David Lloyd

Many of our clients are justifiably concerned for the future welfare of their children. Some are torn between letting children find their own way and accepting that it is, and will likely continue to be, tougher for our kids than we had it. Finding a job, affording to buy a home, uncertainty surrounding government services, caring for an aging demographic and responsibility for an enormous debt burden for which they did not incur, are steep hurdles we did not have to overcome.

One issue facing boomers today is adult children moving back into the family home, indefinitely. So what are some of the issues and practical steps to make sure this family reunion doesn’t turn out to be a like All in the Family (aka Archie Bunker and family)?

Set expectations – How long is long enough? Most people manage deadlines, so why shouldn’t your children? Is rent to be paid? We’ve seen parents collect rent and then give it back when funds are needed for a down payment on a home. At the very least, children should earn their keep by doing jobs around the house and also abide by house rules.

Parents need to understand and then discuss their plans for retirement and how those may affect ongoing support for their children. For example, selling the family home and downsizing is often integral to the plan. In order for that to happen, the nest cannot have children living in it.

Planning for death with adult children living in the family home can be complicated. The death of one parent may cause the survivor to re-evaluate whether the family home is too much for them to manage. The subsequent death of the surviving spouse when an adult child still lives in the home can be difficult as executors manage the distribution of estate assets 

Disability brings on many issues. Physical disability may require the home to be retrofitted at significant expense. Although moving may be the best decision, parents may chose the expensive retrofit to ensure the home is available for junior. 

Mental disability is the foundation for elder abuse, especially if adult children who have power of attorney for the personal care of their parents are living in the family home. Shipping off a parent with dementia to a care facility is a convenient way to accelerate receipt of an inheritance. It happens!

Raising our children to become responsible and independent adults is a parent’s priority. Allowing adult children to return to the nest can provide temporary financial relief, but does little to prepare them for life and arguably robs them of the experience of figuring it out on their own. 

On vacation with my family last week in Los Angeles, we couldn't help but get caught up in the Oscar mania that surrounded us. As we drove through the streets of Beverley Hills, and walked the famed Rodeo Drive, we were struck by the irony and the contrasts: California, the near bankrupt state, bloated with debt, yet opulence everywhere you turn. Every car seems new and everyone is in a hurry to get to where they can be seen wearing the latest fashions.

As a parent, it was refreshing to hear my 25 year-old daughter say, "this all seems so pretentious." I couldn't help but smile and feel relieved that 'she gets it.' See my blog - We've failed our kids, shame on us.

On our flight home, we all watched The Descendants; the George Clooney flick that garnered so much attention at the Oscars. Clooney plays the role of Matt King, a wealthy lawyer who is the sole trustee and one of many beneficiaries of a $100 million+ family property that is to be sold.

The parallel story line deals with Matt's new found responsibility for his two daughters as a result of his wife's comatose condition after an accident. Matt and his family have lived quite modestly and he shielded his daughters from their massive wealth.

My favourite line in the movie: Matt says, "I don't want my daughters growing up entitled and spoiled. And I agree with my father: you give your children enough money to do something but not enough to do nothing."

This is actually a paraphrase from one of the world's wealthiest and best investors, Warren Buffett (maybe why the line resonated with me). When asked how much money he would bequeath to his children, Buffett replied, "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing."

Regardless of source, this is a great summation of the balancing act parents face in providing for the needs and wants of their children. How ironic given the opulence in the city the movie was featured.

A new year, new resolve, new goals.  Each January about 40-45% of us, research shows, make new year's resolutions.  Among the more common resolutions:  get better organized and take greater control of financial affairs.

If those are on your list for 2012, we've updated our handy month-by-month calendar of tasks, 'to dos' and reminders to help you get and keep on top of your financial affairs. Even if you're already in good shape, you're likely to find something on the list that could help you improve your overall picture -- and peace of mind.

January

Review balance sheet for all family entities (i.e. trusts, corporations, family members) and take action to:

• Redeploy cash effectively either to reduce debt or to obtain higher returns.
• Review prior year's investment portfolio results against appropriate benchmarks and determine strategy for the coming year.
• Review relative capital inside versus outside the business and take appropriate action.
• Restructure balance sheet to minimize non tax-deductible debt and consolidate where appropriate.

Revise pre-authorized corporate tax remittance.

Pay interest on prescribed (PS) rate loan by January 30th. If you don’t have a PS loan, consider it; rates continue to be at their lowest levels.

Establish priorities for charitable giving rather than rush giving decisions at year end. Revise preauthorization of payments for changes in giving accordingly.

Caregivers should maintain accurate records of expenses to claim the new Family Caregiver Tax Credit.

February

Maximize RRSP, TFSA & RESP contributions for all family members to take advantage of tax sheltered compound growth.

Consider spousal RRSP and RRSPs for kids over the age of 18.

Make contributions to TFSA accounts.

Collect receipts and other information for tax filings in March (trusts) and April (personal).

Arrange for medical in preparation for 'health management' plan for self and family members.

Consider paying out a taxable /capital dividend to preserve your company's qualifying small business corporation status.

RRSP deadline for 2011 is February 29th.

March

Remit Q1 personal tax installment by March 15th.

File trust tax and information returns by March 31st.

April

File personal tax returns for all family members and pay any outstanding liabilities by April 30th (April 15th for U.S. filings).

