If you have a sizeable RRSP or RRIF program, which continues to grow each year, your estate could have a potentially onerous tax bill. This would significantly reduce the size of your estate. However, with thoughtful planning, these taxes can be mitigated by the strategic use of a “Joint & Last to Die” Universal Life Insurance program.
Many of us don’t even realize that we have this “ticking” estate time bomb. The RRSP is an individual retirement savings plan, which has been registered with Canada Customs and Revenue Agency (CCRA). Contributions to the RRSP are tax deductible and income earned in the plan is permitted to grow tax sheltered. All contributions and accumulations are untaxed income, and the plan holder account is subject to tax on the entire value of the plan in the year of death unless the amount is passed on directly to:
A surviving spouse who may transfer the proceeds of the inherited plan into his or her own RRSP. An appropriate clause should be inserted in the will in order to provide the executor with the authority to transfer the deceased RRSP to the spouse’s plan.
Dependent children or grandchildren (if they are recorded as beneficiaries) who may take into income and pay tax on the amount of the inherited proceeds. Alternatively a financially dependent child or grandchild may obtain a deduction for the inherited proceeds to the extent that the amount is used to purchase an annuity for a term of years not exceeding age 18, minus the age of the dependent at the time the annuity is required. This is a key point for an annuitant who is single or divorced with young children.
The real problem arises on the death of the second spouse, since CCRA requires that you deregister all RRSP’s and RRIF’s at that point. This figure is added to the terminal income tax return. For example, a $500,000 RRSP or RRIF portfolio would trigger taxes of over $250,000 (assuming a 50% marginal tax rate), which leaves a balance of $250,000 for your children/beneficiaries. Talk about estate shrinkage.
This is where Universal Life comes in. These are plans that provide you with the opportunity to “buy” a block of money “in trust”. In this example, $250,000 is guaranteed to be paid tax free (so long as premiums are paid) to your estate upon the death of both spouses.
The beauty of this product, especially when structured on “Joint & Last to Die” format, is its cost effectiveness. Annual premiums range from 1% to 3% per year of the amount of money insured. This makes Universal Life a great tool for estate planning. It can provide replacement income or capital for your successors, assist in funding succession of a business in a closely held company and fund the capital gains tax liability so that your estate can pass intact to your heirs.
Also for individuals in a high tax bracket, a “side fund” can be utilized to invest money separately to grow tax sheltered in a variety of investment options such as Government Bonds, TSE 300, S & P 500, NASDAQ 100, Dow Jones, Eurostoxx, Nikkei 225 and T-Bills. My favorite is the S & P 500, which has compounded at over 12% for the past 20 years.
After several years of tax sheltered capital accumulation within the Universal Life Plan, you can access your money in one of two ways. You can withdraw directly from the policy in which case it will be taxable based on the growth within the policy.
The other withdrawal option is tax-free, by pledging the policy as collateral at several chartered banks; withdrawals can be made through loans at the bank. The amount of the loan will depend on the fund chosen and could range in size anywhere from 50% to 90% of the policy fund values. By capitalizing the loan payments the banks will allow you to borrow money without making loan payments (ideal for retirees). The loan will eventually be paid off by the death benefit from the policy, tax-free.
This program requires effective planning now, so that its maximum advantage is available to your estate and your heirs when it’s required the most. Talk to your tax and/or insurance specialist about this product so that your own unique set of circumstances can be evaluated and a proper plan can be started to meet your financial objectives.
Michael Birbari is Senior Vice- President and Senior Investment Advisor at Dundee Securities Corporation. Michael is committed to providing unparalleled levels of service to the dental community.
