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Hi Everyone,

I recently lost my father and am now trying to deal with my parents finances and plan going forward for my mother. Neither my mother or I have very much investing knowledge and have left a lot of it up to the financial advisor my father used but am now wary of his ability to put forward a tax-effective plan going forward.

My mother has a sizable non-registered investment portfolio (over 1Mil) and his advice is to sell all the current investments and place them all in 2 Mutual funds to generate a steady monthly income, to me this sounds like a way for him to make his cut without actually having to do much day-to-day work.

The other issue is the fact my mother now has approximately 500k in her RRSPs, which if anything were to happen to her would result in a pretty hefty tax bill. My mother is 60 and in good health, and the FA has suggested buying complete life insurance to mitigate this problem ( a service his firm also sells) . While this would cover the 250k tax bill, it would lock up a large amount of capital that my mom would not be able to enjoy in her lifetime. I suggested buying a term policy for the next 10 years (much cheaper than a life policy) and actively depleting the registered account over this period of time.

My mom does not plan to return to work and her investments will be her primary source of income.

As mentioned in the subject line, I have very little finance knowledge but am willing to learn (already noted down some of the books suggested in other forums).

I guess Im looking for advice on:
1. Dealing with my dad's advisor
2. Diversifying portfolios
3. Effective taxation when it comes to withdrawing from RRSPs.

Any thoughts/suggestions or advice will be greatly appreciated.
 

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I'm so sorry for your loss.

An insurance policy - whether permanent or temporary - will be an expensive proposition for a 60-year-old woman (as it would be for a 60-year-old man). Do you need to worry about the taxes due on your mother's passing? Typically if you want to preserve the estate value the *heirs* pay the insurance premiums. Additionally, it is possible your mother will deplete her savings over time, reducing the tax bill automatically.

What I'm concerned about is that insurance is being framed here as a solution to a "tax problem" which may not really exist and/or may be exaggerated. However, insurance is being suggested as a tax dodge here because its risk management benefits are clearly not needed - your mom is self-insuring and does not actually need life insurance. (That is, the insurance salesperson can't sell insurance as a way to protect your mom's human capital, so he's suggesting it will protect her from a tax bill. Both arguments are problematic.)

For sure based on what you've written I would NOT make changes to your mom's portfolio at this point. You don't sound ready, and you have concerns about the plan being suggested. Both of these are reasons to stop and take a breath. I would strongly suggest getting an unbiased second opinion from someone who is not going to try and sell you an investment solution.

I have no more time to respond the moment but those are my initial thoughts. I know others will chime in with helpful advice.
 

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First of all....I'm sorry to hear about your father. Second of all....I'm not a licensed financial advisor so please take my advice with a grain of salt. With that being said IMHO your late father's financial advisor is trying to take advantage of you and your mother.

If I was in your position....I would get a second and even third opinion before selling anything. I'm not sure what part of Canada your in?

Here's a link to a moneysense article on fee-based financial planners.

http://www.moneysense.ca/2012/10/01/where-to-find-a-fee-only-financial-planner/

I would also hire an accountant to go over your mother's tax situation. Mutual funds are certainly not suitable for a portfolio of over a million dollars. Your late father's advisor will be laughing all the way to the bank with the high commissions he'll get. You would probably be better off with a fee based financial advisor who's licensed to sell individual stocks and ETF's. As usual just my opinion. Good luck.

Last thing...don't let your late father's financial advisor bully you and your mother. Remember it's not his money it's your mother's etc.
 

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Firstly, I'm very sorry to hear about your loss.

I don't know why your dad's advisor is recommending your mom to sell all the investments that he presumably set up in the first place. Why were they suitable for your dad but not for your mom? Selling them all in a non-registered account could result in a large tax hit for the capital gains. I would question him on this point.

As to the RRSP tax hit, that will only tax her estate. I would not buy life insurance for this. If she dies early, the tax hit will be larger, but so will the remainder of the estate to make up for it. If she dies later, the estate will be smaller, and the tax hit proportionately so as well. The money spent on the insurance policy is unlikely to be a good investment. If it were, the insurance company certainly would not want to sell it!
 

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Sorry about your loss. My father passed away recently as well and I know how hard it is.

It seems to me as well that your late father's financial advisor is trying to take advantage of your situation. If I were you, I'd seek a second opinion from an unbiased source. While you've said that investments are your mom's primary source of income, are there secondary sources? Is your mom going to receive any pension?

As MoneyGal pointed out, it doesn't make sense for your mom to buy life insurance coverage. It may make sense for her to consider annuities though. Check out an excellent book called Pensionize Your Nest Egg that MoneyGal has co-authored.
 

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CC - sorry to hear of your dad's passing! We are dealing with my mother-in-law's unexpected death last August and winding up her estate, so these issues are very much on my mind these days.

Another thought: if you are looking for tax efficiency, given the size of your mother's portfolio, discretionary management may be appropriate for her, as the fees (on non-registered accounts) are deductible. Are the funds in a discretionary account now? I suspect not, if the advisor is suggesting a move to two mutual funds.

As for annuities versus life insurance: one pays while mom is alive, one pays after her passing - they are essentially mirrors of one another. (In case that is a useful analogy.)
 

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Discussion Starter #7
Sorry about your loss. My father passed away recently as well and I know how hard it is.

