Tuesday, July 28, 2009

The Recession Is Over !!!

The recession is over, but not the pain. Canada's central bank predicted Thursday that the economy would expand this quarter, suggesting the economic contraction lasted for about nine months, considerably shorter than the previous two recessions in the early 1990s and the early 1980s. The Bank of Canada's reassessment of the state of the economy is perhaps the clearest signal yet that the worst of the recession is over.

Does that mean that unemployment rates will magically drop back to the 5-6% range overnight - of course not. Does that mean that your investment losses will be undone as quickly as they occurred? Also a very big no. Bank of Canada Governor Mark Carney stopped short of celebration, saying it will take more than a year to replace the wealth destroyed by the financial crisis. He also stressed that the rebound is fragile, sustained by low interest rates and massive government spending. Business investment is weak, and Canada's exporters are dependent on global demand rebounding as the Bank of Canada assumes it will.
“There are still risks to the recovery,” Mr. Carney said. “The point we really want to underscore is that this recovery is the product of policy and where policy is.”

Due to the nature of our economy (as a massive producer of raw materials), everyone kept saying how Canada would not be as affected by the downturn as other countries. Stephen Harper (not an endorsement) stated that we would slump but we would not stop. Here is an amazing stat - China's GDP (Gross Domestic Product - cost of all goods and services produced in a country during a year) is still growing albeit at a slower rate. That rate? It dropped from the 10-11% range down to 7-8%. I did a little research and Canada has not had a GDP over 7% since - well the research didn't go back that far. Let's just say that the last time the GDP of Canada was where China "dropped to", I still had a full head of hair.

Now before we start singing and dancing in the streets (promo for the Caribana festival), let's be mindful of something else I have pointed out several times over the past few months. While recessions always end, they don't end on a Friday and we go back to stupidity on Monday. There is a slow upward economic curve as companies slowly begin the process of hiring new (or old) employees back. Those employees then start paying down the damages. They don't run out and buy a new car - this behaviour is what caused much of the current damage. The next issue is how the various "banking leaders" adjust going forward. The phrase quantitative easing will be heard more in the next 12 months than "gas is too expensive". The Bank of Canada and it's global counterparts need to ensure that they don't suddenly increase interest rates to fight inflation, or we head back into the same predicament. As governments around the globe printed money to spend their way out of the problem, the resulting inflationary pressures could have equally devastating results.

Stay Well and Pay It Forward.

Friday, July 24, 2009

Is Your Mortgage Really Insured?

It baffles me how many people can be sucked into one of the truly great scams of this century (and the last one too). You have just finalized the purchase on your first home with all of the assoicated problems (getting approved, finding the perfect home, negotiating the price etc). Now the time comes to sign on the dotted line for the priviledge of a financial institution allowing you to stay in one of their "homes" in return for the largest part of your paycheque. Just before signing, the loans officer asks you whether you want to "insure the mortgage". You're spending $1400 per month in mortgage payments; what's another $50 per month. You quickly sign the paperwork and file it with the rest of the mortgage documents and forget about it.

Well, I hate to be the one to tell you this, but you are now offically a (see picture at left). Why you may ask? Well the old saying that if it sounds too good to be true comes into play here. When you arrange for mortgage insurance at the "bank", in fact you are purchasing "group creditor life insurance". Coverage with a lending institution, is part of a group policy owned by the lender, and you, the borrower, have no control. What if you decide to buy your own policy.

With your own policy, your premium is guaranteed and fixed in advance, but group policy premiums may be subject to fluctuations if the lender raises charges for the whole group.
Your own policy is for any amount of coverage you want. If you already have insurance, you can add the mortgage amount to your existing policy. Insurance with a lender, however, is for the outstanding amount of the mortgage loan, and reduces as the loan balance declines.

An insurance company cannot cancel or refuse to renew your own policy, but a policy married to your mortgage can be cancelled by the lender or the issuing company. Bank employees are not licensed or trained to look at the borrower's overall need for life insurance. Independent insurance agents and brokers examine the client's total insurance needs, and not just the payment of the mortgage.

