Leaving the most for your heirs

Q – How can I maximize the estate I leave to my survivors ? – Y.K.

A – The first step it to consider how the final tax bill will be paid. Most Canadians are unprepared, both emotionally and financially, for what will almost undoubtedly be the largest tax bill they have ever encountered — and this in a country that does not have any official estate tax. The government does quite well without them, as it turns out.

Assets such as a cottage, a stock portfolio, or a family business will be “deemed” to be disposed of when you die, as if they had been sold. This can immediately trigger a liability for tax at the capital gains rate.

While registered assets (RRSPs, RRIFs) can pass to a surviving spouse tax-free upon the death of the first spouse, the death of the surviving spouse will trigger the inclusion of their entire value into income. Here again, the resulting tax liability could be significant, perhaps as much as half of the value of the registered plans.

When considering how much you will leave to your heirs, you have to ask how this tax bill be paid. If the estate does not have cash readily availae to pay the taxes owing, then the survivors may need to sell assets to raise the necessary cash.

All this can be avoided if life insurance is used to fund the expected tax liability. Life insurance proceeds paid at death are not taxable. The best option, from the standpoint of cost-effectiveness, is a policy that covers both spouses, with the death benefit to be paid upon the death of the second spouse, which is when the tax liability arises. Such coverages can be surprisingly inexpensive. You might even have your survivors pay the premiums, since they’re the ones who will ultimately benefit from the coverage. – G.P.N.