Division of marital assets in Canada via RRSP and home equity.
January 4, 2013 1:44 PM Subscribe
Division of marital assets in Canada via RRSP and home equity. What are the pros and cons and what should be considered?
Hi. If someone is separated in Canada, it is possible to divide the marital assets and use home equity or RRSPs to do so, including, I think, a lump sum or substantial lump sum for spousal support.
Would there be any downside to accepting an RRSP rollover and then withdrawing a certain amount each year? This is from the POV of the person receiving the rollover.
For example, let's say that $200k was to be paid as a lump sum upon division of assets. If the spouse had $100k rolled over into their RRSP, they could then withdraw $10k a year for 10 years. Whereas, if they had it go into the home equity, they might be able to eventually refinance and obtain the money, but it isn't as readily available. The RRSP withdrawal would be taxed, but let's say the recipient is a stay at home parent. Then they would be taxed in a low bracket and perhaps shielding some of the spousal support (that in the RRSP still) from tax and remaining able to qualify for government benefits, such as family allowance or the child tax benefit.
In taking spousal support in a fixed sum, the recipient reduces the risk of the other spouse's health, employability, etc and can also access the money in the present.
But what else should be considered in reviewing such an offer?
Hi. If someone is separated in Canada, it is possible to divide the marital assets and use home equity or RRSPs to do so, including, I think, a lump sum or substantial lump sum for spousal support.
Would there be any downside to accepting an RRSP rollover and then withdrawing a certain amount each year? This is from the POV of the person receiving the rollover.
For example, let's say that $200k was to be paid as a lump sum upon division of assets. If the spouse had $100k rolled over into their RRSP, they could then withdraw $10k a year for 10 years. Whereas, if they had it go into the home equity, they might be able to eventually refinance and obtain the money, but it isn't as readily available. The RRSP withdrawal would be taxed, but let's say the recipient is a stay at home parent. Then they would be taxed in a low bracket and perhaps shielding some of the spousal support (that in the RRSP still) from tax and remaining able to qualify for government benefits, such as family allowance or the child tax benefit.
In taking spousal support in a fixed sum, the recipient reduces the risk of the other spouse's health, employability, etc and can also access the money in the present.
But what else should be considered in reviewing such an offer?
This is something a lawyer would be happy to advise you on. And the small expense of the lawyer will more than offset the financial penalties of withdrawing from the RRSP (which are considerable at low-income and get worse as the incomes increase). What you are proposing is not what RRSPs were designed for and the government has purposefully imposed penalties to prevent early withdrawals before 65, even at low income. Short answer - bad idea that will leave the recipient spouse worse off for years if not decades.
Judges also shy away from lump sum spousal support, lump sum equalization is normal (although it too can be spread over several payments/years). Even if this is not proceeding to trial it is the case law that establishes what a fair agreement looks like. The issue with lump sum payments, especially when there are children involved, is that if the lump sum is spent/lost in a bad investment/etc, there is the risk the spouse entitled to the support would return to court for more (and might get it too, based on case law). It also can't account for variances in the spouses incomes over the years. Basically lump sump spousal support is usually only used for a marriage of very short duration (less than five years), and for a small amount (a few thousand); it would be rare for compensatory spousal support to be awarded as a lump sum when there are children involved.
Divorce in Canada is really codified with equalisation, child support tables and spousal support guidelines that are all pretty clearly laid out and very accessible to the layperson. I believe all family courts have staff, resources and courses to educate people going through the divorce process.
Who suggested this idea and is there an imbalance of legal or financial resources at this point? The idea of withdrawing from the RRSP for spousal support is such a bizarre and uninformed one (that benefits the payor spouse and disadvantages the recipient as currently proposed, but exposes the payor to future liabilities) that I wonder if there is a need for another set of legal eyes on this agreement in case there are other seemingly good ideas thrown in that impact the parties in ways they do not realise.
The arguments FOR the lump sum do not make sense, the payor would be required to have adequate insurance for the period of spousal support (and child support), would be expected to maintain their employment (judges are happy to input income on underemployment) and the short-term goal of getting their hands on the money proves very costly if they withdraw it from the RRSP.
posted by saucysault at 4:04 PM on January 4, 2013
Judges also shy away from lump sum spousal support, lump sum equalization is normal (although it too can be spread over several payments/years). Even if this is not proceeding to trial it is the case law that establishes what a fair agreement looks like. The issue with lump sum payments, especially when there are children involved, is that if the lump sum is spent/lost in a bad investment/etc, there is the risk the spouse entitled to the support would return to court for more (and might get it too, based on case law). It also can't account for variances in the spouses incomes over the years. Basically lump sump spousal support is usually only used for a marriage of very short duration (less than five years), and for a small amount (a few thousand); it would be rare for compensatory spousal support to be awarded as a lump sum when there are children involved.