One of the most important benefits of owning your own policy is the ability to switch lenders when the mortgage matures. If your policy is linked to the mortgage, it terminates if you refinance or pay off the mortgage. If you switch lenders but have become uninsurable for health reasons during the original mortgage term, your old coverage terminates. What if you move? Under some group creditor plans, you may need to requalify for coverage. An individual plan faces no such problems.

Well at least the plan from the "bank" is cheaper than an insurance company right? Think again. Depending on whether you smoke or not, the insurance company could be significantly cheaper - as much as 30%. You are not penalized for paying down your mortgage quickly as you are under a "group plan". If you want an entire list of the pros of an individual plan over a "group creditor" plan, it would take 45 minutes of reading.

Last year, CBC broadcast a segment on their "Marketplace" show on the perils of "group creditor" insurance for mortgages. The only issue I had with the broadcast was that they pointed the finger at the insurance companies for not paying claims.
The issue presented in the show is not with the insurer or the lendor but specifically with the product and the way it is marketed. Check out the link and watch the video. They presented it in an interesting way and it certainly shocked many people who watched it judging by the "comments" on their website.

So why would people intentionally buy an obviously problematic plan, with numerous issues attached, at a price that may be no bargain you may ask? I have only come up with three possible reasons.

  1. The lendor indicates that you must purchase the plan from them. They may also suggest that you cannot get the mortgage without it. This sort of coercive or tied-selling is illegal and should be reported to the bank's ombudsman. In fact, the plan is cancellable at any time by simply sending a letter to the insurer.
  2. The process is simple. They ask a few simple questions and you "qualify". Buying from an insurer means you may need to go through a medical exam/blood/urine tests/ doctors reports and see if they would be willing to insure you. INSURERS TEST YOU UP FRONT. We buy insurance to protect things. We don't want problems. Group creditor coverage works in a different fashion - investigating you when you have a claim. If you made a small "mistake" on the application, your claim could be denied.
  3. Ignorance. I firmly believe that this is the biggest reason. Ask some of your friends or co-workers if they insured their mortgage? Then ask if they did it with their lendor? For these people, send them a link to this blog and help them avoid a possible catastrophe.

Stay Well and Pay It Forward.

Tuesday, July 21, 2009

Their Schooling Will Cost How Much?

Nothing warms the cockles of my heart than seeing the complete shock on the face of a new parent when they find out the cost of their child's "post secondary" schooling. Just be grateful you don't live south of the 49th parallel where costs are often five to ten times as much.

Canadian Business magazine has an interesting calculator that shows the costs associated with most universities in Canada. You simply decide where Johnny or Susie is going to school, whether they will be a doctor, lawyer or engineer and it does the rest.

The only problem is that it shows the current costs for an education and that is a huge problem for people with younger children. Here's the solution - take the results of the Cdn Biz site and then plug the "real numbers" into
Mackenzie Investments RESP calculator. You can input the number of children, where they will go to school, the costs, and inflation and come up with a very real (and terrifying number). Consider a 4 and 7 year old. Four years at school, while living at home, and with no "extras" like textbooks, school fees, sports etc and the costs are over $80,000. A law program at U of T? Double or triple that number.

If those numbers scare you, then let me point out something truly petrifying - those costs pale in comparison with the costs of not doing anything. In the first example, a child graduating from University with a $40,000 debt load can expect to pay an additional $20-$40,000 IN INTEREST ON THEIR DEBTS. I once made a statement that some people found to be quite prophetic (and others said it was pathetic so what do I know).

People who do not plan for their child's education costs are teaching them the merits of debt financing and establishing the groundwork for future financial misfortune.

In the above example, if mom and dad had set aside roughly $100-$110 per month in an individual RESP (not one of those scholarship type plans - that is a full blog in itself) from birth, it would have paid for the education in full. Don't even get me started on what happens when you wait. Simply waiting for 3-4 years means you need to contribute 20-30% more money. Contributions are not tax deductible, and the grant and growth is taxable but in the hands of the beneficiary. Since your child will likely not have sufficient income to pay taxes, essentially it's a tax free strategy. If you want to learn more about the types of RESP plans, then click on this link.

