Mike and Diane have spent their entire working lives planning and saving to secure a comfortable financial future. They’ve accumulated investments and assets that will allow them to retire and enjoy the lifestyle they’ve worked so hard for all these years. Another goal is to maximize their estate for their children and the various charitable organizations they’ve been involved with over their lifetime. How secure is their future? One important consideration that is often forgotten by couples like Mike and Diane could end up being their financial undoing – taxes owing on their estate. Quite possibly, the largest burden on an estate can be the taxes owing on assets that individuals accumulate over time.
Registered assets (RRSPs, RRIFs) are subject to tax potentially as high as 50 percent in the year of death. Non-registered assets, including incorporated business shares net of any available capital gains exemption, investments and real estate, are also subject to taxes. A substantial portion of what they’ve saved could possibly be lost to taxes. The Income Tax Act allows the transfer of investments to the surviving spouse and the deferment of some tax burden until the surviving spouse’s death. However, when the surviving spouse dies, these taxes will need to be paid by the heir, or by the estate. That could amount to 50 percent of a lifetime of savings gone.
A legacy of a lifetime of careful planning could be in jeopardy. You can avoid this situation in your own life by planning now. A permanent life insurance policy could fund the taxes owing upon death, leaving your estate to those that mean the most to you – debt-free.
Here’s an example
The following is a comparison chart of the costs of the various options for paying a tax liability.
· Mike and Diane are currently age 50, non-smoker, standard risk.
· Their current capital gains tax liability is $250,000 growing to approximately $1,000,000 by age 85 based on the assumed rates of return, a 50 percent capital gains inclusion rate and a 45 percent marginal tax rate.
· The life insurance policy is structured as a joint last-to-die to provide the funds exactly when they’re needed.
· A $285,000* 20-pay life participating life policy is purchased today and will grow to $1,000,000* by year 35 assuming all 20 premiums are paid out-of-pocket, based on current dividend assumptions. The following assumptions were used in this example: Saving option rate of return of four percent, a borrowing cost of nine percent.
As in most cases, the life insurance policy proves to be the most cost-effective way to offset the anticipated taxes owing on death.
Ted Rogers, at the time of his death, reportedly was insured for $350 million. It was probably an illustration similar to this that made his decision an easy one.
If you’ve done everything right so far, make sure you protect your estate and secure your loved ones’ future.
*This example is not complete without the life insurance illustration including the cover page, reduced example and product features pages having the same date.