Suddenly single and strapped for cash
Naomi Davidson remembers the time she and her long-time companion, Mark, made the decision buy a house as one of the most exciting periods in her life.
“It was the first home I’d ever owned, and I was able to work with the designer picking and choosing whatever I wanted,” she recalls. “Everything from the colour of the walls to where the doors would be and which way they’d swing.” She was especially proud of her ensuite with its heated tile floors and double whirlpool tub.
To make this dream come true, Naomi – who asked that her name be changed for privacy reasons – cashed in the better part of her savings, including $20,000 in RRSPs, for a total down payment on her part of $45,000. She didn’t fret about depleting her reserves or the fact that the mortgage would be eating up all of her disposable income and preclude her from further investment in her retirement.
“I wasn’t worried because by the time I retired, the house would be paid for and Mark, who was 10 years younger than me, would still be working, and then when he retired, we’d have his pension.”
Evidently not. After living togetherfor four years, Naomi realized that her companion’s ongoing promise of marriage was suspect, so she moved out. Today, she lives in a $750-a-month rented apartment, a little older and a lot wiser.
In the end, Naomi was lucky. She’s back to managing her own retirement and she got her money back out of the house and then some, thanks to Vancouver’s skyrocketing real estate market, but it could have been worse, a lot worse, says Douglas Welbanks, author of Finances After Separation: A Guide to Renewal and Success for Separated Families.
Welbanks, who was once the director of Debtor Assistance and Debt Collection for the province of British Columbia, says he’s seen it all and then some when it comes to personal and financial entanglements that blow up in people’s faces in the case of either divorce or the unexpected death of a spouse. In a section of his book headlined Sexually Transmitted Debt, he tells the story of Rhonda, a woman who married a predator who not only left her with $80,000 in new debts but had the audacity to file for spousal support and a one-half interest in the $300,000 home she had purchased prior to the marriage.
Each year in Canada, there are about 70,000 divorces, but Welbanks says common-law breakups number at least that many. Add to that the number of people who suddenly find themselves widowed after living in relationships where their spouse handled the finances, and you have virtually tens of thousands of people who suddenly find themselves desperately trying to regain control of their finances. If there were financial problems during the marriage, things tend to get a lot worse after it wraps up.
Not surprisingly, a lot of these suddenly singled are women; according to Statistics Canada, there are just under 300,000 widowed men in this country but a whopping 1.25 million women – fully eight per cent of the population.
Regaining control of your financial destiny after death or divorce can be such a monumental task that it’s not surprising there are financial planners who specialize in it. Heidi Pullem, a CFP with ZLC Financial Group in Vancouver, even has a certified divorce financial analyst designation from the Institute for Divorce Financial Analysts in Michigan.
As often as not, when divorce is the catalyst for separation, it’s Pullem’s job to tell her clients how little they’ll have to spend once the ink dries on the divorce papers.
“My role is often to provide a kind of reality check,” she says. The news is especially bad for women. Typically, women’s household income drops 50 per cent in the first year following divorce, while men’s drops only 25 per cent. Adding further insult is the reality that many women never recover. A 55-year-old woman who’s been out of the workforce for 30 years is virtually unemployable, she says.
“People don’t understand how much their lives are going to change,” she says. “They think they’re going to carry on the way they always did with one less person in the house, but odds are they aren’t going to be able to do that except in a few cases where both spouses have good careers, maintained their own assets during the marriage and the kids are grown.”
Those who find themselves alone after the unexpected death of a spouse may seem to be the lucky ones, but those who ceded all financial control over their lives to their spouses during their marriages can have mountains to climb, particularly if they never established a credit history. Without credit, it’s hard to get a telephone hooked up let alone a credit card or a loan.
Abe Toews, a financial planner with the Stone Creek Financial Group in Regina, knows all about that.
“Depending on the age of the surviving spouse, the biggest issue is that they don’t have all the information they need, sometimes to the point of not even knowing where the bank accounts are.”
Sometimes, this is the fault of advisers, he says, some of whom don’t give enough respect to the person who isn’t signing the cheques. “I make sure both spouses attend all meetings so they both know what we’re doing and why we’re doing it.”
A good adviser will provide clients with a binder where all financial information is collected.
Toews also advises clients to build flexibility into their financial plans to ensure surviving spouses don’t get left out in the financial cold. “I have a client now whose husband retired at 65 and subsequently purchased a 15-year annuity for his pension. He died shortly thereafter, and his widow, now 73, is facing the prospect of having that annuity expire in the spring. Now, she’s scrambling to replace that pension, and I’ve had to tell her that she’s going to be taking a cut in lifestyle.”
