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.

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.

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...

YOU SPEND MORE ON CABLE IN A YEAR THAN A WILL AND POWER OF ATTORNEY COST FOR A COUPLE.

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

1. Age 18 or over
2.
3.
4.
5.

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.

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.