For terminally ill family members, here’s a 10-step estate and tax planning strategy to enhance total TFSA value
Q: My father just turned 83 years old. We are lucky to have had him this long because he had a kidney transplant many years ago. Unfortunately, Dad has now been diagnosed with terminal cancer. He is receiving respite care at home and his doctor says it's a matter of a few weeks until he passes. Mom will be OK financially because they own their home free and clear, she'll get his full pension, she's the beneficiary of his $75,000 life insurance policy and has her own CPP and OAS pensions. They also each have $40,000 in their TFSAs. 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 of your father's prognosis and I'm happy you can spend his remaining time with him. Treasure this opportunity.
I recommend that you do not close your father's Tax-Free Savings Account (TFSA) and instead do the exact opposite by implementing a 10-step estate and tax planning strategy to enhance the total TFSA value. It's easy to implement and will be of significant benefit to your mother. But you must act quickly because the first five steps are critical and not possible after your father dies:
1. First, ensure the TFSA is set up correctly to benefit from special tax considerations when being passed on to a spouse. Every annuitant (owner of the TFSA) can name a beneficiary, but if they choose to have their spouse (or common-law spouse) inherit the TFSA proceeds, the annuitant should designate their spouse (or common-law spouse) as the successor annuitant, rather than an ordinary beneficiary. The benefits will become clear in the remaining steps of the strategy.
2. Next, determine exactly how much TFSA contribution room your father has remaining. Check his account statement or inquire at the financial institution that holds his account. Remember that TFSA limits are based on contributions - not current value. So, although he currently has $40,000 in his account, your father may have contributed less than that and the investments held within the TFSA increased to the $40,000 value; or he may have contributed more than $40,000 but the investments decreased in value to now equal $40,000.
3. The cumulative TFSA contribution limit is $81,500 in 2022. Let's assume you determine that your parents each contributed a total of $35,000 to their TFSA. Accordingly, Dad currently has $46,500 of outstanding contribution room ($81,500 of room minus $35,000 of contributions). (This also assumes he did not make any TFSA withdrawals in the 2022 tax year; you will have to confirm this from his TFSA statement or financial institution.)
4. Redeem all of the investments held within your mother's TFSA, which total $40,000, as you indicated. There will be no taxes withheld nor will there be any tax consequences to her in 2022 (some of the tax benefits of a Tax-Free Savings Account).
5. Use the $40,000 from your mom'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 the $40,000 from your mom). Dad will still have $6,500 of unused TFSA room available (the $81,500 limit minus $75,000 of contributions). If they have $6,500 on hand, they can contribute this additional amount, too; if not, that's not a problem.
My next Money for Life column will offer the remaining five steps to complete the enhanced TFSA legacy your dad can leave to his wife. In the meantime, continue to squeeze as much time as possible with your poppa as you immediately begin to implement my 10-step sequence. You must not delay if you want to help your parents out as much as possible with their finances, as these first five steps must be completed before your father's death.
Thie Convery, R.F.P., CFP, CIM, FMA, FCSI, is a wealth adviser in Dundas, and has a fully-maximized TFSA with a named successor annuitant. Her column appears biweekly in The Hamilton Spectator. Thie invites your questions at TheSpecMoney@gmail.com or by visiting ConveryWealth.com.