Divorce in Canada is really codified with equalisation, child support tables and spousal support guidelines that are all pretty clearly laid out and very accessible to the layperson. I believe all family courts have staff, resources and courses to educate people going through the divorce process.
Who suggested this idea and is there an imbalance of legal or financial resources at this point? The idea of withdrawing from the RRSP for spousal support is such a bizarre and uninformed one (that benefits the payor spouse and disadvantages the recipient as currently proposed, but exposes the payor to future liabilities) that I wonder if there is a need for another set of legal eyes on this agreement in case there are other seemingly good ideas thrown in that impact the parties in ways they do not realise.
The arguments FOR the lump sum do not make sense, the payor would be required to have adequate insurance for the period of spousal support (and child support), would be expected to maintain their employment (judges are happy to input income on underemployment) and the short-term goal of getting their hands on the money proves very costly if they withdraw it from the RRSP.
posted by saucysault at 4:04 PM on January 4, 2013
Response by poster: Without going into too much detail, assume that a lawyer for the payee suggested this, as it is possible in this province (but not all provinces). The payor has insurance and the payee is the beneficiary. There is a huge imbalance of financial resources, with one spouse now disabled and the other earning a senior executive salary, although the first spouse, who was disabled as a result of abuse, gave up a very lucrative career to stay home with the children. The children are now both special needs and will require a stay at home parent for at least the foreseeable future. So, in spite of a shorter term marriage, all parties currently agree that long-term support will be necessary. Because of current financial costs (childcare, therapy, medical expenses, mortgage/rent in an expensive city), this strategy could free up cash flow, as there are substantial assets in the home and the RRSPs. The payor recognizes what actions led to the disability for the previously part-time employed payee.
Also, to clarify, child support would not be tied to this, for all the reasons you identified. And the spousal support would be set as a blend of the lump sum payment and ongoing monthly payments.
Does that help or change anything?
posted by Chaussette and the Pussy Cats at 6:43 PM on January 4, 2013
Also, to clarify, child support would not be tied to this, for all the reasons you identified. And the spousal support would be set as a blend of the lump sum payment and ongoing monthly payments.
Does that help or change anything?
posted by Chaussette and the Pussy Cats at 6:43 PM on January 4, 2013
Response by poster: Cf: many of the expenses are being paid as special 7 expenses by the payor.
posted by Chaussette and the Pussy Cats at 6:50 PM on January 4, 2013
posted by Chaussette and the Pussy Cats at 6:50 PM on January 4, 2013
The imbalance in financial resources should be rectified though equalization of property, spousal support isn't supposed to be used towards equalisation (again, case law is pretty clear on what the role of SS is). Is the lawyer aware of the plan to withdraw money annually from the RRSP? Have they actually sat down with the client (from your wording I get the feeling this isn't you...) and ran the numbers? Ask to compare in table form what a straight DivorceMate calculation would be for ongoing monthly support, a lump sum support based on RRSP rollover and withdrawals of $10,000 yearly with penalties and taxes, and the blended support you are talking about and see which ones net the recipient the highest in the first year, year five, year ten and fifteen and twenty.
One thing that confuses me is the mention of $100,000 and the annual withdrawal of $10,000, exhausting it in ten years. Right there that is putting a time limit on the SS which is not normally in place when there are children (which in the case you are talking about a judge may decide it will run until the children are no longer "children of the marriage", which conventionally is around 23, but for special needs children that cannot achieve independence may be for life). The annual withdrawal of $10,000 could result in a net gain of little more than half that amount depending on the total income of that year. Right off the top you lose $2,000 to penalties; to NET $10,000 a year you are looking at withdrawing closer to $20,000 a year, which then exhausts the RRSP in five years. But she will still have her expenses in six years, and she will be expected to contribute one third of their education costs if they go to college/university. Will she be able to do that when they are 17? What is her retirement fund like? Why is the lawyer suggesting the RRSP as a vehicle for the money anyway when it sounds like the woman does not have the high income to take advantage of the tax credits, or the continuing income to not need to touch the principal?
For a high paid executive paying a stay at home spouse the spousal support and child support should get her to at least 40% of his net income (exclude section 7 from those calculations). So looking at the lump sum payment that will be the equivalent of $300-500 a month for five to ten years; will she be able to be at his equivalent level financially in fifteen, twenty, thirty years? Or will her bank balance keep going down while he enjoys raises and bonuses and a funded retirement?