The biggest bang for the buck within an RESP is the grant monies. Essentially for every loonie you put into the plan, the government kicks in 20 cents. If your net family income is below $37,178, you get an extra $100 on the first $500 you save for each child. If your income is between $37,178 and $74,357, then they provide an extra $50 on the first $500 you save for each child. That really begins to add up. Here's an example:

Let’s say you save $650 a year for 15 years. Now let’s say your invested money will grow by 5% each year. The numbers below show you how much faster your savings would grow with the grant added in. With no grant money, after 15 years you would accumulate $15,656. With the various grant monies available, you contribute the same amount but end up with $18,790. In this case, you could get more than $3,000 for free.

There are several myths associated with RESP's. If my child doesn't go to school, I lose all of my money is the one I hear the most. In an individual plan, that is not true. You lose the grant money. As well, if you have more than one child on the plan (a family plan), then the money can be used by any of the children. Another popular myth is that you have to pay a lot of taxes on RESP's. In fact, only the grant and growth portion of the plan is taxable, and is taxed in the hands of the child. As long as their income is below $10,230 (and that is after all deductions including tuition costs etc), then they pay no taxes on the money.

Stay Well and Pay It Forward.

Friday, July 17, 2009

Did You Look At Your Investment Statements?

Back in January, the general consensus seemed to be resignation and panic. Many people told me they simply refused to open their investment statement. Others mentioned that they literally shredded them or ignored them. The brave souls who actually opened them spent the next month trying to comprehend what went wrong.

Well six months have passed, markets have begun to return to some form of normalcy and now comes your statement. Should you open it? Is there another whammy inside? What would a smart person do?

Simple. Remember that investing is a marathon and not the 100 metres. Your December 2008 statement represented a stumble - a fatal issue in the 100 metres but hardly a concern in a race of 26 miles (42 kilometres). Grab a beverage, sit down in a comfy chair, clear your mind of all negative thoughts and then open the statement. Did you survive?

Of course you survived and the reason I know this is very simple. With the exception of certain specific market segments and foreign investments, most markets returned a somewhat modest 5-10% return over the past six months. Some of the biggest naysayers before this whole mess are now starting to backtrack and are predicting an end to the recession is near. Within the actual stock markets, some did better than others - include the Toronto Stock Exchange (15%) and the Nasdaq (16%) in that group. Want a more telling indication that we are slowly leaving the drama of the past 10 months behinds us?

The Conference Board in the US analyzes tons of economic data to come up with (among other things) three monthly indexes that claim to provide insight for business leaders to use in planning what to do next.
The leading economic index (LEI) is made up of items generally judged to show changes ahead of the general economy. To gauge the future direction of the economy, you’d look at the LEI.
The coincident economic index (CEI) is made up of items generally judged to track (coincide) with current economic conditions. To take the current temperature of the economy, you’d look at the CEI.
The lagging economic index (LAG) is made up of items generally judged to lag behind the general economy. To confirm where the economy came from, you’d look at the LAG.
Here is a historical chart of the Conference Board’s LEI and CEI

Do you notice that the blue line is continuing a downward trend but seems to be "flattening"? This line represents current economic conditions. Look at the red line - this is the leading indicator for the future of the economy. Notice the dramatic uptick over the past 3 months? On March 9th, stock markets bottomed out and since then have been rising and falling but on an upward trend. My best explanation is this - take a Yo-Yo and get on an escalator going up. Start playing with the Yo-Yo. Even though the yo-yo is going up and down, the general direction for the yo-yo relative to your starting position is upward.

Does this mean everything is fine and we can go back to spending like drunker sailors? Of course not. The coming months will show that there are still areas of the economy in bad shape. One of my biggest hopes is that this economic downturn will make more people realize the importance of proper planning for the future. Having an emergency fund instead of using a credit card to solve those unexpected problems. Paying for things with cold hard cash instead of putting it on time. The days of running a deficit will hopefully be contained to governments who have the option to do so.

As always, Stay Well and Pay It Forward.

Tuesday, July 14, 2009

How Safe Are Your Benefits?

For people who worked for a company with an employee benefits program twenty years ago, the concept of "paying" for some of their benefits would have been considered ridiculous. Well as I have stated many times before, the times they are "a changin".
Nowadays, pension plans are in "deficit" positions and employees wonder what else could happen. Last week, a VERY BIG SHOE dropped. I'm sure that most people didn't even notice this headline, but for some people, it will dramatically affect their future.

