Divorce And Planning for Children With Disabilities

May 7, 2019
Madhu Kanwar

We’re big advocates of financial planning and often the transitions in our lives like marriage, divorce, and death make us look at our future and the future of our loved ones with a new focus.

When going through a divorce, the negotiation is generally centred around the obvious assets – the home, RRSPs and pensions. Planning financially for children may get overlooked.

Planning is even more critical if you have a child with a disability. If your child has a disability like autism or Down Syndrome, for example, the focus is often on the immediate need (education, health, intervention). There are a lot of unknowns around development. Will they grow up to have a career or a job? Will they be able to master basic life skills or need assistance? Will they be able to manage their money and save for retirement? Who will care for them once you are unable to?

Your separation agreement should address the long-term financial contributions for your children because planning for your child with disabilities is crucial.

There are two things to consider when planning: government incentives and grants, and time.

Government Incentives

The Registered Disability Savings Plan (RDSP) is a long-term savings plan to help Canadians with disabilities and their families save for the future. If you have an RDSP, you may also be eligible for grants and bonds to help long-term savings.

Eligibility

Highlights

  • Lifetime contribution limit of $200,000. With written permission from the RDSP holder, anyone may contribute to the RDSP
  • Maximum grant payable: $70,000; Maximum bond payable $20,000
  • Shared Custody:  The Canada Disability Savings Program (CDSP) system will use the income level that is the most advantageous for the beneficiary to determine the grant entitlements
  • After the age of majority, the beneficiary will most likely be the holder and their income will be used to determine grants
  • Parents or grandparents of a financially-dependent child or grandchild with a disability can arrange for some or all of their retirement savings to be transferred (tax-free) to their Registered Disability Savings Plan (RDSP) when they pass away

Grants

If your family income is less than or equal to $95,259 (2019):

  • For the first $500 contributed each year to the plan, the Government will deposit $3 for every $1 of your contribution, up to $1,500 a year
  • For the next $1,000, the Government will deposit $2 for every $1 you contribute, up to an additional $2,000 a year
  • May be eligible for an additional $1000 in Bond per year, based on your income (2019 income threshold: $31,120-$47,630)
  • You may catch up for previous years. The maximum grant payable in any year is $10,500

Depending on your income an annual contribution of $1500 can potentially accumulate $4,500 in grants and bonds. That is a 300% return.

Time

The second thing to consider is time. Putting money away in an RDSP for the benefit of your child for when they turn 60 is not a priority. Especially when you are a single parent.

Consider the math:

If you start contributing $1500 a year towards your child’s RDSP at the age of 10, over a 20- year period, the plan will have received its maximum grant of $70,000 and maximum bond of $20,000. Your investment of $30,000 over a 20-year period is worth $120,000.

Now, consider the magic of compounding. Assuming no other contributions are made to the plan and the above contributions and grants are invested in a moderate portfolio earning 6%, by the time the beneficiary is 60 years old, the RDSP will be worth $ 1,267,666.

With planning, $30,000 invested over 20 years will be worth $1,267,666.

Financial Planning is vital and often overlooked. When dealing with a separation or a divorce, working together with a Chartered Financial Divorce Specialist will give you clarity and a vision for your future. You will fully understand the long-term implications of your settlement and the ability to meet your goals.