Leaving More to Your Heirs

Imagine a $1 million estate including $200,000 of stocks in a non-registered account, a $300,000 Registered Retirement Income Fund (RRIF) and vacation property valued at $500,000.

But it’s not $1 million to the heirs. There’s a $100,000 capital gain on the stocks and a $300,000 capital gain on the vacation property. At a 50% marginal tax rate, tax payable is $25,000 on the stocks, $75,000 on the vacation property and $150,000 on the RRIF. Total tax bill: $250,000.

Now the question is how it’ll be paid.

Managing the tax liability

If there’s enough liquidity in the estate, then estate assets can simply cover the tax. But that’s not always the case. To pay the tax bill, vacation property or another cherished asset may need to be sold. Or investment holdings must be redeemed – not ideal if markets are down when tax is due. Heirs don’t wish to sell assets? They could borrow money to pay the tax, but that method can prove costly.

Another option, if you plan early, is to establish a fund designed to cover taxes payable by your estate. A Tax-Free Savings Account (TFSA) can be ideal, supplemented by non-registered investments if needed. This method of providing an estate with liquidity takes great discipline – the funds may face competing interests over the years, like buying property in Florida.

The life insurance solution

In certain situations, life insurance can be a cost-effective way to leave more of your estate value to your heirs. The strategy involves estimating the future tax payable by the estate, then purchasing a permanent life insurance policy with an insurance benefit that offsets the tax liability. So your heirs receive the full value of estate assets.

This solution offers several benefits. The cost of premiums, when this solution suits your situation, compares favourably with other funding methods involving conservative investments. The final payout amount is guaranteed, arrives when needed and is tax-free. From the day the first premium is paid, the tax liability is covered – a benefit unique to this strategy. The executor doesn’t need to liquidate estate assets to pay taxes owing.

If you have a spouse, you may plan to roll over or transfer assets to him or her on a tax-deferred basis, but your spouse may eventually face a large tax liability on estate assets. A solution is to purchase one life insurance policy on both of your lives, a joint-last-to-die policy. This policy only pays the insurance benefit upon the passing of the second spouse. This way, the tax liability on estate assets is sure to be covered no matter when it becomes payable.

If you would like to investigate strategies that help manage taxation on estate assets, please give us a call.

This material was prepared for and published on behalf of the representative named herein and is intended only for clients resident in the jurisdiction(s) where their representative is registered. This material is provided solely for informational and educational purposes and is not to be construed as an offer or solicitation for the sale or purchase of any securities or as providing individual investment, tax or legal advice. Consult your professional advisor(s) prior to acting on the basis of this material. Insurance products are available through advisors registered with applicable insurance regulators. Individual equities are available only through representatives of Assante Capital Management Ltd. In considering any particular investment, please remember that past performance is no guarantee of future performance. Although this material has been compiled from sources believed to be reliable, we cannot guarantee its accuracy or completeness. All opinions expressed and data provided herein are subject to change without notice. Neither Assante Financial Management Ltd. or Assante Capital Management Ltd. nor their affiliates or their respective officers, directors, employees or advisors are responsible in any way for any damages or losses of any kind whatsoever in respect of the use of this material. Certain names, logos or graphics herein may constitute trade names, trademarks or service marks (“Trademarks”) of CI Investments Inc. and/or its affiliates or of third parties. The display of Trademarks herein does not imply any licence has been granted to any third party. Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Copyright © 2019 Assante Wealth Management (Canada) Ltd. All rights reserved.