Category Archives: Avoid Probate Tax

Should you consider getting life insurance before the rules change on Jan 1 2017?

Life insurance is commonly thought of as a simple estate planning tool. Yet it can also make a very powerful investment tool due to its favourable tax treatment.

Deposits and cash growth in life insurance policies are generally tax-free within certain limits, as are death benefits, which makes life policies used as investments very valuable.

On January 1, 2017 the part of the Canadian Income Tax Act governing life insurance policies will be amended to more accurately reflect changes in mortality rates (people are now living longer). It will also place additional limits on life insurance deposit amounts considered tax exempt.

If you decide to take advantage of life insurance for investment purposes and estate planning before these tax changes take place, your life policies will be grandfathered and provide you with the ability to invest more money tax-free than life policies purchased in 2017 and beyond.

There are many situations whereby you should consider investing in life policies before December 31, 2016. A couple of key situations include:

  •  Your business is growing. Insurance taken out on the owners can create or strengthen succession plans to insure the business won’t suffer when key people are unable to continue working for any reason.
  •  You own properties whose value has grown beyond the capacity of your estate to cover estate tax obligations. It’s possible that capital gains taxes will not allow you to have your estate assets distributed in the way that you’d like. Life insurance can be purchased to cover big tax hits such as these, and allow you to leave more to loved ones and charities.

If you’ve already set aside specific funds to go to beneficiaries such as your spouse, grandkids, kids, community causes and charities, Bequest Insurance’s Generosity Multiplier™ can mobilize those funds to guarantee that your beneficiaries receive even more than you hoped, at no additional cost to you.

Rates of return on our Generosity Multiplier™ are based on age, and since none of us are getting any younger and tax changes are coming on January 1st, this could be the perfect time to contact Bequest Insurance to learn more about how you can reduce your taxes and leave more to meet your personal or business needs!

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Do you have charitable gifts in your Will?

DSCF0608The great things that you wish to accomplish with charitable gifts in your Will may be affected by changes to Canadian tax rules in Bill C-43 that come into effect January 1, 2016.

The new rules are generally more advantageous to gifts in Wills than the existing framework. They allow executors to allocate charitable tax credits to the donor’s final tax return, the previous year’s return, and/or any of the first three years of estate returns. Also, charitable gifts will also be valued on the day the gift is received by the charity. This is a major change – previously, the gift was receipted based on its fair market value on the donor’s the date of death.

You should also know that the first three years of an estate are now called a Graduated Rate Estate, or GRE. This means that income taxes paid by an estate in it’s first three years are based on a graduated scale. After three years estate income is taxed at the highest marginal income tax rate.

Your estate may be impacted if your charitable gifts are distributed after the three year GRE period. If this happens, the charitable tax receipt can only be applied against that year’s estate tax return, and can’t be allocated retroactively to the tax returns of the deceased or any of the years of the GRE’s existence.

DSCN1861_2If you want to donate appreciated assets to charities, the capital gains tax exemption for gifted property will no longer be available to the estate after the three year GRE period. This may result in smaller settlements to all beneficiaries due to unintended additional income taxes owing by the estate.

In many circumstances, the new GRE will be a non-issue. However, it may become expensive if your estate is complex and takes more than three years to settle, since your estate can lose the advantages of the GRE. For example, this may happen when charitable gifts are delayed until your spouse dies, or where other entities are involved such as corporations or family businesses that may need more time to be settled or restructured. The possibility of challenges to the Will may be another concern.

DSCN2803In fact, anything that may delay an estate from winding up before the 3 year GRE period expires may become an unintended and expensive situation for an estate that expects to use charitable donation tax credits and other tax-friendly strategies available only to the GRE. If your valuable charitable tax credits are forced to go unused, this will almost certainly throw a wrench into your best-laid estate plans.

If nothing else, Bill C-43 is a compelling reason to get proper legal and financial advice on your circumstances today to determine whether any changes should be made to your Will and to your current investment strategies to ensure that all of your legacy intentions will be met tomorrow.