If you are suggesting the Payor CAUSED the disablity (I'm not 100% sure you are...) then the issue of spousal support is separate from that. She is entitled to child support for the care of the children, spousal support on a compensatory basis for giving up her career and continuing to care for the children, an equal divide of assets, and she can pursue compensation for her injuries though civil court (or add it onto the equalization settlement) but it shouldn't be classed under spousal support (where the Payor gets the tax deduction - so effectively pays less and the recipient gets less due to paying taxes). She should look for the max possible child support on the table in exchange for less spousal support in order to net the most dollars.
Lawyers are good at the law, but as her plan is including some pretty hefty tax consequences she should also have a session with an accountant/financial planner that can explain what she will net out of all of the scenarios and confirm the lawyer's numbers.
You seemed to not be interested in the home equity option for equalisation. Is one thing being proposed that she retain the matrimonial home and he will release his equity as part of the settlement? Again, the numbers would have to be run on that but if it presently has a low mortgage she may be able to get a favorable mortgage or line of credit at a low rate based on how much equity she has in the house (or sell it for something cheaper and bank the equity). If she is disabled she should be on CPP-d or the provincial disability plan and she should make sure her ex has set up his insurance to be payable to her Henson Trust. A different lawyer should look at the impact of any asset transfer on her continued eligibility for the disability support programmes. (She of course should have set up her own Henson Trusts for her children as well). If she hasn't done her CPP-d applications she may want to wait until she completes the transfer of her ex's CPP credits, as long as it doesn't mean she falls outside the timelines.
If her finances are so tight she can't access the necessary legal and financial professionals she can ask the courts to advance her some money from the equalisation.
posted by saucysault at 8:09 PM on January 4, 2013
One thing that confuses me is the mention of $100,000 and the annual withdrawal of $10,000, exhausting it in ten years. Right there that is putting a time limit on the SS which is not normally in place when there are children (which in the case you are talking about a judge may decide it will run until the children are no longer "children of the marriage", which conventionally is around 23, but for special needs children that cannot achieve independence may be for life). The annual withdrawal of $10,000 could result in a net gain of little more than half that amount depending on the total income of that year. Right off the top you lose $2,000 to penalties; to NET $10,000 a year you are looking at withdrawing closer to $20,000 a year, which then exhausts the RRSP in five years. But she will still have her expenses in six years, and she will be expected to contribute one third of their education costs if they go to college/university. Will she be able to do that when they are 17? What is her retirement fund like? Why is the lawyer suggesting the RRSP as a vehicle for the money anyway when it sounds like the woman does not have the high income to take advantage of the tax credits, or the continuing income to not need to touch the principal?
For a high paid executive paying a stay at home spouse the spousal support and child support should get her to at least 40% of his net income (exclude section 7 from those calculations). So looking at the lump sum payment that will be the equivalent of $300-500 a month for five to ten years; will she be able to be at his equivalent level financially in fifteen, twenty, thirty years? Or will her bank balance keep going down while he enjoys raises and bonuses and a funded retirement?
If you are suggesting the Payor CAUSED the disablity (I'm not 100% sure you are...) then the issue of spousal support is separate from that. She is entitled to child support for the care of the children, spousal support on a compensatory basis for giving up her career and continuing to care for the children, an equal divide of assets, and she can pursue compensation for her injuries though civil court (or add it onto the equalization settlement) but it shouldn't be classed under spousal support (where the Payor gets the tax deduction - so effectively pays less and the recipient gets less due to paying taxes). She should look for the max possible child support on the table in exchange for less spousal support in order to net the most dollars.
Lawyers are good at the law, but as her plan is including some pretty hefty tax consequences she should also have a session with an accountant/financial planner that can explain what she will net out of all of the scenarios and confirm the lawyer's numbers.
You seemed to not be interested in the home equity option for equalisation. Is one thing being proposed that she retain the matrimonial home and he will release his equity as part of the settlement? Again, the numbers would have to be run on that but if it presently has a low mortgage she may be able to get a favorable mortgage or line of credit at a low rate based on how much equity she has in the house (or sell it for something cheaper and bank the equity). If she is disabled she should be on CPP-d or the provincial disability plan and she should make sure her ex has set up his insurance to be payable to her Henson Trust. A different lawyer should look at the impact of any asset transfer on her continued eligibility for the disability support programmes. (She of course should have set up her own Henson Trusts for her children as well). If she hasn't done her CPP-d applications she may want to wait until she completes the transfer of her ex's CPP credits, as long as it doesn't mean she falls outside the timelines.
