Estate PlanningEstate Planning

Estate planning is about life – in the present and in the future.

Most importantly, estate planning is about the life of your family and loved ones – and the peace of mind you get from helping to preserve their financial security.

By its very nature, estate planning is a difficult subject to discuss – even more so to plan for because it forces us to come to terms with our own mortality. Yet it’s something you need to talk about  openly with your loved ones today because you can’t do so after you’re gone – or after they’re gone.

Each person will approach estate planning differently, with personal motivations and expectations. No estate plan will be exactly like another. Estate planning should be a reflection of your  personal priorities and choices.

Estate planning is generally guided by three rational motivations

  1. Provide adequately for family members and/or other loved ones
  2. Ensure that your estate is distributed in the most timely manner possible after your death
  3. Minimize taxes – during your lifetime and, equally important, for the beneficiaries of your estate

… and three emotional motivations

  1. Gain comfort from knowing your loved ones are well looked after
  2. Feel secure knowing that settling your affairs will not add more stress to those grieving for you
  3. Rest assured that your estate will be distributed the way you wish

Tax Efficient Transfer of Wealth

Leverage insurance

Some insurance products provide a straightforward alternative for minimizing probate taxes. GICs issued by insurance companies are actually annuities and are eligible to be paid directly to  designated beneficiaries rather than passing through the estate. This eliminates the probate taxes that are payable on the GIC.

You may want to consider additional life insurance to cover administrative and tax liabilities. Cash from insurance policies may also generate sufficient liquidity to cover probate taxes, income tax  liabilities and other debts payable at death. Life insurance solutions, however, are contingent on the individual’s age, health and insurability, as well as the ability to pay the annual premiums. Minimize taxes payable on the estate Income tax can be the single greatest liability on the household balance sheet. In fact, where assets are not transferred to a surviving spouse or commonlaw partner, the realized value of an estate may be substantially less than anticipated due to taxes payable on the estate prior to distribution. The two largest tax bills generally result from the deemed  disposition of both registered and nonregistered investments. In the case of an RRSP or RRIF account, the balance is paid out and is taxed against the estate as income. For non-RRSP  investments, taxes must be paid on all the unrealized capital gains of the investments. Significant gains may also be realized on property other than an individual’s principal residence (a family cottage, for example).


A Lifetime Gift for your Grandchildren      

The Life Insurance Strategy

GrandchildrenIf you are a grandparent wishing to provide an asset for your grandchildren without compromising your own financial security, you may want to consider an estate planning application  that will generate:

  • Tax-deferred or tax-free accumulation of wealth;
  • Generational transfer of wealth with no income tax consequences;
  • Avoidance of probate fees;
  • Protection against claims of creditors;
  • A significant legacy

A grandparent would purchase an insurance policy on his or her grandchild and fund the policy to create significant cash value. The fact that the cost of life insurance is lowest at the younger ages allows the grandparent to establish a significant plan that allows the cash value or investment fund in the policy to grow tax-deferred. The grandparent would own the policy and name their adult child as contingent owner and primary beneficiary.  When the grandparent dies, their adult child now becomes the owner of the policy.


RESPs For Your Grandchildren

RESPs are also an effective way to pass down money to grandchildren to use for education costs while at the same time leaving a legacy for your grandchild.


Charitable Gifting

Charitable gifting with life insurance is much different. The most attractive advantage using life insurance is that it allows one to make a much larger gift to a charity.

When using life insurance for charitable gifting, it is important to consider different strategies and the different tax benefits. I offer three ways in which to help charities with gifts of life insurance:

  1. Designate a charity as the beneficiary of a life insurance policy. The most straightforward approach is to buy a life insurance policy where you are the owner of the policy and you designate the charity as the beneficiary. In this scenario, you would maintain control of the policy, but the charity collects the insurance proceeds upon your death. The death benefit qualifies as a tax credit on your final income tax return. In this scenario, the premiums for the life insurance contract are not eligible for a tax credit. Since there is a direct beneficiary designation, the life insurance death benefit would bypass the estate and avoid any probate fees. If you have an existing life insurance contract, you can simply change the beneficiary to your charity of choice.
  2. Name your estate as the beneficiary. This scenario is similar to the first scenario in that you are the owner of the policy. However, instead of naming the charity as the beneficiary, you name your estate as beneficiary and simply leave instructions in your will that the proceeds of the life insurance policy will be paid to your choice of charities. Again, the life insurance premiums would not be eligible for a tax credit. However, the death benefit would qualify as a donation giving your estate a tax credit on the final income tax return. It is important to note that the proceeds would not be protected from probate fees, as the death benefit becomes part of the estate.
  3. Transfer ownership of the policy to the charity. In this scenario, if a life insurance contract is set up so that the charity is the owner of the life insurance policy, the premiums for the contract will qualify for a tax credit. However, since you are no longer the owner of the policy, the future death benefit will not qualify for a tax credit.If you have an existing life insurance policy with cash values, you can transfer ownership to the charity and name the beneficiary as the charity. Under this scenario, a tax credit is available for any cash surrender value that exists at the time that the policy is transferred. In addition, a donation tax credit will also be available for future payments of life insurance premiums.Since an actual disposition has been triggered at the time of transfer, there may be a tax liability if the cash surrender value exceeds the adjusted cost base of the policy. You will need to weigh the tax credit against the tax paid as a result of disposition. Also, since you’ve relinquished control, you will no longer have any rights (such as the right to change the beneficiary) in the policy.


Which solution is best for you?

IMG_0920Every situation is different. In most cases, you would choose scenario 1 over scenario 2 simply for the fact that you gain the benefit of probate fee protection. The outcome of both of these scenarios is virtually the same.

Other than that, the two most crucial issues are control and when you want the tax credits.

Control. With scenario 1 or 2, you maintain control, as you remain the owner of the policy. As the owner, you can change beneficiaries whenever you want. In scenario 3, you relinquish your control when you make the charity the owner of the policy.

Tax. It is important to determine when you want to utilize the tax credits. If you want to have tax credits every year while you are alive, you will need to take a hard look at scenario 3. You give up the control but you get to use the premiums in paying less tax every year. However, if you have a significant amount of accrued tax liabilities in the estate, you may be better off saving the tax credits for the future by using scenario 1 or 2.

There is no right or wrong and the decision depends on your personal needs.