Life Insurance

There is nothing so certain as death and taxes...or so the saying goes. This certainly is true in Canada where there is a “deemed disposition” when a taxpayer dies. What this means is that a taxpayer is deemed to dispose of all his or her assets at fair market value immediately preceding death.

 

Or so the saying goes. This certainly is true in Canada where there is a “deemed disposition” when a taxpayer dies. What this means is that a taxpayer is deemed to dispose of all his or her assets at fair market value immediately preceding death.

How does this affect your assets?

  • For certain assets (e.g. stock investments, company shares, revenue property, collectables), if the fair market value is greater than the adjusted cost base then capital gains will result.
  • Fifty percent of capital gains are included in the deceased taxpayer’s income.
  • Revenue property could also attract additional tax in the form of recaptured depreciation.

There are some exceptions

  • Assets which are left to a spouse will have the gain deferred until the spouse dies or disposes of the asset.
  • A principal residence is not subject to capital gains.
  • Shares that the deceased owned in a Qualifying Small Business Corporation may qualify for the Lifetime Capital Gains Exemption where the first $800,000 of capital gain is exempt from taxation.

Registered Funds receive different tax treatment

RRSP, RRIF, TFSA and Pension Funds

  • A spouse who is left registered funds by her husband or his wife may roll those funds into his or her Registered Savings Plan or Retirement Income Fund and avoid paying income tax.
  • Registered funds left to anyone other than a spouse or qualifying disabled child are fully taxable as income. Some rules also apply to minor dependent children which involve spreading the tax by purchase of a qualifying annuity for 18 years less the age of the child at the time of acquiring the annuity.
  • Amounts paid to a beneficiary of a Tax Free Savings Account are not subject to income tax.

Other fees and costs

  • Funeral and other last expenses;
  • Probate fees;
  • Administrative costs and possibly legal fees.

Reduce or avoid the impact

Estate planning and life insurance solutions

Freezing the estate which has the effect of fixing the amount of tax payable on assets upon death and passing future growth to the next generation;

  • In conjunction with the above, the use of a family trust with the objective of multiplying the number of Lifetime Capital Gains Exemptions on shares in a Qualifying Small Business Corporation distributed to other family members.
  • The use of joint accounts. This strategy should be used with careful consideration and professional guidance.
  • Effective use of life insurance, both personally and corporately owned, which can provide sufficient liquidity at death to pay taxes with insurance proceeds rather than “hard dollars”. This can be especially true by using Joint Second-to-Die life insurance which will provide proceeds to pay the deferred tax upon the death of the surviving spouse.

While we often complain about the cost of living, the cost of dying can also be extremely high and could create significant problems for those we leave behind. With sound advice and planning the financial impact on your family and business partners can be softened and, sometimes, even eliminated.

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Often we see older investors shift gears near retirement and beyond. Many become risk averse and move their assets into fixed income type investments. Unfortunately this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.

Growing your estate without undue market risk and taxes

Often we see older investors shift gears near retirement and beyond.  Many become risk averse and move their assets into fixed income type investments.  Unfortunately this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.

Or maybe the older investor cannot fully enjoy their retirement years for fear of spending their children’s inheritance.

The Estate Bond financial planning strategy presents a solution to both of these problems.

How does it work?

  • Surplus funds are moved out of the income tax stream and into a tax exempt life insurance policy. 
  • Each year a specified amount is transferred from tax exposed savings to the life insurance policy

In essence, we are substituting one investment (the life insurance policy) for another (fixed income assets).

The result?

  • The cash value in the life insurance policy grows tax-deferred and may also increase the insurance benefits payable at death.
  • Since the death benefit of a life insurance policy is received tax-free by the beneficiary this strategy results in a permanent tax shelter.

In other words, there is an increase in the funds available to heirs and beneficiaries after death and a decrease in the taxes payable before death.

The Estate Bond in action

Robert, aged 60, and his wife Sarah, aged 58 are satisfied that they will have sufficient income during their retirement years.  They used the Estate Bond concept as a means to guarantee their legacy to their children and grandchildren.

Investment: $30,000 for 20 years into a Joint Second-to-Die Participating Whole Life policy which is guaranteed to be paid up in 20 years

Immediate Death Benefit: $892,078

Death Benefit in 30 years: $2,160,257 (at current dividend scale)

Cash Surrender Value in 30 years: $1,582,934 (at current dividend scale)*

* If surrendered, the cash surrender value would be subject to income tax but there are strategies that could be employed to avoid this tax.  Assumes using Participating Whole Life illustrated at current dividend scale.  Values shown in 30th year at approximate life expectancy.

Alternative investment in action

Investment: $30,000 for 20 years in a fixed income investment earning 2.5% AFTER tax

Immediate Death Benefit:  $30,000

Estate Benefit in 30 years: $1,005,504

It should be noted that obtaining this rate of return in today’s fixed income environment would be challenging. 

Additional benefits of the Estate Bond

  • The estate value of $2,160,257 in 30 years is not subject to income tax
  • The proceeds at death, if paid to a named beneficiary, are not subject to probate fees.
  • If the beneficiary is one of the preferred class (spouse, parent, child or grandchild) the cash value and the death proceeds are protected from claims of creditors or litigants during the insured’s life time.
  • The use of life insurance with a named beneficiary also results in a totally confidential wealth transfer.
  • Robert and his wife can both enjoy their retirement without affecting their family’s inheritance.

The Estate Bond strategy is designed for affluent individuals who are 45 years of age or older and who are in reasonably good health. For those who meet these criteria and have surplus funds to invest, this concept can provide significant benefits and results.

Please call me if you have any questions about the Estate Bond strategy or would like to determine if it is right for you.  As always, please feel free to use the social sharing buttons below to forward this article to someone that would find it of interest.

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