The Plan by Investors Group^TM

Wealth preservation

Life insurance is not just a way to replace an income and provide for our dependents in the event of unexpected death. It can also play an important role in ensuring that your estate assets reach their intended beneficiaries intact. Here's how.

The impact of fees and taxes

While Canada doesn't have death or inheritance taxes, there are still tax implications for your estate upon death. "That's because you are deemed to sell all of your capital assets upon death, with taxes payable on any capital gains," says Bob Allebone, Manager, Advanced Financial Planning Support at Investors Group. "In addition, any savings you hold in a registered plan, such as a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), must also be included in your final year's income and taxed accordingly."

The tax liabilities can be significant. If the family cottage you purchased in the 1970s for $50,000 is valued at $250,000 when you die, your estate could face a tax bill of nearly $50,000 or more on the cottage alone. And the value of a $300,000 RRSP, for example, can be cut almost in half once it's taxed.

Your estate may also have to pay probate fees or taxes depending on the province you live in. In high-probate tax jurisdictions, such as Ontario and British Columbia, these fees can amount to thousands of dollars.

The spousal rollover

The Income Tax Act allows you to bequeath capital property directly to your spouse, with the transfer taking place at cost, so there are no immediate tax consequences. The proceeds of your registered plans can also be rolled over to your spouse and remain tax-sheltered. As a result, much of the tax liability can be deferred until your spouse dies.

However, unless your spouse remarries, the tax-deferral possibilities pretty much end with his or her death. Estate assets might have to be sold in order to cover the taxes owing and other estate liabilities.

This could be a costly choice. Poor market conditions could result in getting less than full value, and transaction costs can be significant. There may also be an emotional cost to selling some highly valued family assets.

Cost effective wealth preservation

One of the most effective ways to cover debts and preserve estate assets is to purchase a joint second-to-die life insurance policy.

"These policies cover the lives of both spouses, with proceeds payable upon the death of the second spouse—when the most significant tax liability occurs," advises Allebone. The policy's death benefit is usually tax-free, so the dollar amount the estate receives is guaranteed, provided the premiums are paid. "The proceeds can be used to cover the taxes and other debts the estate must pay, leaving a larger estate benefit for named beneficiaries to deal with at their discretion."

Alternatively, you could purchase two single-life policies to achieve the same objective. But the joint second-to-die policy is usually less expensive.

There are many types of life insurance products that are appropriate for estate planning purposes—with a wide range of costs. Ask your Investors Group Consultant about the most cost-effective way to meet your family's need.

--------------------------
This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.