Your investment income and the risk of time

Is creating your own income that’s guaranteed for the rest of your life important?

If you expect to use some of your investment savings to finance your retirement or other longer term needs, would you feel better if your savings are 100% guaranteed to provide you with income for life? Do your current investments offer that option?

With interest rates stubbornly stuck at historic lows, many savers and investors find themselves caught in a Catch-22 situation with investment choices that on the one hand offer either poor results, or on the other hand offer uncertain results.

For safety and short term needs many people leave money in bank accounts, and invest in GICs and term-deposits. Savings in these types of savings is safe, but growing at a rate that is barely keeping up with inflation. In many cases savings may not be growing fast enough to meet their longer – term financial goals.

Others place hope for better growth on their investments in volatile markets that don’t guarantee gains, and may actually lose value by the time they need the money. Many people hedge their bets and do both.

It’s not that market risk or volatile markets are necessarily bad. In fact, higher risk tends to bring higher rewards with some investments. In fact it is technically correct that over time, securities markets outperform many other investment savings choices. But these rewards are typically gained over long and uncertain periods of time. As an example, the Toronto Stock Exchange is at about the same level today as it was 8 years ago.

So time is a very important factor, particularly for savings that are earmarked to provide you with an income the you’ll need to use at a specific time such as at or during retirement.

Obviously the closer you get to retirement the sooner you may wish to reduce some risk and put guarantees on your savings you’ll use for income. For many people, the simple fact of knowing that they’ll never outlive their savings is a far more important part of the investment process than hoping for out-sized gains in the markets or running the risks of having to hope for markets to ‘come back’ and make some money eventually.

Thankfully there are a variety of guaranteed investments – no matter the size of your nest egg – that take the risk of time out of your future financial plans.

To discover whether these guaranteed investment options meet your unique circumstances, good questions to ask a certified financial planner or advisor are:

  • Can our lifetime expenses be covered by our current pensions and government retirement benefits?
  • How do we finance our future travel plans and other bucket list items?
  • If we want to convert some of the equity from the sale of the family home or from other nest eggs into a guaranteed-for-life income stream, what are the best available options?
  • Can we afford to support our dependents?
  • How will we cover our long-term care needs?
  • After we’re gone, will we have enough to cover the needs of our survivors, bequests and the charitable legacies that we wish to leave behind?

Here’s a very basic example of a guaranteed income solution.

Many of us feel most comfortable when we know that at a minimum we’ll always have an income for life that will pay rent, taxes, heat, light, power and keep food on the table. Often in these cases there’s an easy-to-implement solution, which is to convert the properly calculated amount of nest-egg savings into the equivalent of a 100% guaranteed-for-life personal income plan that will cover these needs.

Some guaranteed income plans may also offer you additional benefits to suit your circumstances such as:

  • Guaranteed future income growth during savings years.
  • Plans that allow you to participate in the upside of the markets while also guaranteeing an income for life.
  • Guaranteed income payments that won’t go down over your lifetime.
  • Minimum guarantees. What you put in is what you can take out, even if the market value goes lower than your initial deposits.
  • Control over your investments.
  • Joint accounts, for the purpose of guaranteed income continuation for a surviving spouse.
  • Avoid probate taxes and maintain control over savings. Note: in most Canadian provinces, it is unnecessary to set up joint accounts on guaranteed investments if your wish is to avoid probate taxes and dramatically ease the distribution of the residual values to your beneficiaries.
  • Transfer of residual proceeds to your beneficiaries can be delivered as incremental payments over time and/or as lump sums, as you see fit.

As an independent Certified Financial Planner and an expert on guaranteed-for-life income solutions, I have personally invested them since they are a perfect fit for my circumstances.

If you’d like to learn more about taking the risk of time out of your investment savings, I invite you to contact me to help you discover if guaranteed investments are the right fit for you today.

Jack Bergmans CFP

Certified Financial Planner/ Founding Partner

Life Insurance & Estate Consultant

jack@bequestinsurance.ca
Phone: (416) 356-4511
Toll free: (888) 708-3134 Ext. 2