Many years ago this major company, who spent money in questionable terms, whose stock market rise enabled a few people to get rich, and many times that number of people made poor, announced that their "disability program" was in jeopardy. The company which shall remain nameless (I don't feel like taking on their lawyers although I imagine they cannot afford them anymore), was a major global player in the fibre optics field and the largest company on the Toronto Stock Exchange 10 years ago. In a National Post article on July 8th, it was explained that the company's disability benefits program was not a true insurance program. Rather the company had created an administrative services only(ASO) plan and was "self insured".

Of late I have seen some excellent articles on why we "insure" things (our home, car, life, ability to earn an income). I will provide some more information in a coming blog that better explain the benefits. The problem here is that the company stopped "insuring" their employees through an insurance company. The company decided to take on the risk themselves to save money. Now they are going through bankruptcy and the employees who are currently on disability may be left out in the cold along with other "creditors". How could this happen you ask? Could it happen to you?

Benefits are offered by companies as a way to attract and retain employees. They are a tax- effective form of compensation for the company and many people consider "benefits" after income as primary reasons for choosing an employer. When times are good, benefits attract employees; when times are tough, they remain a principal reason for the downfall of companies. General Motors was a good example - it is not the wages they pay their staff that hurt, it was the cost of the "benefits" that drove them into bankruptcy. Benefits are made up of but not limited to the following:

  • life insurance and disability insurance
  • health and dental insurance
  • retirement benefits

In previous blogs I have discussed the problems facing some types of pensions (defined benefit plans). Life insurance is almost always a component of a benefits plan - if you have a sufficient number of employees, everyone can have some basic coverage without a medical. Once you cross a threshold, then medical requirements are needed. Disability insurance works in a similar fashion. Health and dental coverage provides reimbursement of covered expenses to maximums under the plan. Most employer go through an insurance company to insure their plans, especially smaller companies. The reason is simple - insurers have thousands or even millions of people insured which spreads out the risk. They take a percentage of the premiums paid to cover the administrative costs and profits.

What happens in an administrative services only(ASO) plan? Essentially, the employer takes on the risks associated with the plan and simply hires an insurer to "administer" the plans. Rather than buying insurance to cover employee benefits, companies can create their own trusts to provide benefits directly to employees, and use insurance companies to simply administer those benefits. But while ASO arrangements offer some tax and premium savings to employers, they put employees at risk when the company hits rough waters.

"It's not insurance; there's no insurance guarantee," says Frank Zinatelli, vice-president of legal services for the Canadian Life and Health Insurance Association (CLHIA).
There are more than a million Canadians whose LTD are covered by ASO arrangements, and whose coverage may be in jeopardy if their companies go under. If an insurance company goes bankrupt, its policyholders would continue to receive their LTD payments from Assuris, a non-profit company set up to deliver payments.

This type of arrangement can make very good sense for both the company and employee to cover dental benefits or perhaps even covering the health insurance portion of their plans. The disability or life insurance portion of the plan? Not in my eyes. As we have already seen with this company, people already on disability may now be in jeopardy as to their future income benefits.

The next time the discussion of "benefits" comes up, remember this blog entry. If you have a question about your plan, ask an advisor but not the one that sold the plan. An answer from a disinterested third party may open your eyes.

As always, Stay Well and Pay It Forward.

Friday, July 10, 2009

How Is Your Business Doing Financially?

I wonder how many people will read the title of this blog entry, then not bother reading any further. You know what they say when you assume. Oh well - it will definitely be there loss. When I talk about your business, people automatically assume I am referring to a physical "business". Even if you have a regular job, whether you realize it or not, you have an important business - your personal finances are just like a small business. If you run a company and don't watch what you spend, you get in financial trouble. There are literally dozens of similarities.

Do you have a budget? I'm not talking about that basic set of numbers you sketched out on a napkin one day at Timmie's. I am referring to a physical document where you actually track your expenses and see how much you take in and put out financially. Have one? Great. Follow it? Not often? Then it's not a budget - just some guidelines.