If her finances are so tight she can't access the necessary legal and financial professionals she can ask the courts to advance her some money from the equalisation.
posted by saucysault at 8:09 PM on January 4, 2013
I just realised you had not gendered your spouses, forgive my hetronormative assumption please.
posted by saucysault at 8:12 PM on January 4, 2013
posted by saucysault at 8:12 PM on January 4, 2013
Response by poster: Forgive me. I didn't mean to suggest that the RRSP was the favoured means. They are looking at home equity percentages as part of this, as it makes staying in the marital home more affordable for the payee spouse. However, as the lawyer had suggested taking a look at home equity and RRSP rollovers as favourable means to working out some of the spousal support, the payee spouse wants to look at this from all angles. Google isn't revealing much information about this sort of situation and the payee spouse is the kind of person who likes to have lots of information before going to an accountant or lawyer, so that the session can get right to the point.
The payee spouse is actually leaning toward home equity transfer as a substantial part of the spousal support, so that there is a blend of the lump sum transfer and a monthly payment.
Yes, withdrawing from an RRSP would result in tax on that income, but so does receiving the spousal support as a monthly payment. And having some of it roll over in the form of an RRSP or home equity transfer helps to protect some means-tested benefits.
The lawyers (payee has seen 2) seem to think that there is hope that her disability will not continue forever. And that the courts would probably only order short-term support (7-10 years), because of the length of the marriage (<1>
You've raised some excellent points - just the thing that AskMefi is great for. Some of your points are really contrary to what the lawyers had said. Perhaps the payee should get another opinion, just in case. The payee does have various DivorceMate scenarios and was just trying to figure out how to value a lump sum payment and choose between monthly payements (which could be uncertain), RRSP rollover (with the withdrawal issues),. home equity, and a blend of all these. The lawyers said that, given the payee's education/experience, the payee would probably be able to work it out without having to unnecessarily pay for legal advice. An accountant is in the works, too.
posted by Chaussette and the Pussy Cats at 8:42 PM on January 4, 2013
The payee spouse is actually leaning toward home equity transfer as a substantial part of the spousal support, so that there is a blend of the lump sum transfer and a monthly payment.
Yes, withdrawing from an RRSP would result in tax on that income, but so does receiving the spousal support as a monthly payment. And having some of it roll over in the form of an RRSP or home equity transfer helps to protect some means-tested benefits.
The lawyers (payee has seen 2) seem to think that there is hope that her disability will not continue forever. And that the courts would probably only order short-term support (7-10 years), because of the length of the marriage (<1>
You've raised some excellent points - just the thing that AskMefi is great for. Some of your points are really contrary to what the lawyers had said. Perhaps the payee should get another opinion, just in case. The payee does have various DivorceMate scenarios and was just trying to figure out how to value a lump sum payment and choose between monthly payements (which could be uncertain), RRSP rollover (with the withdrawal issues),. home equity, and a blend of all these. The lawyers said that, given the payee's education/experience, the payee would probably be able to work it out without having to unnecessarily pay for legal advice. An accountant is in the works, too.
posted by Chaussette and the Pussy Cats at 8:42 PM on January 4, 2013
Glad to hear she is shopping around getting various advice. In case the lawyers have not made it very clear to her, lump sum payments are almost always discounted heavily. So if SSAG were $1,000 a month for five years ($60,000 in total), there would be an immediate reduction due to the tax credit the payor is missing (usually around 30% off), another few percent off for present value discounting and another large percent off for negative value contingencies (such as her health improving and she gets a well-paid job a year down the road). These can reduce her lump sum payout significantly, to half or less, easily. Which if she goes the RRSP route is further reduced by the 40-50% tax she pays on withdrawal (as opposed to the 15% she would pay on spousal support). So the monthly spousal support of $60,000 over five years that would have netted her $50,000 after tax at the end of the five years is reduced to a $15,000-20,000 payout of cash in hand. If her money is that tight can her children afford for her to accept so little? Obviously there are differences in every situation but there is a reason the monthly support is preferred in Canadian courts over lump sums.
posted by saucysault at 9:11 PM on January 4, 2013
posted by saucysault at 9:11 PM on January 4, 2013
And why would the monthly payments be uncertain? If he may leave the jurisdiction and be judgement-proof that would certainly motivate the judge to freeze enough assets to cover his obligations. If he may be spiteful and not pay there is FRO (not perfect, I know), if he quits his job a judge will inpute his income.
posted by saucysault at 9:16 PM on January 4, 2013
posted by saucysault at 9:16 PM on January 4, 2013
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posted by Chaussette and the Pussy Cats at 1:45 PM on January 4, 2013