There is a way your kids can inherit your OAS and CPP
Q: My wife and I both turned 71 this year. We are still living in the family home, and plan to stay here until our final days. Exclusive of two bionic knees for me and a new hip for my wife, we are in pretty good shape. We have generous pensions from our past employers and are able to live off this income. We both collect CPP and OAS and next year we'll also receive the minimum amounts from our RRIFs, but we don't really need any of this additional income. Could we just put the Canada Pension and Old Age Security into an account so our three kids could inherit this money?
A: It sounds like you are set for your retirement, from both a health and a financial perspective.
Because your private pensions, your RRIFs (Registered Retirement Income Funds) and the equity in your home will provide you with sufficient money to support yourselves for the rest of your lives, let's look at a strategy that could leverage some of your CPP and OAS benefits to significantly increase a bequest of these monies to your family. Additionally, the gift will be tax-free and probate-free.
First, I'm assuming that you both elected to begin receiving your CPP (Canada Pension Plan) and OAS (Old Age Security) pension at age 65 and that your individual net incomes do not exceed $79,000, so you do not have a clawback on your OAS benefits.
If you and your wife both contributed the maximum to the CPP, and you both met the Canadian residency requirements to qualify for OAS, then your combined government pensions currently provide just over $39,000 in annual income to your household. Of course, it's taxable, so you don't actually get to keep all that money. And, you may know that your OAS only lasts as long as you do. That is, when you die, it dies. The CPP may have a benefit to the surviving spouse upon the first death but this depends on whether or not the survivor is already receiving the maximum pension. Accordingly, I'm recommending that only 50 per cent of your current CPP and OAS income can truly be considered excess monies" that will never be spent on yourselves, either now or in the future.
To make that money work for you and your heirs, you could both direct 50 per cent of your monthly CPP and OAS income into a special kind of life insurance called joint-last-to-die" (JLTD). Unlike most life insurance policies, this policy is on the life of two individuals, instead of one. You and your wife would both be insured, such that the policy pays out only after you both have died.
As with other life insurance policies, you'll need to disclose your medical history and provide vitals, such as blood pressure, and a blood or urine sample. Your family physician also completes a medical report, which is submitted to the insurance company. Be sure to use a qualified insurance expert to help put together this financial strategy for the two of you.
Let's look at your specific situation: a 71-year-old male and female with surplus annual cash flow of $20,000 could buy a JLTD life insurance policy of $725,000. After both of you have died, the proceeds would be inherited by your three children. This gift occurs tax-free to you and your estates, as well as tax-free to your beneficiaries. Additionally, the insurance proceeds are separate from your estates so they are not subject to the 1.5 per cent probate fee in Ontario.
If you want to set aside some of your CPP and OAS for the next generation, then a joint-last-to-die insurance policy is the most effective and tax-efficient strategy. What a fabulous way to multiply a legacy to your loved ones.
Thie Convery, R.F.P., CFP, CIM, FMA, FCSI, is a wealth advisor in Dundas. Her column appears bi-weekly in The Hamilton Spectator. You can reach her with questions at TheSpecMoney@gmail.com or by visiting www.ConveryWealth.com.