One of the biggest things I have been doing of late is sitting down with people and actually constructing a budget based on their income and expenses. It can be somewhat intimidating as some people have found out. One couple wondered where all of their money went until they did their budget and realized that their expenses exceeded their income by $500 per month. Some small changes and now they are in a plus position, but can you imagine the damage that would have happened if they had not done a budget. Do you have to spend months poring over bank statements to come up with something? Not at all - a simple little excel spreadsheet is more than sufficient. It will provide the basic guide for most people to manage their household finances.

I took a look for something fairly generic that most people could work with. This will link you to a simple excel spreadsheet from Microsoft. You just download it then start filling in the blanks. You may have expenses not listed - simply delete something else and then add what you do need. One simple tip - make sure you list your income first. When you start seeing a bunch of red numbers, that should be a warning flag that your "business" is bleeding.

How do you come up with your expenses. Don't take shortcuts and estimate things. If you want to get good results then remember this - garbage in equals garbage out. Take your time and come as close as possible to the real numbers. The automatic payments from your account are fairly simple, but for other things you will need to do a little digging. If you can get it from the internet, or if you kept copies, get 4-6 months worth of bank statements. These will really help. They will also show you where you spend your money wisely or otherwise. The magic of debit cards is that you often spend money you cannot account for. Let me also say that these issues affect many people - don't assume that someone who makes a lot of money does not have budget issues. If history has taught me anything it's that many people face this problem - the bigger the income, the bigger the potential problems.

At the end of doing your budget you have some "issues" and debts to be paid off then click on this link to help. This simple program will show you how long it will take to get out of debt. One simple rule to remember - it usually takes 2 to 3 times longer to get out of debt than it took to get into debt.

Stay Well and Pay It Forward.

Tuesday, July 7, 2009

Who Will Care In The Future?

I have a great idea. Let's do our income taxes, buy some life insurance, spend 45 minutes on hold with a company telling you they value you as a client, then go arrange for a will and power of attorney, and just for fun, let's put mom into a seniors home. Sounds like a fun day, doesn't it.

It seems like life is filled with things we hate to do. Thankfully we don't need to do these things too often (imagine if we could stop doing and paying our income taxes). However, it never ceases to amaze me that people don't think they need a will and power of attorney. As I love to point out to these same people...


Having a properly designed will and power of attorney is important if you meet the following criteria:

1. Age 18 or over

No, I did not delete the rest of the list. Personally, if you are over age 18 and of sound mind, then I believe a will and powers of attorney are important things to arrange. Have minor children? That just raises the "importance" bar several notches. Why you may ask? Let me ask a simple question? If you were to become incapacitated due to a medical issue, who would you want to oversee your personal affairs? Without a properly designed power of attorney, a family member or friend must apply for the right to look after things for you. I certainly hope that whomever they appoint sees things the same way you do. They then have a measure of control over your finances, your health etc. Think it's not true? Here's the link to the Office of the Public Guardian info on the topic. There have been horror stories where the Public Trustee's office stepped in and whamo - say bye bye to some of your money.

Sounds easy then right? Arrange a power of attorney and will and all is fine. One other little problem. As most of you know, society as a whole is aging. What used to kill people, now leaves them disabled. The miracles of modern medicine now prolong life, but at what cost. Most of you will have a memory of a relative in some "retirement home" or hospice. One of my strongest memories of these places was the antiseptic smell. Those are the "affordable" places. In this case, the phrase affordable has a somewhat hollow ring to it. Check out the costs of provincially-run institutions on this link. The really nice ones are more like country clubs or hotels than a medical facility. These nice places also cost an insane amount of money. How much? Would you believe $4,000-$7,000 per month and up. What are the alternatives?

Here's the good news. You can always move back in with one of your kids. They won't mind - after all you raised them and now it's simply a matter of returning the same favour. They may not see things in the same light (see my opening comments), and wonder where to put you. They may still be raising their own children and I am sure you'll feel very comfortable sleeping in the room next to your grandchild who has a habit of only wearing black clothes, listening to strange music, spends an inordinate amount of time on computers and is still finding him/herself.

