Fraught territory: (solicited) financial advice for my MIL

[lizi]

My FIL recently passed away, leaving my MIL in charge of their combined assets. While she has a reasonable level of financial literacy, he was the one who handled everything. Over Easter she asked me about setting up a TFSA and a taxable account, as she wants to draw down the balance of her RRSP fairly quickly to avoid the tax burden when she dies (the balance is not a concern in terms of RRIF minimum withdrawal amounts getting into OAS-clawback territory).

I'm a DIY investor, and I have my TFSA through Questrade. I wouldn't dream of suggesting the same for her so I showed her a few options like WealthSimple, Tangerine funds, TD funds and Questrade managed accounts. We went through the funds and the MERs together and I also want to write up an email summarizing them. My main issue is that when we were chatting, she made a few contradictory remarks that make me a bit nervous about recommending *anything*. She was saying that markets are down at the moment, so she doesn't want to be in stocks. When I mentioned evening out the volatility with bonds she said there was no point because interest rates are going to rise so bond prices will fall. Sort of a lose-lose situation. I want to help her and make recommendations, but I'm worried if she goes with one of my suggestions and doesn't get perfect returns she will blame me. Obviously this is why financial advisors come with disclaimers!

I'm thinking I will lay out those options and let her do the research to pick a particular one. Is there another company/fund that people would suggest? She wouldn't necessarily need a face-to-face advisor, but she will need more hand holding than DIY. I'm hoping that Weathsimple strikes that balance, but I haven't used it myself.

And is her plan the only way to avoid a big chunk of RRSPs going to the CRA upon her death? At the moment the amount she wants to withdraw would be around 4% (to stay under the $40K tax bracket), which seems to defeat the purpose because the principal will stay the same. Should she be increasing the withdrawal amount and taking the hit now at the higher tax bracket and drawing down the principal? I'm a bit unsure about pointing this out for fear of being blamed for her big tax bill each year (even though that is her aim).

Note this is not something DH is particularly concerned about. Obviously tax minimization is desirable, but he isn't relying on the inheritance and we acknowledge the money has been growing tax free this whole time. It is stressing her out but it's hard to tell her not to worry about it for his sake. It would suck for her to unnecessarily complicate her investments and pay more taxes while she's alive, only to live another 30 years and spend it all anyway.

[Prairie Stash]

Here is a way to cheat the taxman later on with the TFSA that your MIL should be aware of.
http://www.moneysense.ca/save/investing/tfsa/successor-holder-tfsa/

Basically if she takes a tax hit now and funds the TFSA, she can avoid larger taxes later. if FIL had done so, all of his TFSA could have passed tax free to her and then to their kids. At this point they could have had $150,000 in the TFSA tax shelter (2 people, combined contributions and growth).

The TFSA is the best way to avoid taxes at death, the RRSP is not. If inheritance is on her mind, then she needs a TFSA and over the next 30 years it will grow to be a very large inheritance that's all tax free.

Highlight the benefits in a positive manner for her. She gets full control over 30 years, she can acess the money at any time for future medical needs and she gets to avoid a very large tax bill upon her demise.

[Lews Therin]

You could also recommend to put only the safest of options in RRSP (I.E. Bonds) and use the TFSA and taxable accounts for the rest. The RRSP will be drawn down by the 4% WR, and the other accounts will get bigger. This might also allow her to feel safe, since you can point to the RRSP number, and say this is exactly how much you have for the next X years, and you could do the same with stocks in the future. (Sell a portion of stocks and move into bonds for example)

[TrMama]

How old is she? What's her current stashe, other income (OAC, pension, etc.) and what's her burn rate? AKA, is having more money than she can spend in her lifetime even an issue?

If she won't invest in either stocks or bonds, then that kind of only leaves GICs, or high interest savings accounts.

You may find this graph helpful. It plots the optimal drawdown strategy for retirement, http://pabroon.blogspot.ca/2015/05/retirement-planning-and-forecasting-20.html

You're correct to be concerned about her blaming you if your recommendations don't turn out the way she hopes. Does your DH have any interest in helping her? Or at least being the messenger between the two of you? My DH manages his mom's finances and the fact that he's her son makes the resulting awkwardness less adversarial. If I were to try some of the things he's done, she'd have cut me off long ago and would now be up the creek with no paddle.

[lizi]

I guess she must be 65 now because she has started OAS and CPP payments, as well as her other pensions. She has a stable income that pretty much covers her living expenses. At her current rate she could probably avoid dipping into the RRSP at all, but that will most likely change as she gets older.

TrMama, I really like your point about shifting this more to DH. He isn't very proactive when it comes to finances and generally just follows my lead, but I'm sure he would be willing to step up a little if I explain how it could potentially become awkward. I think her expectations are unrealistic, but of course I can't point that out. I did make it clear that I only expect 7% from my investments, and that's averaged over decades. So at least she wouldn't expect crazy high returns from following my advice. I pointed out that I prefer to sleep soundly at night.

CB, I think splitting up the allocation like that might be a bit too sophisticated, but I can certainly suggest she try to find cheaper and more conservative funds for within the RRSP.

Prairie Stash, that is an excellent point about TFSAs and my FIL's estate. I find it hard to believe their financial advisor didn't tell him to set one up as part of the estate planning process. A TFSA would have solved the tax issue for a reasonable chunk of the total estate. At least she is thinking about it now and getting it sorted. I guess TFSAs were under the radar for some older people, as they only came out in 2009. But it seems anyone giving financial advice would be recommending them, especially in an inheritance situation.

BNgarden, I like the point about never being able to avoid tax. That's how I see it, that this money was invested pre-tax and has grown tax free, and something has to give somewhere.