(Note to consultant: If you do not have your insurance license this seminar must be presented by your Insurance Manager. Please insert your name, title from your business card and the name of the dealer on the slide. The dealer name under which you present yourself will differ, dependent upon whether you are licensed with Investors Group Financial Services Inc. (Mutual Fund Dealers Association - MFDA) or Investors Group Securities Inc. (Investment Dealers Association - IDA). If you are licensed through the MFDA, you must use this dealer name on the slide: Investors Group Financial Services Inc. (use in Canada outside Québec) Investors Group Financial Services Inc., Financial Services Firm (use inside Québec) If you are licensed through the IIROC, you must use this dealer name on the slide: Investors Group Securities Inc. (use in Canada outside Québec) Investors Group Securities Inc., Firm in Financial Planning (use inside Québec)
When you were just starting out, insurance was a simple solution to your needs - an income replacement, a fail-safe way to protect your family, a college fund, or a source of cash to pay off the mortgage and other debts. But, now that your personal and financial lives are more mature and more complex, you’re looking for other things - like tax relief, a way to preserve the value of your estate, and ensuring that your medical and physical needs are met should your health suffer. Today/this evening, we hope to be able to answer your most pressing questions as it relates to wealth preservation, estate equalization, and the financial impact of a life altering illness. By asking the right questions - and getting the right answer - you can make the right choices for your life today and as you wish it to be tomorrow.
Go through the points of the slide. Although wealth preservation includes a variety of areas, the focus of this portion of the presentation will be on the income tax liability your estate could incur without proper plans in place and some of your options to minimize and pay this tax. As indicated - you don’t want to make the tax man a beneficiary of your Estate.
You are deemed to have disposed of your property in the year of your death. This basically means that from a tax perspective, the government treats your property as if you had sold it. For example: 100% of the value of your RRSP or RRIF may become taxable. Your Personal Representative is required to include the value of these plans as income when your tax return is filed for the year of your death and this may, in all likelihood, put you into the highest marginal tax bracket (if you’re not already there). This could mean taxes in the 46% tax bracket - perhaps higher due to a clawback of the Old Age Security pension. In addition, you will have to pay taxes on the appreciation in any capital property you own outside of a registered plan. Presently, 50% of the increase in value of your capital property must be included as income on your final tax return, and taxed at your marginal tax rate. Once again, this inclusion of income may put you into a higher tax bracket in your year of death. A simple example of capital gains tax is as follows: You purchased a mutual fund for $10,000; The mutual fund is worth $20,000 when you die. The appreciation in value is $10,000 - 50% is taxable - so your Personal Representative must include as income and pay tax on $5,000.
Focusing on capital gains for a moment, the following are examples of the types of capital property you may own that may result in capital gains tax either when you sell it, or due to a deemed disposition when you die. For example: All investments, such as mutual funds and stocks/bonds if held outside of a registered plan, may become taxable; If you own a cottage, the increase in value may become taxable; Owing rental property, land, a business, including a farm, as well as any other appreciable asset such as antique cars or artwork, can all result in a capital gains tax when you die. The thing to remember is that you only pay capital gains tax if the capital property has increased in value since you purchased it. If the property has declined in value - you have a capital loss - which can be used to offset other capital gains you may incur on other property. As you can see, if you own these types of assets, depending on the increase in value, your estate could face a significant tax bill - hence making the Canada Revenue Agency an unintended beneficiary of your Estate.
So, are there any exceptions to having to pay this tax in the year of your death? The following are the most likely exceptions you may come across: 1) Your personal residence is tax exempt - meaning that when you sell your principal residence (or your Personal Representative does it after your death), the proceeds are tax free. However, a family unit can only claim one principal residence - which is why if you own a vacation property ( a second residence) - one of them is subject to capital gains tax if there has been an increase in value. This opens up some unique discussions with your financial advisor and accountant - about which property should you claim as your principal residence (it can be your vacation property)? The simple answer is - the one which has largest capital gain - but like all simple answers there can be complexities - so it’s best to discuss this with your financial advisor and accountant 2) You can transfer your capital property, and your registered plans (RRSPs and RRIFs) to your spouse or common-law partner on a tax deferred basis. This means that tax does not have to be paid on those assets when you die - but the key is that this is a tax DEFERRAL. When your spouse either sells the asset, or dies, one-half of the net growth in value of the capital property, and the entire value of the RRSPs or RRIF is included in your spouse’s or common-law partner’s income for the year of their death, and tax paid. 3) For business corporations and family farms, the $750,000 capital gains exemption may be available when a shareholding in the corporation or certain farm assets are sold or transferred to the next generation. Potentially, $750,000 of appreciation in the value of the business or farm may be tax free depending on the circumstances. Any additional increase in value becomes taxable. For business owners - this capital gains exemption is available for ‘qualified small business corporation shares” and there are certain ‘rules’ regarding eligibility - you should sit down with an accountant to ensure you qualify. 4) Finally there are special ‘roll over’ rules if a family farm is being transferred to a child or grandchild. Again, it’s important to sit down with a financial advisor and an accountant to determine if you qualify.
