Buy insurance to protect estate?

Q – I am a single, retired 62-year-old woman. I have a significant RRSP savings. My financial advisor is advising me to purchase death insurance to cover the tax bill when I pass away. The cost is approximately $4,000 a year and would cover what my son (my only heir) would need to pay in tax upon my death. I’m wondering if you think this is a sound financial decision and if you have any other suggestions as to how we (my son and I) could reduce the tax on my RRSP. Can I gift money to my son now and if so would that be a better alternative as I am presently in the 27 per cent tax bracket. I am just learning about investments and find it difficult to find a financial advisor who has a full range of services, i.e. long-term estate planning, tax reduction ideas, along with investments. – M.M., British Columbia

Gordon Pape answers:  First, let’s consider the odds. The life expectancy of a 62-year-old Canadian woman who is a non-smoker and is in average health is 17.4 years. Assuming you live to age 79, the total cost of that insurance policy will be about $68,000. So there’s a starting point. Based on the anticipated withdrawals from the RRSP/RRIF over that time, how much ilikely to be left when you die? Would that amount attract a tax bill of more than $68,000? If not, then the coverage is not worth it unless you expect that your estate will have significant other assets. Your financial advisor should be able to do this calculation for you.

There is no gift tax in Canada so you can give your son any amount of cash that you wish with no tax consequences to him or to you. However, if you withdraw extra money from the RRSP to do this, you will of course have to pay tax on that amount when it comes out. If you have non-registered investments like GICs, you can consider gifting some of those assets to your son. But don’t leave yourself financially vulnerable in the process.