Estate Planning Strategies

Using Insurance

    Life insurance is a great 'tool' for solving many of the most difficult estate planning challenges. Here are some common strategies...

Capital Gains tax liabilities on death: People with significant real estate holdings, or corporate shares, can face huge capital gains liabilities on death, and these gains may be triggered even though the assets themselves have not been sold. By using capital gains tax-protector insurance, investors can ensure that these tax liabilities do not trigger the forced sale of properties, or shares,  to pay tax bills.

RRSP/RRIF de-registration on death: Many people with larger portfolios bristle at the fact their retirement savings become de-registered when not transferred to a spouse or minor child. RRSP/RRIF tax-protector insurance can be used to ensure these portfolios are not eroded on death. More importantly, this coverage can also ensure that the distribution of assets to heirs remains equitable. For example, if a testator willed their $300,000 home to one child, and their $300,000 RRIF portfolio to the other, this would result in a very significant inequity. This is because the full $300,000 RRIF would be de-registered on death, pushing the testator into the highest tax bracket and resulting in roughly half the portfolio being wiped out by taxation, while the heir receiving the home would experience no such erosion by taxation. By insuring the RRIF, an equitable distribution of assets is maintained.

Providing Fair Share Inheritances: As alluded to above, insurance can be used to distribute assets in a more equitable manner, which may not mean equally. For example, you may own a property that only one child is interested in owning, and that you would like to have remain in the family. If you will the property to all your children equally, conflict will likely result because some of the children will want their money out. By using life insurance, you can will the property to the one child, while compensating the other children with 'tax free' cash in the form of life insurance. Of course, a primary function of good estate planning is to ensure that siblings and other family members are still speaking to each other after everything is said and done.

Buy/Sell Agreements: As the owner of a business, what will happen if you, or your partner(s), passes away? Will you end up in business with their spouse, or your partner's executors? Insurance used in the context of a buy/sell agreement can provide for the transfer of ownership in the event of death. It is also usually the least expensive option when cash is needed in these situations. Buy/sell agreements themselves, also address issues of disability, disagreement, and retirement.

Key Person Coverage: The loss of a key individual in a business can be devastating. Fortunately, businesses have an 'insurable interest' in their employees, and so corporations can purchase life insurance on the lives of their most essential personnel. These policies can also be owned and paid for jointly between the corporation and the employee, with the employee taking advantage of the tax-deferral advantages of permanent insurance products for retirement income boosting purposes.

Charitable Gifting: By making a registered charity the beneficiary of a life insurance policy, the amount of the death benefit is treated as a gift made immediately before the death of the insured. This amendment to the Income Tax Act allows for full deductibility of the gift in the year of the donor's death, with a one-year carry-back. As such, a gift of life insurance is now a much more versatile estate planning tool because individuals can decide if they need the tax credits in life, or if those credits are best reserved for their estate. This is also extremely helpful for those wishing to leave a lasting legacy, and while the gifting reduces what the government receives, it can correspondingly increase the assets available for heirs. A win-win-win situation.

Joint Policies: A joint second-to-die insurance policy covers the lives of both spouses, but only pays out on the death of the second spouse, when significant tax liabilities occur. These policies are also considerably more affordable than joint first-to-die policies, or two single life policies. Life insurance death benefits are tax-free, so the dollar amount the estate receives is guaranteed, provided the premiums are paid.

Financial planning, estate planning, retirement planning, insurance planning, tax planning, insurance products, segregated funds, and tax preparation services mentioned herein are offered through Cheri Crause & Associates Inc.