A Caring Plan for Sick Parents


In Toronto, a couple we'll call Tom, a retired engineer, and Molly, who runs a small business, are in a quandary. Both 57, they are in the sandwich generation caught between the needs of their children, ages 26, 24 and 20, and their aging parents.

Molly's mother is 79 and widowed. She has diabetes, smokes heavily, and appears headed for institutional care. Tom's dad, who is 89, has kidney disease and is planning to move to a retirement home in the near future. Both parents have substantial assets that will pass to their estates. For now, Tom and Molly want to develop a financial strategy to manage the costs of care for their parents and to ensure that various probate taxes and capital gains taxes levied at death will not impair what their own children will eventually inherit.

"No integrated financial strategy has been defined for our parents," Tom explains. "Significant estates will flow to me and to Molly. The dilemma is that if no appropriate action is taken, federal income tax laws and provincial probate fees will ultimately cheat their grandchildren out of a better life."

What our expert says:

Facelift asked Derek Moran, a registered financial planner based in Kelowna, B.C., to work with Tom and Molly in order to sort out their options. They have a combined net annual income of $100,000 and their children have average gross incomes of $36,700 a year. But the eventual deaths of Molly's mother and Tom's father will add $1,385,000 to the couple's current $1.27-million net worth, most of which is in their $500,000 house and their $350,000 cottage.

"Tom, who is in charge of family finances, needs to increase cash flow from the grandparents' capital as the care they need grows over time," the planner says.

The problem is not so much financial as administrative, Mr. Moran adds. Probate fees are a relatively small cost. Tom's father's net worth of $570,000 is mostly in cash, a large part that came from the $360,000 proceeds of the sale of his house. Another $170,000 is in life insurance assets, which, if passed to named beneficiaries, will not be subject to probate costs, though income tax may be charged on guaranteed income certificates outside of the registered plans.

Molly's mother's assets are a collection of mutual funds, bonds, stocks, real estate and gold. Her estate will have capital gains exposure at her death.

It would be possible to trigger capital gains taxes before death, crystallizing capital gains and reinvesting or even distributing money via powers of attorney given to Tom and Molly. The concept is tax averaging, but, Mr. Moran cautions, tax minimization should not be the driving force in investments. Suitability of investments and returns are more important.

The problems to be considered are therefore what to do with $360,000 cash from the sale of Tom's father's house. The solutions are actually fairly simple, the planner notes. Tom's dad's annual income is $23,000. There is no danger of having his Old Age Security payments reduced by the clawback, which begins at $63,511 a year of net income.

The $360,000 can be invested in guaranteed investment certificates sold by life insurance companies. They can be laddered to mature in two, three and five years and rolled over as they come due. The money will be safe, interest can be paid regularly, and the money, if distributed to named beneficiaries, will not go through probate. The GICs will be immune from most creditor claims. But it is important that the money stay in Tom's father's name for the balance of his life. Health care cost deductions are limited when paid by caregivers, but unlimited when claimed by the persons receiving the care, the planner adds.

Molly's mother has a more complex problem. Her $815,000 of assets include appreciated common stocks, numerous insurance-based segregated funds that guarantee most or all of their initial cost when held for at least 10 years, and about $80,000 in cash-equivalent assets.

Molly currently spends $2,900 a month on her mother's care, a bill that could rise to $4,120 when she moves into a retirement residence. Molly's mother pays current costs out of her own income. She can increase her cash flow by raising payments out of her registered retirement income fund. Her annual income of $40,000 is far below the Old Age Security clawback start point and after medical deductions, her taxes are likely to be very modest. Boosts to her cash flow can be used to pay for health and care costs. Those costs will be tax deductible as long as she pays for them herself.

Tom does have a problem that he has so far failed to recognize, Mr. Moran notes. His present pension is $60,000 a year and is indexed to rise with inflation. He will be eligible for Canada Pension Plan payments at age 60 and Old Age Security payments at age 65. Those sums will push him over the start point of the OAS clawback. If he also inherits substantial sums from his dad, the problem will become more serious.

There is a solution in a trust, Mr. Moran says. A codicil can be added to both parents' wills directing that their estates go to a testamentary trust for the benefit of Tom in the case of his father, and to Molly in the case of her mother. The money will be taxed in the hands of the trust at graduated rates. Once the trust has paid tax on the income, Tom and Molly are free to use it as they wish.

Tom and Molly need to move swiftly to deal with their family's tax and investment issues, Mr. Moran emphasizes. "Both parents are nearing a point at which they may be incapable of managing their affairs."

There are costs to rearranging the affairs of three generations of the family for the ultimate benefit of the grandchildren, Mr. Moran notes. "As well, Tom needs to focus on the use of trusts to split income. That plan will save the family a great deal of money and add to their security."

Client situation

The Couple

Tom and Molly, both 57, live in Toronto and are caring for two elderly parents.

The Problem

How to pay for increasing care costs while controlling present and future taxes.

The Plan

Use trusts to average income for the family.

The Payoff

Reduction of taxes by as much as $20,000 a year.

Net Monthly Income



House $500,000, cottage $350,000, registered & other financial assets $172,000, small business $250,000. Total: $1,272,000.

Monthly Expenses

Property taxes house and cottage $492, utilities $590, food & restaurants $970, entertainment $460, clothing $250, RRSP $600, car fuel & repairs $417, travel $540, life insurance $125, car & property insurance $375, fitness $160, charity & gifts $330, interest $150, miscellaneous $850, savings $2,024. Total: $8,333.


Lines of credit: $25,000.

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