A second option are the aforementioned facilities run by the province. For far too many Canadian seniors, nursing home care is inaccessible or unaffordable. In some provinces, wait lists for nursing home beds are excruciatingly long — up to two years. Most beds become available only when residents die.
Private nursing home care can cost between $40,000 and $70,000 a year, depending on the community. This is clearly not a viable option for most seniors. In the patchwork system that has evolved, it is apparent that public and non-profit nursing home care provides the most affordable solution. But even this option is becoming unaffordable for many seniors as these facilities struggle to fill the funding gap left by government funding cuts.

Option number three is to sell your home and move into something "easier" to deal with. That approach always sounds good to the kids. Whether that means a condo or "seniors residence", it also means losing some of your independence, and for seniors, a loss of independence is "the next step towards complete dependence".

The fourth option is to spend your money on in home care. This remains a viable option for people with the financial wherewithal to stay home and have home-care people assist with the "Activities of Daily Living". Private nursing home care can cost between $40,000 and $70,000 a year, depending on the community. This is clearly not a viable option for most seniors.

The other problem may surprise you. Your children are getting concerned about "mom and dad". Many of them are already at that crossroad. Middle-aged couples are wondering how to approach their parents about their "declining years". Aging parents are wondering what their options are. Will the problem stay the same? Not likely. Currently, 17% of adults are over age 65. The number of Canadians aged 80 and over will double in the next 20 years - and triple in the next 40 years. The number of seniors in Canada has increased by one million in the last decade. By 2020, there will be as many seniors as children! These issues will further complicate the problems we already face.

Long term care insurance goes a long way to solving the problem. It provides a way for older family members to solve their finance issues. It allows them to maintain their dignity, while choosing whether they need to move to a facility-care residence, or simply need some help with meals and housework. One of the best things I have ever seen on the topic originates in Ottawa. The Council on Aging of Ottawa publishes and updates a lengthy handbook on the topic. It addresses almost every possible concern and as a "disinterested" party, you can count on the contents not being a sales pitch for some company.

Let me close with this thought for you. The three greatest expenses for the Canadian federal government are:

  1. Paying interest and principal on our deficit
  2. Health care expenses
  3. OAS (Old age security) program

As the population ages, tax revenues will decrease, health care expenses and OAS payments will increase. Do you really believe the government will suddenly have a lot of extra money to fund new "seniors homes"? You may find a nice private home, but at what cost? Think about your options before the choice is made for you.

Stay Well and Pay It Forward.

Friday, July 3, 2009

I Think I'll Have A Henson...

You want a what? The first time I heard the above expression, I wondered if Molson's or Labatt's had some new competition in the Canadian beer market. My next thought (having young girls) was that it must be some new (and therefore annoying) band. I seem to recall three brothers who...boy am I old. My daughter informed me that "Hanson" was so yesterday. I wonder what she thinks of the Beatles -that was so biblical? I could not have been farther from the truth as to what a Henson was.

Wikipedia defines a Henson Trust as:

Henson trust (sometimes called an absolute discretionary trust), in Canadian law, is a type of trust designed to benefit disabled persons. Specifically, it protects the assets (typically an inheritance) of the disabled person, as well as the right to collect government benefits and entitlements. The key provision of a Henson trust is that the trustee has "absolute discretion" in determining whether to use the trust assets to provide assistance to the beneficiary, and in what quantity. This provision means that the assets do not vest with the beneficiary and thus cannot be used to deny means-tested government benefits.
In addition, the trust may provide income tax relief by being taxed at a lower marginal rate than if the beneficiary's total assets were considered. It can also be used to shield assets from matrimonial division in case of divorce of the beneficiary. In most cases, the trust assets are immune from claims by creditors of the beneficiary. The Henson trust was first used in Ontario in the late 1980s. It became of wider interest when the Supreme Court of Ontario ruled in 1989 that the trust assets were not vested in the beneficiary and thus could not be used to terminate government benefit programs. A Henson trust can be established as either a living trust, or a testamentary trust.

