Category Archives: Probate Tax

Should you buy prescribed annuities now to avoid 2017 tax increases?

Living longer than people in previous generations is great but more and more people are now worried about the possibility of outliving their savings. 

Because of this, guaranteed-for-life income solutions are becoming a vital investment component for many Canadians. 

Within the available choices of guaranteed-income solutions, prescribed annuities provide much higher annual take-home income than you’ll get from other typical guaranteed savings choices due to both their structure and the overlay of significant tax benefits. For example*:


A 60 year old in the 40% tax bracket using $100,000 in savings to provide income for life :

Scenario 1:    2% GIC is purchased

Gross Income: $2,000
Taxable amount: $2,000
Net Annual Income: $1,200

 

Scenario 2:     5% Prescribed Annuity purchased

Gross Income: $5,000
Taxable amount: $1,054  (if purchased in 2016)
Net Annual Income: $4,578 

*Please note that this example is for illustration purposes only.

Your annual taxable amount is set for life when you purchase prescribed annuities.  If this same 5% prescribed annuity is purchased in 2017 the taxable amount is expected to increase from $1,054 to $1,450. 

It's a balancing act!

It is also important to consider how various retirement income streams might lower or even eliminate your income tested government benefits such as your Old Age Security pension (OAS). For the 2015 taxation year OAS clawbacks begin when your total annual taxable amount (not your total income) exceeds $72,809.  OAS benefits are completely eliminated when your net income (including your OAS income benefit) is just over $117,000.

For many people,  increasing take-home income that’s earned from savings can end up being a bit of a balancing act that often includes tax-friendly income streams such as prescribed annuities. In fact, prescribed annuities are a very effective triple win for many people because they can provide higher incomes, lower income taxes and preserve as much as possible from income tested government pension plans.

You may now be asking yourself these questions:

  • How do prescribed annuities or other guaranteed-for-life income options work?
  • At my age what rate of return would I get on a prescribed annuity?
  • How is prescribed annuity income guaranteed and for how long?
  • How are my prescribed annuities valued for my estate, spouse and other beneficiaries when I die?
  • Are annuities suitable for me? Would they be suitable for my dependants?
  • Are there guaranteed income-for-life annuities that allow me to access my capital just in case I need it? 
  • Should I get prescribed annuities now to avoid tax increases coming in 2017?

As many of you already know, there’s no obligation when you reach out to us and we make every effort to answer these and any other questions you might have within one business day.


Best Regards



Jack

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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.

Recent market volatility and your investment savings

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This morning my wife Marlena asked me if we should be worried about the recent stock market activity that’s all over the news these past few days.

I reassured her that the vast majority of our retirement savings were carefully placed in products that offer guarantees that keep them immune to market swings.

When speaking with clients for the first time to determine the most appropriate choices for their own investment needs, my goal is also protect your own hard-earned savings against the effects of these negative market events

As my client, you learn that it’s important to establish a stable savings portfolio following sound practices such as having a proper asset mix of stocks and bonds based on your risk tolerance. Some financial institutions call this balanced approach ‘safe investing’.  Our work goes further, offering you more advanced and sophisticated levels of protection.  For example, choosing investments that historically have been able to recover very quickly from market downturns can often be critically important during both your savings and income years. Additionally, I am constantly monitoring your investments to ensure they continue to perform as anticipated, and always looking for new or better solutions that might fit your specific needs and keep your savings safe so you can use them when you need them.

Events such as the current market downturn can’t be predicted, but I offer all of my clients even more ways to protect their savings. Often that comes by choosing insured investment products that can provide a 100% guaranteed benefits on your capital, guarantees on savings growth, and/or contractual guarantees to provide you with an income for life that rides out these volatile markets.

Marlena was comforted when I reminded her that our own savings are 100% guaranteed and our income is contractually guaranteed for life.

Please feel free to contact me anytime if you have any questions or concerns about your current investment savings. If you know of anyone else who can benefit from this worry-free approach to their investments, I invite you to share my contact information with them.

 

Best Regards

Jack Bergmans 

Certified Financial Planner/ Founding Partner Life Insurance & Estate Consultant

Bequest Insurance

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

What really happens to your assets when you die?

With a few simple changes you can leave a lot more to your beneficiaries and pay much less in taxes when you die. 

Often the conversations we have with  clients leads to the inevitable question, “What happens to my assets when I die?”

Many people assume that upon death, all of their money will automatically go to their spouse, kids, place of worship and charities.

In our experience, the wills and personal finances of most people are not properly set up to realize these goals.

Often, it only takes a few simple changes to allow your bequest wishes to be much more valuable and effective, while making the handling of estate matters much simpler for your executor.

