For terminally ill family members, here’s a 10-step estate and tax planning strategy to improve the total value of the TFSA

Q: My dad just turned 83. We are lucky to have had him for so long as he had a kidney transplant many years ago. Sadly, Dad has now been diagnosed with terminal cancer. He is receiving respite care at home and his doctor says it is a matter of weeks before he dies. Mom will be fine financially because they own their home frankly, she will receive her full pension, she is the beneficiary of her $75,000 life insurance policy and has her own CPP and OAS pensions. They also each have $40,000 in their TFSA. Would it be wise to close dad’s account and use the money to top up mom’s TFSA before he dies?

A: I’m so sorry to hear about your father’s prognosis and I’m glad you can spend his remaining time with him. Cherish this opportunity.

I recommend that you don’t close your dad’s Tax-Free Savings Account (TFSA) and instead do the exact opposite by implementing a 10-step estate and tax planning strategy to increase the total value of the TFSA. . It is easy to implement and will be of great benefit to your mother. But you must act quickly because the first five steps are essential and impossible after the death of your father:

1. First, make sure the TFSA is set up correctly to receive special tax benefits when passed on to a spouse. Each annuitant (TFSA holder) may designate a beneficiary, but if they choose to have their spouse (or common-law partner) inherit the TFSA proceeds, the annuitant must designate their spouse (or common-law partner) as successor annuitantrather than an ordinary Beneficiary. The benefits will become evident in the remaining steps of the strategy.

2. Next, determine exactly how much TFSA room your father has left. Check their account statement or ask the financial institution that holds their account. Remember that TFSA limits are based on contributions – Not current assess. So, although he currently has $40,000 in his account, your father may have contributed less than that and the investments held in the TFSA have grown to the value of $40,000; or he may have contributed more than $40,000, but the value of the investments has declined to $40,000 now.

3. The lifetime TFSA contribution limit is $81,500 in 2022. Suppose you determine that your parents each contributed a total of $35,000 to their TFSA. Therefore, Dad currently has $46,500 in unpaid contribution room ($81,500 in room minus $35,000 in contributions). (This also assumes that he made no TFSA withdrawals in the 2022 tax year; you’ll need to confirm this from his TFSA statement or from his financial institution.)

4. Redeem all the investments held in your mother’s TFSA, which total $40,000, as you indicated. There will be no withholding tax or tax consequences for her in 2022 (some of the tax advantages of a Tax-Free Savings Account).

5. Use the $40,000 from your mother’s TFSA to contribute to your father’s TFSA. His TFSA contributions will then total $75,000 (that is, his own contributions of $35,000, plus your mother’s $40,000). Dad will still have $6,500 of unused TFSA room available (the $81,500 limit minus $75,000 in contributions). If they have $6,500 on hand, they can also contribute that extra amount; otherwise it is not a problem.

My next Money for Life column will provide the remaining five steps to complete the enhanced TFSA inheritance your father can leave to his wife. In the meantime, continue to spend as much time as possible with your poppa as you immediately begin implementing my 10-step sequence. You must not delay if you want to help your parents as much as possible with their finances, because these first five steps must be completed before your father passes away.

Thie Convery, RFP, CFP, CIM, FMA, FCSI, is a Wealth Management Advisor in Dundas and has a fully maximized TFSA with a designated successor annuitant. His column appears bi-weekly in The Hamilton Spectator. Thie invites your questions to [email protected] or by visiting ConveryWealth.com.

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