Hello everyone, and welcome to the Retiring Canada Podcast. In today’s episode, we’ll discuss the six crucial steps a widow or widower needs to consider after losing a loved one.
Specifically, we’ll cover:
- The importance of taking things slow and making a plan,
- Understanding the impact on your government benefits,
- Time-sensitive tax planning considerations,
- The importance of an estate and beneficiary review,
- Making a plan for your minor or adult children,
- And lastly, a few actions items for you to consider.
Let’s get into it!
One of the most devastating experiences someone can go through is the loss of a spouse. Whether it was a sudden loss or one that slowly manifested over time, nothing can truly prepare you to say goodbye. If this is you or someone you know, I am deeply sorry. I cannot imagine the feeling, and no words can take away the sorrow.
I hope you find peace in God, with your family and friends, and in the memories you hold dear. Nothing can replace your loved one, but keeping their memory alive is an amazing tribute that lasts well after their passing.
If you don’t have anyone to talk to, please reach out for help. Wellness Together Canada is a great resource if you are going through the loss of a spouse. You can call 1-866-585-0445, text WELLNESS to 741741, or visit wellnesstogether.ca to learn more about the available programs. Remember, you are not alone.
Once you have given yourself some time to get grounded, cope with your new reality, and deal with the most pressing issues, it will be important to review your finances. Speaking with a Certified Financial Planner (CFP) can provide support during this trying period. In most relationships, one spouse often bears more responsibility for understanding the household finances. If you were not as involved in the process, now is the time to take control and get organized. A CFP can help you map out where things are, get organized, simplify, and make a plan for moving forward.
I will now go through a number of key considerations we cover with our clients who find themselves widowed. The aim is to give you a broad understanding of what needs to be reviewed. However, it is our role to help you make sense of things in plain English, complete a “one-page plan,” and help you take action when you are ready.
The first step is to take things slow. Your mental health and well-being should be your first priority. There is no right or wrong time period here. Everyone deals with grief differently, so take your time and do what feels right for you. Making large financial decisions during this time needs to be well thought out and not done hastily.
If you have to make an investment decision in the short term while still in a state of shock, consider a liquid investment like a money market fund, high-interest savings, or simply leaving it in cash. Once you have had the chance to recover emotionally, you can then make a plan and consider all of your options thoroughly. The key here is not to lock into any investment decision until you have had time to get organized and plan for the future.
Next, once you are ready, it’s time to get organized, simplify, and create a plan. When we create these plans for widows and widowers, we follow a two-step process. First, we get organized and simplify by creating an asset map. This is a visual representation of everything you and your deceased spouse have accumulated over the years, including RRSPs, insurance, pension plans, CPP amounts, TFSA, your home, and more. This visual tool is very impactful when it comes to getting organized.
This is particularly important for any surviving spouse, especially those who have not been the lead in household finances. I have left a link in the description to illustrate what getting organized looks like.
The second step of our process is creating an easy-to-understand one-page plan with clear action items and accountability follow-up. This document brings together all the planning considerations discussed in this episode. If you want to learn more about the one-page plan, I encourage you to check out the episode I released on June 13, 2023.
The third crucial aspect is understanding the impact on your government benefits, specifically the Canadian Pension Plan survivor benefit, orphan benefit, and the allowance for survivors. If your deceased spouse or common-law partner made sufficient contributions to the CPP plan, you will receive a survivor benefit based on the amount contributed, your age at your spouse's death, and whether or not you receive CPP or CPP disability benefits.
To avoid losing some of this benefit, consider applying as soon as possible, as retroactive payments can only be made up to 11 months after the time of death. Calculating the survivor pension is complicated and becomes trickier when factoring in your own pension income. There is a cap to what you can receive in survivor benefit and your own retirement benefit. So, please get in touch or speak with another certified financial planner.
Another benefit consideration is the allowance for survivors, payable to the surviving spouse if you are between ages 60 and 64, live in Canada, have not remarried or become common law, and your income is below a certain threshold. You must apply for this benefit; the Canadian government will not sign you up automatically. If you or someone you know is between the ages of 60 and 64, review the tax return with a professional to see if this benefit is available. If you qualify and have missed out on the benefit, you may be eligible for up to 11 months of retroactive benefits.
