Don't Make the Government your Beneficiary: Keeping Your Estate in the Family

Article by Gene Giordano

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 More Information:

Gene Giordano, CFP
Strategic Financial Management Group Inc.
Tel. (416) 512-1500 ext. 24

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