Life insurance can help

Too few people realize that the government will be there, sooner or later, to scoop up its share of an estate. In fact, RRIFs containing substantial assets will ultimately trigger a tax liability amounting to 50% or more in most provinces. However, if you consider your RRIF monies to be estate assets in addition to a source of retirement income, you may be able to use life insurance to keep your legacy intact.

A sad but legal fact of life is that, as pointed out above, your capital assets are deemed by the Canada Customs and Revenue Agency to have been sold when you die, and any capital gains resulting are folded into your taxable income and reported on your final tax return. Your RRIFs are brought into taxable income as well.

This is not the case when your estate is left to your spouse or if your RRSP or RRIF assets pass directly to dependent children or grandchildren. In these cases the assets roll over to them tax-free — but this is merely a deferral. The tax liability is triggered when the assets are passed on to the next generation. So, although it is true that you are not subject to estate tax or death duty in Canada, your heirs may end up facing a huge income tax bi that could catapult even those of modest means into the highest tax bracket.

Buying life insurance is a sound way to reduce the possibility of the Canada Customs and Revenue Agency becoming one of your beneficiaries. The inevitable taxes will still be paid, of course, but the insurance policy generates the money needed and preserves your estate.

The basic concept is to buy enough life insurance to take care of the taxes when you (or you and your spouse) die. Providing you are in good or reasonable health, the money you pay out in annual premiums could easily be offset by future tax savings.

Some companies offer policies specifically designed to preserve estate assets. Other insurance plans are designed to pay out a lump sum when the surviving spouse dies. Life insurance can also be useful in equalizing estates, such as in the two-child beneficiary, where assets outside a registered plan are not easily liquidated or there is no desire to sell them.

If your children are old enough and can afford it, ask them to pick up the tab for the insurance premiums C. After all, they are the ones who will benefit down the road, and they will never find an investment with as good a return.

If you have dependent children or grandchildren, be aware that the 1999 federal budget made a dramatic change regarding how RRSP and RRIF assets can be passed on at the time of your death.

Dependent children or grandchildren may now inherit assets from your RRSPs and RRIFs, even if you have a surviving spouse. This new rule applies in cases of deaths that occurred after 1998, but may also be applied retroactively to 1995, if the deceased’s estate and beneficiaries wish to do so. In instances where a spouse is not in need of the monies, this could represent an effective estate planning strategy for reducing taxes.

As well, the transfer options that are available to your dependant vary according to circumstances. In the case of a child or grandchild who is financially dependent because of a physical or mental infirmity, the benefits may be transferred to a registered plan (RRSP or RRIF), or be used to purchase an annuity; for a child who isn’t dependent because of a physical or mental infirmity, an annuity is the only option, and the term of the annuity is limited to not more than 18 years minus the child’s or grandchild’s age at the time the annuity was purchased. Payments must begin no later than one year after the purchase.