Should Peter put most of his 88-year-old dad’s money into a fixed-income fund?

Q. My dad recently moved into assisted living and is about to sell his paid-off house. He has a long-term care plan and a generous company pension, so for now he will have about half a million dollars and growing at age 88. He’s in fairly good health, other than his body failing. I have power of attorney. Dad doesn’t need the money now, but if something goes sideways, he might at some point.

I’m thinking of putting most of the money in a solid fixed-income fund and keeping $30,000 in cash for an emergency. Seeing that he’s 88 years old, I’d like to focus more on preservation of capital and less on growth. But I was wondering if there’s something else that might be a better place to stash it for now. Most of the money will be in a trust. —Thanks, Peter

FP Answers: Hi Peter, I am sure you appreciate the confidence your dad has placed in you to be his power of attorney. It is an honour that comes with a lot of responsibility and work to make sure your dad, and his wishes, are looked after. At the same time, you and possibly your siblings may have differing thoughts and needs which can make the role of a power of attorney a little more challenging.

If your dad’s future needs will be looked after with his generous pension, why not invest in something that will grow his money rather than something designed for capital preservation? Assuming you are going to receive the money when your dad dies, invest it the way you would invest your own money. Of course, it may lose value and if you have siblings they may complain it’s down, but they also may complain that you didn’t try to grow it and they could have had more. Plus, who knows what the future holds: Your dad may need the money.

What if you gift the money to yourself? If you are going to get the money anyway, why not take it and use it today, especially if you are having some financial difficulty? It will save your dad some tax, avoid probate, and besides, if the money goes through the estate, who knows how long it will take before it gets to you? If your dad needs more money in the future you can always help him out, assuming you haven’t spent it all.

Those are a couple of thoughts I sometimes hear, but they come with risks. It sounds like you want to be prudent with your dad’s money and ensure it is safe and available to him if it is ever needed. That is one reason why you are in the role of the power of attorney.

The big risk with taking a capital preservation-only mindset is inflation. But inflation is normally a long-term risk and as a person ages, inflation risk reduces. Your dad also has Canada Pension Plan (CPP), Old Age Security (OAS) and a company pension, which are all indexed to inflation.

The first investment decision to make is which type of account this money should go in and for your dad that will be either a non-registered account or a tax-free savings account (TFSA). Maximize the TFSA first and the rest can go to a non-registered account.

Don’t discount guaranteed investment certificates (GICs).. If you are just looking to preserve capital, then a GIC works. Yes, you may pay a little more in tax on the amount earned, but the G in GIC stands for “guaranteed.” Whenever you move your investments away from a GIC, you are taking some risk. How far do you want to step away from a guarantee in order to increase the rate of return? There are good high-income investment funds available, but the downside is that they can lose value.

You mentioned a trust and that tells me your dad, or both you and your dad, have been giving this some thought. I assume it is an alter ego trust the money is going to go into but I am curious to know why you are adding the money to a trust.

The two main reasons I can think of are to add more safeguards to the money and avoid it passing through the estate. Avoiding the estate means no probate fee and the beneficiaries get the money right away.

• Can Greg, 61, with adopted younger kids, afford to retire on $4.2 million
• Peter, who may be about to be laid off, wants to take the opportunity to retire at 49. Is his plan ‘pie in the sky?’

Your dad will know that once the money is in the trust he is the only beneficiary until he dies. In some ways this reduces pressure on you, Peter, if you have siblings that need or want the money. It is in a trust and they can’t get at it.

If you are in a high-probate province such as British Columbia, Ontario or Nova Scotia, you will save probate fees, which on $500,000 range from about $6,500 to $7,800.

Have you balanced out those benefits with the costs of setting up the trust? There are legal fees to set it up and then ongoing annual tax returns, which is more work for you.

Peter, it sounds like you want the best for your dad and you have a very good handle on things. I wish your dad well.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at [email protected].