People are often unwilling to consider the
implications of their own death, and therefore avoid making
an estate plan. As a result, spouses, children and other
beneficiaries are often left with significantly less than
the amount anticipated. The value of the estate could
erode by as much as 50%; in the worse case scenario, the
deceased’s debts may outweigh the assets and the
estate will be insolvent. Sometimes family assets such
as real estate properties and businesses must be sold
in order to pay the final income tax obligations. We have
all heard the horror stories of real estate holdings being
drastically devalued due to forced estate sales.
Taxation of property held at death
Many Canadians have been dangerously fooled
by the fact that we do not have an official estate or
inheritance tax. However, a Canadian resident is generally
deemed to have disposed of his or her property for fair
market value immediately before death. Thus the deceased
is taxed as if the property had been sold to an arm’s
length third party, and realizes accrued gains or losses
in the tax return filed for the year of death. Currently
50% of the capital gain is added to the taxpayer’s
income.
Of course, properties with accrued capital
gains can create significant tax burdens in the year of
death. These gains can be deferred where property is transferred
to a surviving spouse, but will be realized when the spouse
dies or otherwise disposes of the property. Only your
principal residence is exempt from taxes.
RRSPs and RIFFs are fully taxable at death
But the taxation does not stop there. Unless
there is a surviving spouse named as beneficiary, amounts
remaining in the RRIF or RRSP are fully taxed in the year
of death. For example, if you had $200,000 in RRSPs or
RRIFs at the time of death, almost $100,000 taxes would
be owed. Also any accrued capital gains or stocks or mutual
funds outside of your RRSP’s or RRIFs will also
be subject to tax.
Therefore, if it your desire for your heirs
to inherit the full value of your estate, you need to
replace the imminent tax liability; it is not enough to
have a will or power of attorney, as important as these
instruments are. The most cost effective investment strategy
is highlighted in the following:
Discount your taxes at death up to 90%
It used to be that life insurance was strictly
something families bought against the possibility of the
death of the breadwinner. It served as a means of replacing
needed income and providing for the welfare of the loved
ones left behind. However, there is so much more that
today’s life insurance policies can accomplish.
Applied properly, life insurance has unique and valuable
financial characteristics that can be utilized to create,
optimize, maximize and preserve wealth. Life insurance
has been utilized by some of the wealthiest, most knowledgeable
and financially exposed families in North America to further
their ability to make life better for their families.
One of the main benefits of life insurance is its tax-free
status. Other than your principal residence, it is the
only financial vehicle so endowed. The insurance proceeds
are inherited by your heirs tax-free. Life insurance has
been recognized by many of this country’s leading
tax authorities as being the most tax effective vehicle
for funding the final tax bill. Though it does not prevent
the government from collecting the taxes, as is its due;
it is the only vehicle that can replace the funds. It
replenishes the estate for the heirs for as little as
ten cents on the dollar. Also since the payment at death
is tax-free and in cash, it eliminates the potential risk
of a forced sale which could ravage an estate.
It works very simply. If you have a projected
tax liability at death of one million dollars, you would
use a last-to-die life insurance policy in your estate
planning to drastically reduce the cost to your heirs.
With this policy, instead of insuring one person’s
life, it insures you and your spouse and the death benefit
is paid out on final death.
Using a last-to-die policy, a couple that
averages age 55, would be able to receive a ten to one
return on their investment. For instance, a one time deposit
of $100,000 would secure a life insurance policy guaranteeing
the estate of $1,000,000. Analyzing this from a purely
investment point of view, the returns are very favourable.
Most investments are subject to income taxes
that reduce their value as they pass to your heirs. Other
than life insurance, no other vehicle or estate planning
strategy offers a predetermined return available the first
day after you buy it if necessary. Implementing this program
will enhance your peace of mind and allow you to live
a longer time secure in the fact that you have provided
for your heirs’ continued financial well being.
For further information, please contact
Gene Giordano,
CFP, at
Strategic Financial Management Group Inc.
Tel. (416) 512-1500, ext: 24