Needless to say, those going through a divorce or grieving the loss of a partner are emotionally vulnerable, and Toews says that’s a good reason to move slowly when it comes to making big financial decisions. First thing to do is accumulate all the relevant information. “You need to take a good long look at what you have, what you want to do and what you can afford.”
Joanne Dereta with Stonegate Private Counsel in Toronto says she’s “absolutely shocked” by the number of people who don’t even have wills. If you do have one, make sure it’s up to date and suits your wishes; otherwise, the province will step in and divide assets based on a formula.
And don’t get carried away trying to avoid probate. “Sometimes, people own their houses jointly with their kids to avoid probate, but that’s dumb,” she says. If the kids have a share in the primary residence and get divorced or go bankrupt, the house could get dragged into court with them. “I’ve seen it happen,” she says, “and if you want to sell, be prepared to ask your kids for permission.”
John McNamee, a CFP in Regina, has another reason to avoid joint ownership with offspring. “I just finished undoing a joint ownership for a client who has children in the U.S.,” he says. “This could well have triggered double taxation upon the death of a parent.”
Partners, married or otherwise, should also speak to an accountant about tax implications associated with making spouses the beneficiaries on RRSPs and other capital-growth assets. Sometimes, it’s better to have some assets flow through probate in order to take advantage of capital losses or other deductions the deceased may be eligible for on their final tax assessment.
Second marriages come with their own set of financial implications. In addition to pre-nuptial agreements, mid-life brides and grooms may want to consider keeping inheritances and gifts in separate accounts and not using them for family expenditures. Trusts can also be set up to protect assets, and there are insurance products that allow you to name a beneficiary that keeps the proceeds out of the will. Segregated funds, the insurance industry’s answer to mutual funds, also allow you to name a beneficiary, such as children from a first marriage.
Another thing to consider when marrying someone with kids is that if you support them during the marriage and get divorced, you may still be on the hook for child support, even if you aren’t the biological parent.
Ultimately, all partners to a marriage contract need to realize that there can be a high price to pay for dependency. Whether you think your marriage will last forever or not, establish your own credit history by having your own bank account and bills to pay with your name on them.
Ultimately, the more control you have over your finances prior to divorce or death, the more control you will have after the fact. And even if you don’t use the services of financial advisers, says Lori Bamber, author of seven books including Financial Serenity and The Complete Idiots Guide to Personal Finance for Canadians, spouses should have open communication about the family wealth or lack thereof.
“It makes sense to have the money managed by the more skilled partner,” she says, “but it’s equally important to sit down on a regular basis once a month and look at where things are, what the net worth is, what the assets and debts are, and to have in place an exit plan that will kick in following divorce or death.”
BAD NEWS FOR WOMEN
Not surprisingly, a lot of these suddenly singled are women; according to Statistics Canada, there are just under 300,000 widowed men in this country but a whopping 1.25 million women – fully eight per cent of the population
IT’S THE LAW
Each province in Canada has its own act dealing with the disposition of common property following a divorce. In B.C., it’s called the Family Relations Act while in Alberta, it’s known as the Domestic Relations Act. Whatever the title, the goal of these legislative tracts is to protect the welfare of children and ensure both parties in a divorce get treated fairly when it comes to the disposition of common property. In principle, this means a fair and equal division of assets – the old 50-50 rule – but Alison Ouellet, a family law lawyer with the MacLean Family Law Group in Vancouver, says that doesn’t always mean splitting the pie into two equal pieces.
“One reason assets may not be shared equally is if the marriage was really brief,” she says. “Conversely, a long marriage where a woman has been out of the workforce raising kids, will result in her getting more than 50 per cent.”
Debts incurred during marriage don’t go away after dissolution, even if they were incurred by one partner. If you co-signed any loans, held joint credit cards or had any shared lines of credit, you can be liable no matter what private arrangement you make for repayment with an ex-spouse. The Canada Revenue Agency is another potential creditor with sharp teeth. If your ex owes taxes from years when you were married, the CRA can and will pursue that person’s interest in common property, like the family home.
BENEFITS AND PENSIONS
If you’re a widow and your spouse contributed to the Canada Pension Plan for at least three years, you could be eligible for a one-time death benefit of up to $2,500, monthly survivor benefits and, if you have children under 18, monthly benefits for dependent children. (A child 18 or older qualifies if they are enrolled full-time at a school or university; the benefit is paid directly to him or her on application.) These benefits are available even if you remarry. Divorcing couples should also know that private pensions and CPP credits, like any other common property, can and probably will be divided between separating partners. Contact Human Resources and Social Development Canada (www.sdc.gc.ca) for more information. As far as private pensions go, whether or not surviving spouses continue to receive the benefits following the death of the spouse who earned the pension through employment depends on the kind of options either available or chosen. Most married people choose joint pensions because they continue paying out until both partners are deceased.