Revise personal tax installments for the balance of the year.

Review Q1 investment portfolio results.

May

Review 'health management' plan and assess related insurance needs for all family members.

Review amount of emergency funds and arrange for line of credit or put cash into savings to ensure you have a minimum of 3 months of living expenses.

Discuss income/family expectations for university/college kids returning home to set expectations for the summer and September enrollment.

Review your notice of assessment and take appropriate action.

June

Remit Q2 personal tax installment by June 15th.

File personal tax return by June 15th if self-employed.

Pay out any prior year accrued bonus from company by June 30th.

If over 40, consider setting up an Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA).

Explore opportunities to sprinkle the capital gains exemption on shares in your business to other family members.

July/August

Review Q2 investment portfolio results.

Consider mid-year reflection on longer-term plans for you and family members through family summit or family council.   Reflect on personal, business, family and financial goals, philanthropic/stewardship objectives etc. and develop action plan for implementation in Q3 and Q4.

Determine most effective tuition funding strategy for upcoming school year. Also, review student living accommodation and opportunities to buy vs. rent.

Encourage and support your children in establishing their own savings and investment plans.

September

Remit Q3 personal tax installment by Sept 15th.

Review estate plan (e.g. will, power of attorney, life insurance).

Review shareholder’s agreement.

Consider the merits of incorporating and/or an estate freeze.

Consider transferring property to other family members to minimize current and future tax liability. If you have a child turning 18, there are additional opportunities.

October

Review Q3 investment portfolio results.

Review cash balances and invest surplus cash.

Review medical expenses for the past 12 months (including those of dependent parents) to determine if there are tax deduction benefits.

November

Begin year-end tax planning:

• Review status of unrealized capital gains and losses on investment portfolio and take appropriate action to minimize taxes for the current and prior years.
• Consider a private or community foundation to shelter large capital gains.
• Consider flow through shares or other tax sheltering opportunities.
• Ensure at least minimum RRIF and IPP (new) withdrawals are made prior to year end.

December

Make all charitable, political donations (in cash or publicly-traded securities), IPP contributions and unused RESP and TFSA funding by December 31st.

Determine bonus/dividend policy for your company.

Ensure amounts paid or payable from trusts to beneficiaries are properly documented.

Income splitting: ensure family members are paid for work done during year.

Any loans from the company to shareholders should be eliminated prior to year-end.

Final review of tax loss selling opportunities. Remember carryback of losses to shelter 2009 gains expire at year end.

I recently had the experience of counselling a long-time client who, despite a very secure financial position, was overcome with anxiety about money. What became clear to both of us after a lengthy and at times emotional discussion was that her anxiety was not about money at all. Rather it was about her obligations to her children, as the sole beneficiary of her late husband’s estate.

It’s a scenario we see frequently: a surviving spouse, usually the wife (life expectancies between men and women being what they are) of a sole or principal income provider, with more than sufficient capital to sustain her lifestyle is anxious and unsettled. Through discussion, we come to understand that the uneasiness is related to guilt over spending money that is perceived to be earmarked for heirs. 

With Hallowe'en just passed, it brings to mind another spectre that appears to have been revived: Individual Pension Plans (IPPs). And it's good news for business owners.

As individual investors return from summer vacation and revisit their portfolios, most are likely frustrated with the lack of performance. The gloomy economic cloud resulting from European and U.S. deficits and debts continues to weigh on the capital markets. Equity markets corrected, again, leaving North American and global indices negative for the year. Corporations and individuals are holding cash patiently waiting for signs of leadership and direction before they risk capital. In the meantime, negative real returns (after adjusting for inflation) on cash (or near cash) at -2.6% haven’t been this low since the 1970s. 

We have been saying for some time that the emerging markets, particularly China and India, will drive the global economy. (see our May 2010 post Yearning for Yuan, China's Inflation Problem)

Yesterday, headline news was that the Chinese Yuan hits 17 year high against the U.S. dollar, based on a better than expected trade surplus report combined with a weakening U.S. situation. 

Chinese premier Wen Jiabao hinted that perhaps policymakers may shift priorities from fighting inflation to maintaining economic growth. This is welcome news to suppliers of resources to China, like Canada. As debt troubles mount in Europe and the U.S., it appears that many western economies will show little if any growth for the foreseeable future. The tale of two very different economies - east versus west, is playing out as many predicted. China is becoming an exporter of inflation rather than disinflation. If the trend continues, we may see stagflation (high inflation with low economic growth) in North America. 

I attended a tax brief hosted by the CICA last week entitled The Changing Landscape Faced by High Net Worth Individuals. I learned about Canada Revenue Agency’s (CRA) new Related Party Initiative.

As a fan of John Mauldin’s views on the world economy, I was anxious to read his newly released book, Endgame co-authored by Jonathan Tepper. The reviews are terrific and I was not disappointed.

Mauldin and Tepper pull no punches in their criticism of the Fed and other central bankers and policymakers in allowing debt levels to get to these crisis levels. Endgame examines the causes and ramifications of the debt supercycle and offers some plausible paths to dig out of the mess.  

Canadians have very few tax breaks left. Investing in “flow through” shares offers significant tax savings to help out our energy and mining industries with a charity kicker. This is a rare win, win, win opportunity.