The key to effective estate planning is to minimize estate tax and maximize the amount of wealth available for transfer to the next generation.
Investments and taxes
While registered assets such as those held within an RRSP, RRIF and pension plan allow for an immediate tax deduction and tax-deferred savings for retirement, any withdrawals will be fully taxed as income at the marginal tax rate. Any income or growth from non-registered investments such as GICs, stocks, bonds, real estate and cash will be taxable to some extent – either as it’s earned or upon the distribution of the assets. Even upon death, all assets are deemed to be sold at their fair market value for tax purposes, which can result in a significant tax liability for your estate. Many investors are simply looking to create a diversified pool of assets with stable returns that will attract the least amount of tax during their lifetime and transition that wealth to the next generation in a tax-efficient way.
How the strategy works
A tax-exempt permanent life insurance policy would be purchased, and the policy could be structured on a single or joint life basis. Clients can choose an insurance product with guaranteed values or accept a product with some market risk, which may result in higher values. Premiums for the policy could either be funded by reallocating assets from the client’s non-registered investment portfolio or using excess cash flow not needed for annual living expenses. The policy could be structured as a “quick pay,” meaning the premium would be payable for a pre-determined number of years, provided the policy performs as expected. At the death of the insured(s), the policy would pay out a tax-free death benefit directly to the named beneficiaries.
The estate reallocation strategy will provide a way to diversify the client’s current asset mix in a tax-efficient way, significantly increasing the net estate value available for the next generation.
Clients who will benefit
- Canadian resident
- Typically, clients over 45 (can also work for younger clients)
- In good health to qualify for life insurance
- Capital that exceeds lifestyle requirements
- Fixed income investments
- Receptive to long-term planning and slow growth
- Concerned with preserving assets for the next generation
The benefits
The benefits of the estate reallocation strategy include:
- Life insurance protection that can enhance the overall size of your estate
- The growth within the policy may increase the insurance proceeds payable at death to beneficiaries
- Potential to reduce taxes payable by shifting funds from a taxable environment to a non-taxable one
- Proceeds are paid directly to the named beneficiaries avoiding additional estate taxes/probate fees upon the insured individual’s death
Client example
Through a planning engagement, it was determined that a couple, male and female, both 60 years old and non-smokers, had $50,000 in excess cash flow each year. The clients were looking for an effective investment strategy that would maximize their estate for the next generation and minimize taxes payable upon their last death. After learning of the estate reallocation strategy, the clients preferred the benefits the insurance policy could provide compared to an alternate fixed income investment yielding 3.9%.
Comparing the two options:
The following table illustrates how the clients maximized the value of their estate while benefiting from significant tax savings.
| Traditional Investment | |
| Net estate value at age 90 | $809,039 |
| Rate of return | 3.9% |
| Taxes payable | $325,538 |
*For illustration purposes only. Values as of April 2021, assuming a 51.30% personal tax rate, insurance products and rates will vary according to the client’s situation.
Want to learn more?
Our team along with our insurance specialists can provide more information about minimizing your taxes and maximizing the legacy you leave behind through the estate reallocation strategy.
This article is intended as a general source of information only and should not be considered or relied upon as personal and/or specific financial, tax, pension, legal, or investment advice. Please note that it is extremely important that individuals obtain advice from a professional advisor when developing an insurance strategy. Benefits from different strategies can vary greatly depending on a number of factors, such as age and health. Individuals interested in this type of planning should contact their professional advisors.
Dri Financial Group 