Tag Archives: life insurance

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.


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.

Financing My Retirement Part 5 – Get better outcomes with Annuities and Life Insurance

Continuing with some guaranteed retirement income strategies and making the most out of your nest egg whether you’re selling your home or using other savings for your retirement income.

The goal of this blog is to discuss strategies with guaranteed income solutions that allow you to stay in control, decrease taxes, increase income and leave more to heirs.

In the previous blog we looked at the outcomes of some typical client income strategies and this is a continuation on that theme:

A lot of people feel that their home is the one thing that will be able to provide enough money to support them in their later years.  If you are planning to sell your house to use your nest egg for retirement income,  and/ or are looking for guaranteed safe ways to increase your income, annuities should be the first thing you consider.

Here are a few reasons why.

1. Interest rates are low: Traditional expectations were that interest earned on the value of a home and other saved assets would be enough to live on for life and the principal would pass on to one’s beneficiaries. Unfortunately, for many of us low interest rates don’t provide enough of an income to support a decent retirement.

2. It’s very likely that negative returns in the market can wipe out your retirement income nest egg:  Hoping to avoid a negative outcome in the markets is not a plan and unfortunately the math doesn’t lie. There are many sources you can go to to discover the dangers of negative returns on a stream of income. My favourite source is Dr. Moshe Milevsky Ph.D. Professor of Finance at the Schulich School of Business at York University who, over the years has done excellent research that quantifies the severe and rapid financial devastation that can result from a negative sequence of returns in your retirement years. If you’d like to learn more about  the technical aspects of this topic I’d definitely recommend you check his website. Also, his book Pensionize Your Nest Egg  is an important piece that details some practical methods of ensuring lifetime income.

3. Psychology: The reality is that the majority of people are more afraid of running out of money in their lifetime than of dying so financial planners and most of people who are retiring or expect to retire, need to rely on products and strategies that give lifetime income guarantees.  This is a basic and necessary need that allows everyone to actually sleep at night.

4. Pensions: Traditional defined benefit pensions provide guaranteed income for life but fewer and fewer people have access to pensions of this kind. Defined contribution plans are more common however they are mostly invested in the market so there is significant risk that your retirement nest egg will be wiped out or insufficient.

So what are the available options to replace these risks that can provide us with a personal private pension that’s guaranteed for life?

Option 1 : There are variable annuities which are excellent for savings years and provide a minimum  dollar amount of guaranteed income for life. These we touched on in part 4 of this series.

Option 2: Then there are annuities which also guarantee income for life.

A general overview of annuities and many of the benefits can be found here.  In general, annuities provide you with the best, tax friendly way of generating an enhanced income for life that is available today. Your annuity income is determined by a number of factors including your age and the prevailing interest rates. In general, the older you are, the higher the income you can expect. Your after-tax income from an annuity will generally be much higher than what you get from a typical GIC or other guaranteed savings and in fact, because most of the income from an annuity is tax-free, income tested benefits such as Old Age Security or the Guaranteed Income Supplement are less likely to be impacted, if at all!

A separate point but very important outcome for many people regarding annuities is:  that almost everyone buys annuities with guarantee periods so that when you pass away, all of the residual value  is guaranteed to go to your beneficiaries.

Here’s an annuity example: (Please note that these rates are like fresh bread, so they go stale very quickly. Contacting a licensed insurance broker will get you up- to-date information when you need it).

A sample annuity:  In March 2015, a 65 year old male can receive an income of $15,194.86*  for $250,000 every year, guaranteed for life. The taxable portion of this income would be a mere $1,712.87.

* (Please note that these rates are like fresh bread, becoming stale very quickly, so contacting a licensed insurance broker will get you up to date numbers when you need them).

Our same 65 year old may also wish that his capital stay intact so that on his passing everything goes to his beneficiaries. Buying a $250,000 GIC or term deposit today is certainly a valid option that is often used in these cases however, it will get him a fully taxable income of only $6,150 per year. The high taxation and low income may not be the best solution.

Combining an Annuity with life insurance: To replenish his capital if he were to buy an annuity, (also known as an estate preservation strategy), our 65 year old would have a higher annual income if he we to do the following, using the same money.

The first is to purchase a life insurance policy for the amount he wishes to replenish. The benefit will go to his beneficiaries tax free, fast and outside of the estate so there are also no probate taxes, fees or delays. He then buys an annuity to pay for the life insurance premium payments.  Interestingly, today $250,000 of life insurance would cost him $7,122.50/ year in premiums which is more than offset by the $15,194.86 income we saw above that he can get from a $250,000 annuity.

By combining the two ideas, the annuity payments will give him an income (which is the difference between the cost of the premiums and the income from the annuity). In this example, after paying the life insurance premiums our 65 year old gets an  income of $8,072.36 per $250,000.  This income is still higher than he would get using the same money for a GIC or term deposit but more importantly because most of it is tax free he has much more money in his pocket each year. He also dramatically lowers the risk of a clawback from any income tested government benefits he may be receiving such as OAS or the GIS.

Of course, when our 65 year old  passes away his beneficiaries will get the full value of his estate because of the insurance policy.  And, it’s an easy process for his executor, can remain private and confidential, probate taxes and fees are eliminated, and his beneficiaries receive the proceeds very quickly.

This strategy works in many situations and I like it because it can be adapted to include joint first or last to die options, be specific to your individual income needs, and can include an extremely wide variety of outcomes such as privacy issues, an uneven splitting of the proceeds that you may like to see happen etc.

Of course everyone’s needs and situations differ.  To learn more about what investment strategies best suit your circumstances please speak with your advisor.

And as always, if you have questions or would like to learn more please feel free to drop me a line anytime.