by: Rick Hoogendoorn
Some time ago I attended a seminar
where participants were told to burn some money; a reasonably-sized
amount of money. You should have heard the gnawing and gnashing of
teeth in that room! Step right up, folks, and light it on fire. Come
on now. It’s only money.
Some people, likely less adept at
saving than others, actually rushed forward in an attempt to show how
money had no hold over them. There was a principle in there somewhere.
Not sure what it was.
Others cowered into the corner,
refused to take out their wallets, looking for the exits. It does seem
reasonable to me to avoid torching cash. After all, you’ve worked
hard for it. Put in years worth of work and put off many luxuries to
accumulate what nest egg you have. Burning it would somehow seem to
indicate a crack in the psyche.
But what if I told you that many
people are geared right up to burn tens of thousands of dollars? Oh,
they’re not going to march forward to the front of some hotel
ballroom and pull out stacks of cash from a briefcase and toss them
all onto a controlled, indoor bonfire. Nope. That’s dramatic. Their
method is much harder to picture, but let’s try and create a vivid
picture nonetheless.
Imagine a retired widow or widower.
Or, perhaps, a senior single person. A person who is finished working,
and has been enjoying the fruits of their savings. They have
accumulated several hundred thousand dollars in their RRSP, which has
since been transferred to a RRIF. They receive income from this RRIF.
Let’s say it has $400,000 in it.
Like most of us, this person does not
want to think about their own demise. Their focus is on their
grandchildren, perhaps. Hobbies. The garden. Other things. They are,
of course, surprised when they die, and even more surprised when they
get a box of popcorn and a front row seat for the posthumous show
called ‘distribution of your assets’.
Let’s go straight to the grand
finale, shall we? In this last part of the show, the contents of the
person’s RRIF are put in an over-sized briefcase, sawed in half, and
one half is tossed onto the gigantic bonfire known now as the Canada
Revenue Agency. Let me explain…
The proceeds of an RRSP or RRIF can
roll, tax-free, to a surviving spouse without any tax consequences. In
our example, however, there is no spouse to roll the proceeds to. As a
result, the full amount of the RRSP or RRIF comes into income in the
year of death. What happens when you get a sudden influx of cash? Say,
$400,000 worth of cash? Well, first of all it will put you in the very
highest tax bracket. Second, you’re taxed. (Hence the idea of just
sawing that over-sized briefcase in half and tossing one half on the
bonfire.)
Not convinced. Okay, forget the
bonfire idea. Instead, half of the briefcase contents, $200,000 in our
example, are put into a box, tied up with a nice red ribbon and hand
delivered to … the Prime Minister. Like that better? Hmm.
Well, at least now you know what
happens when you die. There’s a big fire. There’s gnawing and
gnashing of teeth. People rushing for exits. And a few, good people,
are sitting there calmly because they planned ahead, or had already
gone through all of this at some weekend seminar.
Strategies do exist to avoid the
erosion (torching) of your assets when you die. Talk to your financial
advisor.
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