You May Be Able To Protect Your Estate Wealth Using These 2 Insurance Strategies
Did you know that a significant risk to Canadian estate wealth lies in the application of deemed disposition by the Canada Revenue Agency (CRA)?
In an estate planning context, deemed disposition is the assumption (for tax purposes) that the deceased has disposed all of their capital property just before death, thereby crystalizing taxable capital gains on appreciated assets, as well as including the full value of the deceased’s RRSP or RRIF assets in their taxable income on their terminal return (if spousal rollover is not elected or is not applicable).
The application of such deemed disposition upon your passing, subject to how you have structured your wealth at the time of your passing, may significantly erode your estate wealth. In extreme cases, your executor may be forced to liquidate assets to settle the resulting tax liabilities.
In this article, we describe two insurance solutions which may help you cover the tax which would otherwise be payable by your estate.
Estate Freeze To Freeze Your Future Tax Liabilities
As a business owner, you can freeze the future tax liabilities associated with the value of your business with an estate freeze. This is a strategy typically contemplated as a part of business succession planning that can also play an important role in your estate plan.
The central premise in the estate planning context would be for you to exchange your common shares on a tax-deferred basis for preferred shares with fixed values, which are redeemable at the fair market value of the company at the time of exchange.
Effectively, you would limit or “freeze” your gain, while new common shares would be issued, either to the next generation directly or through a family trust.
With respect to the tax planning opportunity created, this process allows you to lock in your gain, such that you can plan for the corresponding tax liability at the time of your passing with a fair degree of accuracy.
With the future tax bill projected with this strategy, you can put in place a life insurance policy naming your estate as the beneficiary to provide sufficient liquidity to settle the resulting tax bill from the deemed disposition of these shares.
If you own a business that has grown and will likely continue to grow in value, this approach may be worth exploring with your professional advisors to both facilitate future succession while also preserving the legacy you have built up within your enterprise.
Injecting Liquidity To Keep Assets Intact
If you have built up a considerable investment portfolio, whether in financial instruments, real estate, or other wealth, the application of deemed disposition upon your passing could force your executor to liquidate assets to settle the resulting tax liabilities. This means that the bequests you have thoughtfully laid out in your will may no longer be viable after the executor has used up a significant amount of capital to satisfy the tax liabilities.
Decisions of this sort in administering an estate are seldom easy, and there may not be equitable ways of achieving the desired liquidity, sometimes leading to some beneficiaries being disproportionally affected based on the nature of the wealth that was ear-marked for them.
Life insurance can also be used here to mitigate such outcomes, for instance in naming your estate as the beneficiary of a policy with a face value in alignment with your estate’s forecasted tax liability on the disposition of your investment portfolio, so that the need to sell off assets at the time of administration is reduced.
To facilitate this planning, it may be beneficial to complete a comprehensive wealth planning exercise, taking into account what wealth will be used during your lifetime, what wealth will be allocated to philanthropy and what will form your future legacy.
Bloom Investment Counsel, Inc. is a well-established Toronto-based independent, privately-owned boutique investment management firm providing customized, actively managed, Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.
Founded in 1985, Bloom has experience in managing in excess of $2.5B in assets over the years. We believe that generating independent cash flow is central to the success of our clients’ portfolios because it provides capital for the present day, if needed, while continuing to preserve and build wealth for the future.
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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.