The last one I will mention regarding government benefits is the orphan benefit for children under the age of 18 or under the age of 25 if they are full-time students in a recognized school or university. This dependent benefit is payable through the deceased spouse’s participation in CPP contributions. Please visit canada.ca and navigate to public pensions to learn more.
The fourth crucial step is to analyze the tax ramifications after your spouse's passing. In most cases, if the deceased spouse's estate was left primarily to you, the tax consequences are likely deferred until your death. Being named as a direct beneficiary of an RRSP, for example, means the tax can be deferred until you withdraw the money.
Things like the family home or cabin also qualify for this spousal rollover provision, where again, there is no tax at the first spouse's passing. However, you may still want to consult a professional as there are a couple of things to watch out for.
First, if your spouse had a large amount of unused capital losses, consider electing out of some of the asset rollover or including some RRSP income to use up any remaining capital losses. By including this tax planning on the final return of the deceased spouse, there will be less tax to pay in the future.
Second, if your late spouse had unused RRSP room, the estate could consider making a spousal RRSP contribution to offset the tax on the final return. The estate representative only has 60 days at the end of the calendar year to make this election, so if passing takes place at the end of the year, there really isn't much time to make this decision. Please consult with a tax expert or qualified CFP to see if these options are possible.
The fifth crucial step is to complete an estate planning review. This process should include three key areas.
First, review your will. Chances are your deceased spouse was your personal representative; if so, this should be changed. Choose someone capable of fitting this role, as they will be required to make important decisions on your behalf after your death and determine how your estate will be distributed. Generally, you should choose someone trustworthy, organized, discreet, capable of handling complex scenarios, and with sufficient time to help settle your estate.
Second, review and update your Power of Attorney. Again, your spouse was likely named in this role. Choose carefully for this role as you would for the personal representative of your will. In the case of an enduring power of attorney, this person will be required to make financial decisions on your behalf if you are incapable of doing so yourself.
Lastly, review your beneficiary designations on your registered accounts, such as RRSPs, TFSA, LIRAs, pension plans, and insurance policies. Often, the surviving spouse’s immediate reaction may be to name their children as the beneficiaries of these accounts. However, this choice can have many unintended consequences that do not match the intent.
In most cases, naming children as direct beneficiaries is not recommended, particularly if the children are minors. This is because the inheritance would be managed by a public trustee until they reach the age of majority, at which point they would receive the entire lump sum. For many young adults, receiving a large lump sum with minimal guidance can be detrimental.
Therefore, you are generally better off naming your estate as the beneficiary and then delegating how and when the tax-paid estate will be distributed to your beneficiaries. Some may be concerned about probate fees to the estate. In such cases, it might make sense for certain accounts like TFSAs or insurance policies to be sent directly to beneficiaries. Again, their age and financial responsibility should play a significant role in these decisions. Seek guidance from proper legal counsel before making any estate planning changes.
The sixth crucial step is to review your insurance policies, as many survivors lose their entitlement to the deceased spouse's medical benefits. For those whose late spouses had pension plans, take extra care with this step. The pension plan may offer you a lump sum payment, but you need to weigh the benefit of keeping the monthly payments to maintain extended healthcare benefits.
Review your life insurance and disability policies alongside your ongoing need for these coverages. If there is a gap between what you need and what you have, complete an insurance needs analysis review with a professional to help close or narrow that gap.
Alright, that covers the six crucial steps for a widow or widower to take following the loss of a loved one. I hope this information is helpful to you or someone you know.
Here are the action items for today's show:
First, take some time for yourself. It will take time, but I promise you will make it through this. If someone you know has lost their spouse, give them a call. Even if you don’t know what to say, letting them know you are holding them in your heart can go a long way when the chips are down.
Second, when you are ready, ask for help. If you weren’t the lead in the household finances, find someone who can help you get organized, make a plan, and move forward.
Lastly, keep the memories alive. Creating a tradition is a healthy way of remembering your loved one. It can provide you and your family with a way to grieve and recognize the person's life and impact while allowing you to continue living your life.
Well, that’s all for today. Thank you so much for joining me. If you enjoyed the show, please subscribe and leave us a review on your favorite podcast app. Be sure to sign up for my weekly Retiring Canada newsletter; the link to sign up is in the podcast description.
And remember, when it comes to your retirement, don’t take chances.
Make a plan so YOU can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.