In this article I’ll explain a few examples of things that normally occur when someone dies that create some common problems and impediments, and how you can easily solve them.

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Problem 1: You don’t have a will.

As in most places in North America, dying in Ontario without a will essentially means that your assets will flow in pre-set proportions to people and creditors the government deems to be ‘next in line’. If you want your entire estate to go to your spouse and kids, this will happen though maybe not in the proportions you imagine and only provided your debts don’t outweigh your assets. However, when a provincial trustee must step in to administer your estate, they deduct very high fees and probate taxes, which reduces the value of your estate and can also result in all kinds of other unforeseeable problems.  For example, your family home may need to be sold to pay these taxes and fees. Also, your estate is likely to be frozen and inaccessible for at least one year – or even many years depending on the complexity of your case. These common outcomes cause significant financial and emotional hardships on surviving family members who continue to rely on the proceeds of your estate.

If you are living common-law and die without a will, it’s extremely important to know that your rights as a married couple end immediately on your death. Your partner may be put in a position where they may not be able to claim any of your estate.

Solution 1: In almost all cases, directing your wishes through a will is a very inexpensive way to prevent many unwanted outcomes. Even though I am not a lawyer, this is very nearly always the first thing I recommend to my clients.

Problem 2: Heirs and creditors can challenge your will and reduce the size of inheritances and charitable gifts.

Even if you have a will, there are still many circumstances that can reduce the value of your estate, and obstruct your bequest intentions.  There are simple ways to set up your bequests to allow you to be completely sure that your bequest wishes are followed.

Let’s say you have set aside money to go specific beneficiaries including your children, grandchildren and a few charities. You have specified who will get what in your will.

However, probate taxes and fees, legal fees, and funds going to creditors will cut into your inheritances. Because money can do strange things to people, your children may challenge your choice of beneficiaries and even your charitable donations. Also, if you’ve not listed your charities by their formal legal name, charities of a similar name may each lay claim your donation. These common problems can tie up your estate for years.

You can make many simple and free changes that will make your estate much more valuable, and free from any contentious tug-of-wars over your money.

Solution 2: Another way to eliminate any challenges is to give your community-based legacy gifts through charitable Community Foundations. Many offer you the attractive option of making a charitable contribution now and deciding later which causes will get your money, and how much each will receive. You can make as many tax-deductible donations through Foundations such as these as you like, and they will then follow your wishes and efficiently dispense your funds upon your death.

Solution 3: If you are sure you won’t need the money you’ve set aside, consider giving it to your beneficiaries while you’re alive. This will reduce the size of your estate and therefore probate taxes and fees. When your beneficiaries are charities, gifts made while you are alive produce tax credits that you can use to your reduce current taxes – and unused credits can be carried forward for as much as five years. Lower taxes now will allow you to give more to all of your beneficiaries.

Solution 4: If you have income that is more than you spend, consider making significant ongoing contributions to your favourite charities. The charitable tax credits can significantly help to offset your current taxes.

Solution 5: If there is a chance you may need the money you’ve set aside as you grow older, or you want control over changing your beneficiaries in the future, or you want to completely avoid probate taxes, fees and delays, consider moving your funds from bank savings accounts, mutual funds or money market funds into identical products offered by insurance companies. By doing so, you can directly assign beneficiaries and easily change them at any time, without incurring any costs as you would to change your will. Then when you die, these funds will pass to your beneficiaries outside of your estate. Your beneficiaries will receive the funds within three to four weeks of the insurance company receiving your death certificate.

In addition, some insurance companies will provide a 100% guarantee on your principal so you’ll know for sure that your investments and subsequently your bequests won’t be negatively affected by market fluctuations.

Even better, leaving your bequests in this way removes this money from your estate (just as if you gave it away during your lifetime), which will lower your estate’s probate taxes and fees on remaining assets in your estate. Lower taxes means you will leave even more to your beneficiaries!

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Solution 6: Purchasing a life insurance policy with money that’s already set side for beneficiaries is a simple way to significantly multiply what you’ll bequest to these beneficiaries. You simply use the money that’s set aside to pay your life insurance premiums. In particular, if you want to leave money to charities, it is often to your advantage to pay your policy off in one lump sum or over a few years.

As it is with any insurance product, your bequests will go to your beneficiaries tax free and outside of the estate. They will flow quickly and directly to your beneficiaries, usually within three to four weeks of the insurance company receiving your death certificate. No hold-ups, no taxes, no hassles.

These are some simple options available to you that will allow you to have complete control over what happens when you die. If you’d like to discuss how you can easily create a more valuable estate that reflects your personal circumstances, please feel free to contact me anytime.

Next: Including your favourite charities as your beneficiaries is not only a good thing to do but can help significantly reduce the taxes owing on your estate.