Integrating Retirement Planning in Estate Planning
Retirement and estate planning are considered separate for many reasons. One plans finances after retirement, and the other plans finances after death. While retirement planning is for yourself, estate planning is for your loved ones. But there are several overlaps as both involve building wealth during working life and preserving it in the second half of your life.
A strong estate plan protects, manages, and distributes assets in a way that supports your retirement goals while you are alive and your loved ones’ financial goals after you are gone. Integrating retirement planning into your estate make your assets pay for retirement while keeping them safe from excess taxation and creditors.
What Does One Need?
For individuals, the most common sources of passive income are government benefits like the Canada Pension Plan and the Old Age Security (OAS) pension. Then there are Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and other registered and non-registered savings accounts.
Business owners have the above retirement savings instruments, as well as trust and holding company structures, to manage the transfer of their company’s shares. Shares of private companies cannot be held in registered accounts. Hence, they need estate and succession planning to pass on their business or its income to loved ones. This same trust can also be used to earn dividends through retirement years while keeping their shares safe from personal or business creditors.
Most assets listed above are deemed to be disposed of at fair market value (FMV) when you die or when you gift them to your loved ones while alive. The change in ownership is considered a disposal and triggers a tax event. The estate must pay capital gains tax on it. Not just the assets, even the passive income like CPP and OAS, except TFSA withdrawals, are taxable.
Aligning Retirement and Estate Planning
You don’t want the Canada Revenue Agency (CRA) taking a big bite out of your estate and retirement savings. This is where retirement planning integrates with estate planning. Together, they minimize taxes and protect your estate assets and retirement income from unnecessary risk.
RRSP in Retirement Planning
Let’s take the case of RRSP in the context of both retirement and estate planning.
RRSP withdrawals are taxable. After you turn 71, the RRSP ceases to exist. If you don’t want to pay tax on the entire RRSP balance, you have to transfer it to an annuity or a Registered Retirement Income Fund (RRIF), which has a minimum withdrawal rate. This withdrawal rate increases with age. So if you have a significant RRSP balance, RRIF withdrawals will be high and added to your taxable income.
A high taxable income due to high RRIF withdrawals could result in OAS clawbacks that depend on your previous year’s taxable income. You are not only paying a higher tax on higher RRSP/RRIF withdrawals, but you are also losing government benefits such as OAS.
A professional accountant can help you identify the ideal RRSP balance for your estate and determine when and how much you should withdraw to minimize tax liability and maximize OAS benefits. The accountant will review all your income sources, the OAS income threshold, and RRSP balance, and create a financial model with different scenarios, permutations, and combinations so you can enjoy maximum retirement income with minimal tax liability.
RRSP in Estate Planning
The same RRSP can also form a part of estate planning, as the balance will be transferred to your beneficiaries after your demise. After your death, your unused RRSP/RRIF balance is added to your taxable income unless it is transferred to the surviving spouse or a dependent child under certain conditions. If you don’t have either, you might want to reconsider reserving RRSP balance for later. OAS is, anyway, not transferable to beneficiaries.
A professional accountant will wear the estate-planning hat and devise a strategy that considers your financial situation, beneficiaries, and, accordingly, reduces your RRSP balance to minimize estate taxes.
Key Considerations When Integrating Retirement and Estate Plan
Rising healthcare costs, economic uncertainties, and longer life expectancies increase the risk that retirees will outlive their retirement savings. This calls for an estate plan to finance retirement. When planning your estate, make sure to address the following:
- Create a Sustainable Withdrawal Strategy: Withdrawing from your estate is a strategic decision that should account for taxes, required minimum distributions, estate-planning objectives, and economic scenarios. Considering you have a significant stock portfolio, you might want to refrain from withdrawing large amounts during a market crash, which could permanently shrink your portfolio. If you have a dependent child or spouse, you might want to leave behind a significant estate rather than deplete your retirement savings.
- Budget for Long-Term Care Cost: When building your estate budget, consider potential long-term care expenses, medical costs, and unexpected financial challenges. You could consider buying long-term care insurance, Medicaid, and building a separate asset that only covers healthcare needs. That portfolio could have a higher growth rate that matches medical inflation.
- Planning for Incapacity: Many avoid this in retirement planning. However, both young and old should think practically about their health. Select a trusted person and give them power of attorney to manage your finances and another to make medical decisions on your behalf in case you are not capable of doing the same.
- Communicate Your Plans to Beneficiaries: While you may make the best of the retirement plan and build a large estate, it can all still end up in the hands of the CRA and creditors if not communicated to the beneficiaries. Make sure you write down the withdrawal strategy, your financial objectives, and your will in plain language and make that document easily accessible. A plan is as good as its execution.
- Review Your Plan Frequently: The future is continuously moving. What looked like a great plan yesterday may not work today, due to life changes, changes in tax laws, a shift in business circumstances, or the single largest asset in your estate losing value. A timely review of your plan will keep it up to date and relevant to the current environment. For any major changes, especially in tax laws, you should not even wait for the review and act to protect your wealth.
Your retirement is your responsibility. It takes years to build wealth, but one wrong decision can lose it. While you may be an ace at finances in your day-to-day, when it comes to loved ones, your health, and retirement, emotions often take over. Having an unbiased professional accountant by your side to navigate your finances and taxes through a changing environment can ensure your retirement is peaceful and your estate is protected.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Retirement and Estate Planning
Talk to a professional accountant to help you structure your retirement portfolio and estate in a way that generates tax-efficient retirement income and estate transfer. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and estate planning services, contact us online or by telephone at 905-517-2297.
