A number of legal, financial and emotional issues come up when one senior needs to sell their home for enhanced healthcare and accommodation, but their partner remains healthy. Kim Parlee speaks with Nicole Ewing, VP, Tax and Estate Planning, TD Wealth, about what you need to know when spouses face different futures.
- When couples grow old together, often one will be healthier than the other-- just a fact of life. And that probably means one spouse may have more health care needs, and that could end up bringing up a lot of emotional as well as financial and legal issues. Nicole Ewing knows a lot about that. She's Vice President, Tax and Estate Planning with TD Wealth. And I had a chance to talk to her about the problem when spouses face different futures.
- In an ideal world, everything would be happening at the same time, and the same financial considerations would be relevant to both spouses. But that's just not the reality in a lot of different situations. So if somebody has had a health care incident where they require longer term or more intense care, it doesn't often make sense to have the spouse necessarily playing the role of caretaker. And so we need to think about some strategies to ensure that both parties' needs are being met.
KIM PARLEE: All right. So how do you-- where do you start? How do you plan for, let's say, one person going to a senior's home and the other not?
- I think first is having the conversation and sort of anticipating that this is a possibility. This is something that might happen. And so looking at your finances and really having a sense of what the expectations are and how would we fund something like that-- not being sort of knee-jerk reaction when one spouse requires that care.
So if we think, for example, in many people's financial plans, the house will eventually be sold, and the proceeds from the home will be used to fund that long term care of the retirement residence. If that's happening at different times and the house is going to fund the first person's care, what are we going to do for the care of the second person? So we need to, I think, have those conversations and just get it on the table.
KIM PARLEE: So what do you do in that situation? I mean, that is-- I think probably when you're saying that, people will be thinking of this for the first time. It's like, if you've got one person who needs to stay in the house, or needs to stay somewhere, how do you manage all that?
- Well, I mean, speaking with your advisors about what your options are. So looking at your finances and looking at your financial picture from that holistic point of view. How are you funding your retirement? What options do you have? Can you stay in the home, for example, and pull down on a reverse mortgage or a line of credit, accessing funds in that way? But there's going to be-- the right solution is going to be unique to each family and what's available to them in their circumstances.
KIM PARLEE: What if you're-- just to add one more layer of complexity-- a common law couple and if you're not married?
- Yes. Well, and this can really pose a challenge. So for married persons you have expectations built in. You have the law on your side. And it says, for example, in Ontario, you cannot encumber or sell or mortgage a matrimonial home without the consent of both spouses. And so we know that those decisions are going to be made together. If, instead, you're in a common law relationship and you're not on title, you don't have those same protections. And so one party may have all of the power in terms of making decisions.
Layer on that, if the person who's, for example, common law, the older person is the homeowner, and they have not named their common law spouse as their attorney for property-- say instead they've named their child-- well, their interests are not aligned. And so if dad needs funds in order to provide for his care, how do you think that decision is going to be made by the child? He's going to be looking out for the interests of his parent, and the spouse then doesn't have those same protections. So they're essentially a tenant.
Things can be done. So we want to plan around this. Or we want to have that cohabitation agreement or have a prenuptial agreement, have the discussions and the documents put in place to make sure that accidents don't happen that way,
KIM PARLEE: Yeah, that it's not straightforward. What about-- I think most people might know and are familiar with the term of principal residence exemption. How does that play out in this case, because, again, timing differences-- and I know you gave a couple examples before we start talking-- of just how the use of the house might change in the process?
- Exactly. So if we have, for example-- so principal residence exemption, as we all know, we don't pay tax on any gains on our principal residence. And so this is a great tax savings and planning technique. But if, for example, one individual moves out and to fund more care, I move somebody in and I start charging them rent, does that change the use of that home? And have I now disqualified that home from being a principal residence for the purpose of the principal residence exemption? Perhaps.
- It's significant.
KIM PARLEE: Right? And if you sort of accidentally walk into that without realizing the implications, or if both people move out and sort of hold onto the home for a little while, not really sure what to do-- maybe leave it empty, maybe have somebody renting it-- the tax rules are really specific about how that exemption is granted. And so unless you fall within those parameters it could be lost. And again, accidentally. We want all planning to be intentional.
- And there's accidentally little changes, but that's a big one, if it is to go wrong. What about giving your spouse power of attorney? Does that help or hinder?
- Well, I suppose it depends. It can both. So I'm a big proponent of having power of attorney documents in place. Without them we don't have any authority. So the spouse does not have the authority to make decisions on your behalf simply because they're your spouse. You need to have a document giving them that authority. And there's a conflict of interest. Inherently, there's a conflict of interest, where the attorney for property is required to look out for the best interests of the person to whom they've given them that role, but the spouse's interests may be different.
And so you may want to-- in Ontario, for example, where you can't encumber the home without having spousal consent, you want to include a clause in the power of attorney giving your spouse the authority to also make those elections for family law purposes or for-- so it's really important to think through how those roles will actually play out. Again, when I referenced the-- if you have the son acting as the attorney for property in a second marriage, that is going to complicate things as well.
So there's no straightforward or one-size-fits-all solution. I think people really just need to have a look at their own situation and think through these before things happen.