So, for heirs of your estate, what are possible solutions to covering the tax bite: One of the best methods has already been discussed - the spousal or common-law partner rollover. As previously mentioned, you can DEFER tax until your spouse’s death, but the tax liability may continue to build while the surviving spouse owns the assets (if the asset appreciates in value). The spousal or common-law partner rollover option doesn’t solve the problem - it merely postpones the potentially growing tax liability. If your personal representative and your heirs decide to save the tangible assets of the estate from a forced sale they must come up with enough money to pay the tax liability - what are their options: a) Your heirs could pay the taxes out of their own income or assets. This would be done with after tax dollars (assuming they even have the available funds) making this an expensive solution compared to other options. b) Your heirs could borrow money to cover the tax liability on your estate. What will be the terms of the loan, amortization period and interest rate? Can your heirs afford this loan? Are they prepared to take on a huge after-tax loan repayment burden? Finally, your heirs could sell the estate assets to cover the tax liability. But such sales may attract an additional income tax liability, sold assets are gone forever, and forced sales can cause serious losses if you can’t receive a fair price for the assets. Finally - and most importantly - is this what you want?
However, there is another solution - you may wish to use second-to-die permanent insurance to provide tax free funds upon the second spouse’s death to offset the estate liabilities including tax on capital gains. Second-to-die insurance would insure both your lives under one policy and the proceeds would be payable on the death of the second to die spouse. This type of insurance is considerably less expensive than permanent insurance, insuring only one of your lives, since the point at which the proceeds will be paid will probably be many years after the expected point at which a claim under a single life policy would be made. Life insurance is a viable and commonly used solution to the tax liability problem as it creates ready liquidity. Life insurance guarantees the future delivery of a certain amount of money. Generally speaking the price of life insurance will never be less expensive for you than it is today. Why? As we grow older, the cost for new life insurance increases. The earlier permanent life insurance is purchased, the lower the cost will be.
We are now going to start discussing a very important consideration as you start to determine the distribution of your estate - how to do it equitably between your heirs. Providing a fair and equitable distribution of one’s estate to children can present a difficult challenge, especially when the estate includes assets that are not easily divisible, such as a family cottage, property, land, machinery, a business or a family farm. Do you see yourself in any of the scenarios listed on screen (Consultant to go through points)? It is not uncommon to find that parents often procrastinate having Wills drafted (or revised) because they see no clear means by which a fair and equitable distribution of the estate can be achieved. Traditionally, Wills usually state that upon the second spouse’s death, the residue of the estate is to be divided equally among all children. Often, this ‘equal share’ distribution is the worst option. This fact, coupled with disagreements between the children as to which of them should inherit the asset is a recipe for hard feelings amongst family members. If an estate distribution is EQUAL, does this also necessarily result in a FAIR distribution? Often, it does not.
So, how do you obtain a fair and equitable estate distribution? Well, you must first consider these critical issues. 1) Who either wants to own the family cottage or in the case of a family business or family farm, which child or children has the ability and motivation to continue the family business and succeed? Will this child or children succeed if they are required to share the profit with other siblings who are not involved in the business or farm? Will this create hard feelings? 2) What other assets are available to your estate? Basically, if a business, farm, cottage, rental property etc., is bequeathed to one child, are there sufficient other assets in your estate to bequeath to your other children? 3) If the cottage, farm, business etc., is not divided equally among all your children, what will their reaction be? Does each child expect to receive an equal share? 4) An important consideration is when do you want to transfer the asset. If the asset is transferred at the owner’s death, does the surviving spouse have adequate financial security? Tax implications may also have to be taken into account since the spousal rollover is not available in this scenario. If the transfer is to occur upon retirement, tax implications must be considered together with the financial needs of the parents. A gift of the asset at retirement may be quite inappropriate, instead the child(ren) may have to gradually purchase it from the parents to generate for the parents a continuing retirement income.
So, after addressing each of these questions, it may become apparent that you need to implement an estate equalization strategy. The most common solution is to purchase permanent life insurance, often second-to-die, in order to create enough estate assets that can enable a fair and equitable distribution to your heirs after tax.