When a Guelph man by the name of Leonard Henson died, he left his money — in trust — to his disabled daughter Audrey. In order to prevent the trust from negating Audrey's government benefits, it was set up in such a way that the trustee had "absolute discretion" over the assets (meaning they would be paid out as the trustee saw fit, not according to the wishes of the beneficiary). This meant that Audrey did not actually own the assets, and could therefore go on collecting both the government benefits as well as receiving payments from her father’s trust. At Audrey's death, the assets would go to charity. In 1987, the Ontario Ministry of Community and Social Services took the matter to court and attempted to prove that Audrey did indeed enjoy beneficial ownership. The government, however, lost the case and the "Henson trust" was born — an absolute discretionary trust that allows the beneficiary to collect government benefits while at the same time receiving private income, without any restrictions on how that income is to be used.

Now for the English translation of the above explanations. When someone who suffers from a qualifying disability in the province of Ontario, they may be eligible for benefits from the government. This is affectionately known as ODSP (Ontario Disability Support Program). The program comes in two forms - income support (money for people who qualify) and employment support (help finding work for people who qualify). The government does not like handing over funds to people who don't need money. If the person has too many "assets", they may be ineligible to receive support (income). For a single person, the maximum asset value is $5,000. Some assets are "exempt". Here are some examples of exempt assets:

  • The home you own and live in.
  • Your primary vehicle (the one you use the most, if you have more than one).
  • Trust funds derived from an inheritance or life insurance policy, up to allowable limits.
  • Necessary household and personal items, such as furniture and clothing.
  • Pre-paid funerals.
  • Registered Education Savings Plans (RESP).
  • Registered Disability Savings Plans (RDSP).
  • Cash surrender value of life insurance policies, up to allowable limits.

What I find very interesting is this - what defines a "life insurance policy". For you and each family member, up to $100,000 of the cash surrender value of a life insurance policy is exempt as an asset under the Ontario Disability Support Program. This means it does not affect your eligibility for Income Support. Under the Ontario Disability Support Program, life insurance includes:

  • Annuities
  • Deferred annuities
  • Segregated funds

Segregated funds are the insurance industry answer to mutual funds. They work in a similar fashion, and hold similar types of investments. The fees are typically higher than with mutual funds, but they offer guarantees at both maturity and death. What I find most interesting is that someone who is receiving ODSP benefits could hold $80,000 in a segregated fund without penalty, but having $8,000 in a similar mutual fund would result in lower income benefits.

As you may already know from a previous blog, last year the federal government introduced the RDSP (Registered Disability Savings Plan). It is a savings plan designed specifically for people with disabilities in Canada. The first of its kind in the world, this new tax-deferred savings vehicle will assist families in planning for the long - term financial security of their relatives with disabilities. Contributions to the plan can earn grant money as well as a bond each year. Anyone can contribute to the plan, but only one plan is allowed per person. The RDSP does not replace the Henson Trust but rather works in concert with it.

The remaining problem for the Henson Trust is how best to arrange for funding. There are a variety of resources within the reach of most families which can be used to fund the trust. They are:

Savings. The establishment of a regular savings program may be able to provide adequate funds to Henson Trust.

Parent's Estate. Provided that the parent's estate is sufficiently large, it could provide for their own needs in their elder years, as well as having enough left over to fund the trust.

Family Members. Siblings, Aunts and Uncle's, Grandparents could be willing and able to provide money to fund the trust.

Life Insurance. For the average family, life insurance may be the only way that they can leave a large lump sum to the trust by making small monthly payments. It is also possibly the only way of funding a trust that is guaranteed. The other resources mentioned above may not always be available but a paid-up life insurance policy can guarantee future funds.

Families of people with disabilities should examine the benefits and pitfalls of each of the funding methods mentioned here. A review of these resources with an Estate Planning Professional who specializes in planning for people with disabilities would be an excellent starting point.

Info above courtesy of:
The "Special Needs" Planning Group is an organization that is made up entirely of parents of people with disabilities. We feel that this is important since we believe that no one can simply read a book and truly understand the feelings and concerns that parents have with respect to the needs of their sons or daughters with disabilities. We are experienced, knowledgeable professionals who understand the issues because we are living those issues. We use a team approach to planning using Planners, Lawyers and Accountants, all of whom are specialists in planning for people with disabilities. In addition, we provide solutions which include much more than just a will and a trust account.

Stay Well and Pay It Forward.