be insured with respect to that trip.” 

In this case of this Saskatchewan family, the mother gave birth to a nine-week premature baby while in Hawaii and their new daughter spent almost two months in the neo-natal intensive care unit before she was strong enough to fly home.

Their total bill was just under $1 million.

This type of risk is not just for travel to the United States either. An Australian couple visiting Vancouver a couple of years ago had a premature baby at just 26 weeks gestation and their 90 days of care costs them almost $750,000 in our “cheaper” medical system. 

For anyone who’s pregnant, I strongly advise against any foreign travel beyond the four-month mark. Sure a premature birth may not happen to you but then again, it might.    

The point I’m trying to make is: you really need to understand what your travel insurance will and won’t cover and if you’re pregnant or have a pre-existing condition, travelling away from home might be a lot riskier than you think.

Before you pack your bags for one last trip, take a moment to consider how much it might really cost. 


Annuities are a great idea

Are you worried about outliving your retirement savings? Is there anything you can do?    

Most Canadians have this fear, and many choose to accept a certain amount of risk in their investment portfolios in hopes for the potential returns that will allow them to meet their needs. 

Others are not, however, willing to accept the market risks and volatilities and choose instead to hold their retirement savings in GICs or other low risk, interest-bearing vehicles.

These low risk investors still worry just as much about meeting their retirement goals yet don’t seem willing, or don’t know how, to do something about it. 

For many of these retirees, an annuity might be the ideal option, yet few Canadians are using or planning to use an annuity right now.

Why is that?

With our low interest rate environment, annuities have fallen out of favour, yet the people who should be using them seem perfectly happy to accept the low-interest rates that they’re earning in GICs.

More than likely, the real reason most people who should be using annuities are not is the fact that they simply aren’t aware of them and the bank teller who sells them their GICs is unaware of or not allowed to discuss these options. 

An annuity provides a predictable income stream that is guaranteed for as long as you live.

They can be particularly helpful to guarantee the ability to cover your fixed monthly expenses and then you can use additional savings to fund travel and other elective costs. 

Purchasing an annuity is best described as purchasing a defined benefit pension plan. Once set up, you don’t need to do any follow up or management and much like a pension, your retirement income will come in every month as long as you live, regardless of what the stock market or interest rates do. 

To help explain, let’s look at an example.

Fred is a 65-year-old widow who retires next month from his business that he has run for the past 35 years. He has already sold the business to someone and will get a $500,000 cheque when the transition is complete.

Since Fred poured all his efforts and disposable income into the company over the years, he has no other retirement savings but also no debt. Fred worries about ensuring that his money will last as long as he does since his parents are both 85 and still healthy.

He is also very wary of the stock market as he lost a bunch of money a few years back and would prefer to keep all his money in GICs and take on as little risk as possible.

Scenario One:

  • Fred invests in GICs and earns an average of 2.5 per cent per year in interest. Fred wants to guarantee income to age 95 (I’ve removed inflation from both scenarios for simplicity, but it can be built in to both options). He would be able to draw $25,300 per year from his GIC portfolio and would run out of money at age 95.

Scenario Two:

  • Fred purchase a life annuity with his $500,000. The annuity provides a guaranteed lifetime annual income of $31,631 and Fred doesn’t have to worry about market risks or interest rate movements at all. 

For the GIC option in Scenario One to break even with the annuity, it would have to earn 4.6 per cent per year in returns — considerably higher than GIC rates right now and unlikely they’ll be that high anytime soon. 

There are a lot of Canadians who would love to have the stress-free type of retirement planning that comes with a defined benefit pension plan yet still have all their savings parked in GICs.

If you think that an annuity product might be a good fit for your retirement, take some time to learn more and get a quote.

I would be more than happy to run an annuity quote for anyone interested as well, feel free to send me an email! 

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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