It seems to me as well that your late father's financial advisor is trying to take advantage of your situation. If I were you, I'd seek a second opinion from an unbiased source. While you've said that investments are your mom's primary source of income, are there secondary sources? Is your mom going to receive any pension?

As MoneyGal pointed out, it doesn't make sense for your mom to buy life insurance coverage. It may make sense for her to consider annuities though. Check out an excellent book called Pensionize Your Nest Egg that MoneyGal has co-authored.
Thanks Canadian Capitalist and everyone else in the Forum for your speedy responses and condolences.

My mother will receive an EXTREMELY modest pension but it hasnt been factored into her financial plan.

I am definitely not in any position to advise my mother or the financial planner on investments at this point. We were advised to consolidate accounts from other financial institutions and combined with the life insurance proceeds from my father we have approximately 400,000 sitting as cash that should be invested. The FA advised that we split this among 2 mutual funds to generate monthly income and it was this suggestion taht set off alarm bells for me (and resulted in the original post). I think I've received the confirmation I wanted and will start investigating fee-only planners.

We would be looking for a planner either down town Toronto or in the west end of the GTA and am open to suggestions (Thanks for the article as well)
 

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Firstly, I'm very sorry to hear about your loss.
+1


As to the RRSP tax hit, that will only tax her estate. I would not buy life insurance for this...
Another factor to consider is whether the OP is going to be the executor for the estate.

If so, what happened with my uncle's estate may also help out. My mom and aunt (co-executors) filed paperwork to show it was a complicated estate to wind up. The result was that they had two years to wind-up the estate and two tax returns. This meant that the basic personal exemption applied twice and I believe they also spread out his charitable donations across the two years as well. I'm not sure if this is still the case but if so, spreading out the windup process will help tax-wise.

Then too - if one is executor and has discussed the option properly, there's directing more to the deceased's favourite charities instead of paying income tax to CRA. IMO, the way I'd structure it is for a minimum to go to whatever charity and discretion to the executor for a set amount in addition. Of course this assumes that there is a high trust level.


As well to minimise the tax hit, my mom has once in a while given larger than normal gifts to the kids/grand-kids so that it's a smaller pile when she passes on.


There's no mention of anything in a TFSA so I'd also look at loading that up as it is tax-free. Just make sure to have a "successor holder" named (if appropriate) so that the TFSA can be passed on tax-free.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/dth/sccrhldr-eng.html


The other thing to check out is what will happen when the RRSP is converted to a RRIF as well as how any CPP, investment income and other sources of retirement income add up. It may make sense to withdraw from the RRSP while there is only the investment income with any additional sources to minimise the year on year tax hit.


Bottom line for the OP to take the time to understand what is being done and why as a reasonable pace. Rushing into the wrong decision is likely going to be the most expensive.


As usual, I'm not an expert so make sure to check out any of the options suggested to make sure they are still available and that they fit the specific situation.


Cheers
 

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Sorry for your loss. I have some experience in this situation. My father died in 1996, and I took over my mother's investments at that time until she died in 2010. I am an only child, so there was no one else to consult with. They had no life insurance, but a sizable investment portfolio.

One important thing to consider: There is no need to to anything immediately. You have lots of time to craft your own solution, and don't be pressured by your father's advisor to do anything right now. It seems that your father had everything taken care of very well.

A good thing to remember is "sometimes the best investment strategy is to do nothing".
 

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My mother will receive an EXTREMELY modest pension but it hasnt been factored into her financial plan.
This is why she might consider "pensionizing" a portion of her nest egg, i.e., purchasing a personal pension plan (an annuity) from a life insurance company.

I am going to PM you one recommendation for a fee-only planner who specializes in retirement income planning.
 

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Sorry to hear about your loss.

My advise would be to:
1) Listen to Moneygal, her advice and help is worth it it's weight in gold and always spot on.
2) As other have said do not rush to do anything, take your time to evaluate the situation and gather as much info as possible before making any changes so you will be armoured with knowledge when trying to help your mother. Buying mutual funds in this case is indeed a salesman attempt to collect commissions, nothing else.
 

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Discussion Starter #12
Thanks for all the advice everyone, it really helped.

Since last posting, we have explored a few options and further realized that our current FA is completely wrong for us.

As suggested, we started shopping around and most of the planners we've met have suggested purchasing a diverse portfolio of blue chip dividend paying stocks along with a bond ladder and some insurance products to generate income and minimize fees (using a fee per trade basis instead of discretionary advising)

As mentioned before, the investments will be my mom's sole source of income going forward. My interpretation of the situation is with her account size we are creating her own mini mutual fund without having to pay MERs, is this too good to be true? Is the risk much higher than purchasing a variety of mutual funds ? (We've met a finacial planner who I believe would be capable of executing it, but he is not a professional fund manager)

Would appreciate any feedback on the matter and happy early Canada Day!
 

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Sorry to hear about your loss.

I recommend getting a couple of different opinions before making a decision.

Yes, I personally view all of my holdings as my own mutual fund of sorts. Your only risk is that the company runs into trouble and cuts the dividend, see recent history for Manulife and Yellow Pages. Having said that the bonds should provide a stable return. Most blue chip companies will increase the dividend annually, so your Mom could actually get a raise, or at the very least keep up with inflation/cost of living.

Good for you for taking it upon yourself to look into this and help her out.
 
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