Disabled Child: Financial Planning for Long Term Care
In this month’s case study, we’re sharing the financial story of a family with a disabled child who will require long term care. Before we introduce you, we’re circling waaay back to the beginning of the year (was that just eight months ago?!), when we let you in on our theme for 2020.
Each January, your Spring Plans team puts together a What We Want for You in (this year) article. It introduces the theme we want to concentrate on for the year ahead, something that’s become kind of a bee in our collective bonnet.
In this year’s What We Want for You, we looked back at 2019, when what we wanted for you was permission to design your life, which led to our Design Thinking theme. We know that we tend to do a lot of theorizing around here, and while 2019’s theme was an incredibly useful way to get the mental wheels turning, it could have left some people there, with wheels just spinning and spinning.
The next step, after thinking about something pretty thoroughly, is to make a decision (or several decisions), and to take action. 2020’s theme is a series of case studies, based on actual planning processes we’ve completed with the very cool people we have the honour of serving. The goal with these case studies is to show you exactly what happens when the rubber hits the road, after all that thinking is over.
So far this year, we’ve introduced you to Troy and Annie, Zoe, Baby and Johnny, Terri, and Isaiayah – all of whom had interesting and sometimes difficult financial decisions to think through and take action on. Whether debt was spiraling out of control, money was coming in and out weirdly, a life solo was being contemplated, or a portfolio had been left unattended for a while, we were able to help people make great decisions that moved them to the next level.
Financial Planning with Long Term Care of a Disabled Child
This month, we want to introduce you to Jesse, Tulip, and their children, Cassidy and Conor. This family immigrated to Canada from a middle eastern nation over 10 years ago.
Jesse now works at a big tech company in Vancouver that pays him exceptionally well, and also provides stock options and restricted stock units (RSUs) as part of his compensation package. Tulip decided to discontinue her career some time ago, when Conor was diagnosed with autism, and they learned that he would need care for the rest of his life.
After doing quite a bit of research about the types of advice available, Jesse and Tulip reached out to us with their key concerns:
- Taking care of their disabled child, Conor for the rest of his life – which will likely be much longer than their own lives
- Funding education for Cassidy… but is it worth it if he doesn’t go on to university?
- Funding their own retirement
- Dealing with their income tax burden, given Jesse’s high income and the limitations of RRSP, TFSA, and RDSP accounts
Despite Jesse’s high income, he was feeling resigned to the idea that he may have to work the rest of his life, and save every penny he can, in order to ensure the financial well-being of the family. Both he and Tulip were starting to feel pretty burned out with the amount of work on each of their shoulders and the lack of time that they had, not only as a family, but also together as a couple.
They gathered quite a bit of detailed information and brought it to Sandi, who helped them build a plan that frankly surprised them. With some changes to their cash flow management, and effective use of the tax planning tools available to them, she was able to demonstrate how they could fund all of their primary concerns in just two years. After that two year period is over, Jesse needs to work only to fund family living expenses until retirement – which he will be able to enjoy thanks to the early, rapid funding created in their plan.
The short story? Jesse can take care of his family, he and Tulip can retire at an age they think is appropriate. He can also choose a different job in the future that isn’t quite so stressful, allowing them all to spend more time together.
Of course, Sandi prodded and poked that plan to make sure it would still work, even if the price of those stock options and restricted stock units drop leaving Jesse with much less from selling them than he would have hoped. The plan even works if the company discontinues providing him with this unusual form of compensation in addition to his regular salary.
What were the tools that Sandi used?
Jesse’s RRSP and Tulip’s Spousal RRSP contributions were maximized, reducing some of the tax burden on Jesse’s income. Both of their TFSAs were maximized, and a large lump sum was added to non-registered (taxable) investments over the next two years. This funding, because they have such a long time horizon until retirement, makes it possible to retire when Jesse is 60.
A spousal loan from Jesse to Tulip was implemented, which she then used to invest in her own name. This allows the income on the investment to be taxed on Tulip’s tax return, moving that money from Jesse’s 53.53% marginal tax bracket to Tulips 29.65%. Tulip pays interest on the loan at the relatively low prescribed rate every year, and the result is positive for the whole family, particularly from an income tax perspective.
An RDSP for Conor was opened and front-loaded with the maximum lifetime contribution amount (rather than making annual contributions). This allows all of that money, and the growth on it, to be tax-sheltered right away. Government grants are then gathered each year until that maximum grant amount is exhausted. With the lengthy time frame until Conor is legally an adult, and the compound benefit of the tax-sheltering available through this useful account, Conor’s financial situation is projected to be stable for as long as he lives.
Tulip and Jesse were concerned that Cassidy may not go on to university later in life, but didn’t realize that RESP funds can be used for all kinds of education programs – not just a standard four year degree. The fact that the account they have in place is a family plan means that Conor might be able to use the funds at some point as well. While Conor does have autism, he’s also likely to seek some kind of education as he grows into adulthood. The tax-sheltering inside the RESP was really just too good to pass up, even if things don’t work out exactly perfectly in the long term, so Tulip and Jesse have maximized their contributions to this useful account.
Finally, Sandi had a little chat with them about insurance. Tulip and Jesse had not ever considered that if Tulip passed away, the impact on the family would be much more than emotional. Without Tulip at home, caring for Conor, Jesse would have to hire professional help – and that help would not be cheap. Together, with Jesse and Tulips’ insurance advisor, a plan was developed using relatively inexpensive term life insurance, with a future strategy to convert this to permanent life insurance, both for Tulip and for Cassidy, since Cassidy is likely to be Conor’s caregiver when both Jesse and Tulip have passed on.
Wills and incapacity documents were drawn up after discussions with Jesse and Tulip’s lawyer, an expert in estate planning for people with disabilities. These made the most of testamentary trusts, with protections for Conor’s disability benefits and opportunities for tax planning in mind, to ensure that the whole family can manage financially if Jesse passes away, and that Conor and Cassidy will be well protected if both Tulip and Jesse are gone. There is also a timeline of activities as Conor gets closer to adulthood, to make sure that Tulip, Jesse, and Cassidy can continue to support him even when he reaches the age of majority.
Where are they now?
Jesse and Tulip are about halfway through their two year plan, and really excited about next steps. They can see the light at the end of the tunnel, and they know that once they’ve put these systems in place, it will be time for Jesse to look for a different type of job that gives them all more time together.
Financial planning is complex and confusing at the best of times. Add in some tax concerns, arriving from another country with a very different system, as well as a disabled child to plan for, and Jesse and Tulip were overwhelmed.
We were so excited to help them through the planning process, enabling them to envision and create a future they hadn’t dared to hope was truly possible. If you’d like to find out whether our team can help you work through your own unique financial situation, please contact us! We’d love to hear your story.