The bond

Why would you live with someone, marry them maybe, buy a house and have a kid or two together, yet not trust them with money?

Weird. But it’s common. Perhaps this is why four in ten unions fail. No wonder arguments about money are the greatest predictor of marriage breakdown. And lots of studies show that finances are the No.1 thing couples squabble over. Even more than her MIL. Or what to feed the pooch.

My experience is consistent. Almost always old wrinklie couples blend their finances. Young ones? Nope. They don’t get this trust/bond thing. At least not until years into the relationship, when it dawns on them the gig’s going to last. So they’d better have a plan.

Spouses with separately-managed TFSAs, registered retirement funds, investment accounts, LIRAs or matched employer pension plans, plus separate bank chequing and savings setups almost always suffer for it. Assets are duplicated. Overall risk is impossible to determine. There may be no balance, lousy diversification, poor returns or too much tax payable. For sure these folks won’t be doing income-splitting or harnessing the power of spousal RRSPs or investment loans.

All bad news. After all, spouses are an economic unit. Their lives and futures are intertwined, especially when you add in real estate, mortgages and (above all) children. How can you possibly plan out a stable retirement when the two of you don’t know what the other person owns, where those assets are, how they’re growing and what they’ll provide in the years to come? Answer: you can’t. So stop it.

In fact couples with a joint investment, savings and spending plan have one thing less to argue about. Then they can focus on fighting over crucial decisions, like the next retirement destination – the Galapagos or Paris, for example.

Here’s a plan. First ensure your RRSPs, both self-directed and the group ones at work, have your squeeze listed as the beneficiary (minor children don’t qualify as benes). For your TFSAs, you and he/her should have each other listed as ‘successor holders’. That means if one of you croaks the other person absorbs the TFSA into theirs, instead of just inheriting the assets. The kids’ RESP should be a family plan, and you both should be ‘subscribers’ to it. If grandparents want to set up an RESP for your spawn, don’t.  If they pass before the kids need the money the plan could be kaput. Have the oldies give you the cash to contribute.

Now, consider a joint non-registered investment account, potentuially a key tool in retirement to generate income and reduce tax. It’s also called a ‘cash’ account in the investment business, and simply indicates it’s not a tax shelter (like an RRSP) and uncontrolled by government regulations restricting contributions or mandating withdrawals.

Why joint? Why not separate ones?

All of the above reasons, plus another biggie. If a spouse dies everything in their non-registered account is deemed to be sold on the day of death. And, yikes, all gains are taxed. There are no beneficiaries allowed for this kind of account, so the remaining spouse is SOL. The assets form part of an estate to be diddled around with by the authorities and tied up for weeks, moths or more. But with a joint account all assets flow seamlessly into the hands of the survivor. No disposition. No taxes. No probate. No delay. Just make sure it’s the right kind of cash account – called a JTWROS (joint with rights of survivorship).

This reason alone is compelling. If you love someone, surely you want them to have les stress and more security after you check out. So you need a will. You need registered accounts correctly set up. And you need this.

What about taxes and a joint non-reg account?

Here’s the law: taxes on investment gains are paid according to who originally contributed assets. Both spouses can transfer assets in kind from separate non-reg accounts into a joint one without tax being triggered. But growth is then taxed.

Here is how evil, bean-counting, no-personality accountant dudes put it:

Joint accounts cannot be used by you and your spouse to achieve income splitting. For example, you and your spouse cannot arbitrarily split the income 50% each, solely on the basis that it is a “joint” account. You also cannot choose a ratio to report on your respective tax returns each year to optimize your tax savings. Each spouse must report their share of income earned in a joint account in accordance with the proportion of funds they have contributed to the account.

However in the real world, as a couple saves money, buys assets, disposes of real estate one spouse may have paid down, moves employment savings around and accumulates it all in a joint non-registered account, meticulous record-keeping ain’t gonna happen. So the actual practice of most couples is to divide the taxable investment gains equally. Can that save taxes sometimes? You bet.

But joint accounts can save more than that.

Marital bliss through strategic asset allocation. What’s not to love?

About the picture: “I have occasionally contributed comment under ‘Murray the Vet’,” he writes. “Tess came into my clinic as a stray cattle dog, roughly a year of age. There is a provincial park a short walk away, Long Beach on Vancouver Island, in which we ran and walked countless miles. Full of attitude, she was the best companion and is sorely missed. Tess died 3 weeks ago. We were fortunate to have had her for over 14 years. As a dog lover, you can appreciate that I shed a tear writing this. On a positive note, these experiences reinforce the empathy I feel for clients in similar circumstances. I’ve read your blog from the beginning. Your continual efforts are very much appreciated.”