Consultant to go through points on slide
How does estate equalization work? The parents acquire a second-to-die permanent life insurance policy which insures both of their lives and provides for the payment of tax free proceeds upon the second parent’s death. As mentioned earlier, second-to-die plans are less expensive. The parent’s Wills are amended to provide that upon the second parent’s death, the asset in question (cottage, business, farm) is to be bequeathed intact to the chosen child who is committed to using, maintaining and prospering from it. The Wills also provide that upon the second parent’s death, the other assets are to be divided equally among the other children. A life insurance policy is set up with the other children as policy beneficiaries. The tax-free life insurance proceeds would be paid upon the second parent’s death, directly to these children. The life insurance amount would supplement the other estate assets which would be bequeathed to the ‘non-involved’ children to produce a fair and equitable estate distribution. In some situations the estate may have to be a beneficiary for a portion of the life insurance proceeds if there is insufficient liquidity in the estate to pay the resulting income tax liability. Rarely is it desirable to produce a total payment in cash to each of the ‘non-involved’ children equal to the value of the asset the other child received - especially if that other asset is a business or family farm. The reason is because the child that inherits the farm or business will have the daily challenge of operating the farm or business on a profitable basis. With this challenge comes stress, frustration and hard work. There is no stress or hard work in managing cash, and cash is what the non-involved children will receive. So, it is quite reasonable to expect that a fair and equitable share of the estate for each of the non-involved children will be less than the value of the assets which the other child receives.
So, what are the advantages of estate equalization (go through slide). Estate equalization is not really about creating an equal share of the estate for each child. It is more about providing a fair and equitable distribution to all heirs, based on what you feel is fair and equitable and best for the long-term well being of the children. Life insurance can be the tool to help you achieve your estate distribution objectives.
You’re probably aware that Canada’s population is aging, that health care and hospital costs are rising, and that there are fewer long-term care facilities available. But have you considered how that personally affects you? Have you planned for such an eventuality? Take a look at the stats (go through #’s).
People who have become ill, have in some cases, drained all their assets during their recovery period. And, often, even though they recover, there’s an impact on their life that can last a lifetime. Have you thought about what impact a life altering illness may have on your current financial situation? Does your monthly budget allow for emergency expenses? Have you set aside an emergency fund for such contingencies? If not, where will the money come from to tide you over through these difficulties? Can you sell assets, rely on family or borrow? How would a life altering illness affect your financial foundation - and more importantly - your life’s goals and dreams?
Are you prepared both emotionally and financially to cope with the effects of a serious health set back? In addition to regular ongoing expenses such as mortgage or rent payments, credit card bills and living expenses, you would be forced to deal with new ones - lifestyle adaptation expenses (such as nursing care, a wheelchair or walker); transportation expenses (such as a chauffeur or van conversion); home conversion expenses (such as widening hallways, lifts for stairs, ramps) as well as possibly retraining expenses. Would that cause a burden? Dr. Marius Barnard is a world renowned heart surgeon who helped his brother complete the very first successful heart transplant. He is also instrumental in pioneering critical illness protection plans. As a doctor he had first hand exposure to people suffering from critical illnesses and the impact they had on their families and their own continued physical, emotional and psychological well-being. He firmly believes that people can recover from physical setbacks, but emotional and psychological setbacks take longer and are in some cases irrevocable. Since there is a strong link between financial well-being and psychological well-being, the former has to be addressed in conjunction with appropriate medical and rehabilitation treatments.
So, how can you protect yourself from the financial burden of a life altering illness. Two relatively new insurance products are available - critical illness insurance and long term care insurance. Critical illness insurance usually provides a lump sum payment upon diagnosis of a specified critical illness and surviving required period of time. The benefit amount is paid to you to use in whatever fashion you choose. Generally, there are no restrictions or directives issued by the insuring company to dictate how and when the money should be spent. You are in full control. Long term care insurance helps pay for expenses incurred for homecare or nursing home care that may be required as a result of an extended illness, where one becomes functionally dependent and is unable to perform certain activities of daily living, or suffers a cognitive impairment.
Here are some examples of how the benefits from critical illness or long term care insurance can be used.
This concludes our presentation on the importance of implementing financial strategies using insurance to preserve your wealth, provide a fair and equitable estate distribution and protect your financial foundation in the event of a life altering illness. Are there any questions? (Note to Consultant) Ensure you have everyone fill out the Questionnaire (MP1589) and let them know that you will be contacting them later in the week to set a time to meet in person.
If it took a lifetime to accumulate your nest egg, it’s worth protecting Melissa Dailey Consultant 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 any other investment or financial matters, please contact an Investors Group Consultant.
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Estate Equalization - How it works? Rental Property Farm Business Cottage ESTATE Involved/Interested child Asset usually acquired at increased cost base Estate Residue Insurance Company Estate Equalization Payments Non-Involved/Interested child No legal interest in asset bequeathed to “Involved Child”