You work hard your whole life to build your assets – retirement savings, home, cottage, business and other investments – with the intention of someday passing on some of those assets to loved ones.
What you may not realize is that those assets may not transfer at the full value you intended. As part of the estate planning process, your financial advisor looks at all of your assets and determines the tax implications and any other potential fees associated with a transfer. A necessary part of building an estate plan is transparency which means having open discussions with you advisor about your goals and how you would like to see your wealth transferred to your loved ones.
A will is a good starting point and should be kept up to date; however, a proper estate plan looks at strategies to preserve or enhance the value you pass on. One of the strategies your advisor may look at is building insurance into your overall plan. Life insurance is one of the few assets that transfers to beneficiaries completely tax-free and is used as a tool to maximize value and protect your legacy. Money from a life insurance policy can go to anyone you choose, tax-free, when you die (called a death benefit).
Here are 5 ways life insurance might be integrated into your estate plan:
- Preserving assets and covering taxes
Life insurance is a very effective way to ensure there is liquidity in your estate to pay off taxes, debts and other estate costs at death and maximize the value of your estate when passed on. Many of your assets will be subject to taxes due after you die, which can significantly reduce the amount that is able to be passed on. In some cases, the tax owing can be high enough that the estate may not have the liquid funds to pay what is owing. Insurance can be used to avoid having to sell non-liquid assets like a cottage or business assets.
2. Estate creation
We know it is difficult to accumulate retirement savings and also leave an estate behind. Proceeds of a life insurance provides a lump sum tax-free benefit to the beneficiaries named in your policy. This strategy is often used to build estate values and transfer wealth to the next generation. The growth in permanent cash value policies (within limits) grows tax free and can be a more efficient way to build estate values than traditional investments which can be subject to taxation annually or at the time of transfer. Your financial advisor will build a plan that accounts for the growth and taxation of all of your investments and assets during your lifetime and after you are gone.
3. Planning to take care of a loved one
Do you have anyone in your life you want to make sure is taken care of for the long term? Life insurance provides a tax-free, lump sum payment to replace earnings, cover costs and daily living expenses. Whether it be a spouse, parent, child or another loved one, life insurance is one of the best ways to ensure those who depend on you financially will continue to receive support in your absence. Assigning a trustee will also allow you to set the terms and conditions of how the proceeds are to be disbursed and used.
4. Charitable gifting
Many people choose to donate part of their estate to a charity or an important cause during their lifetime and in death. Charitable gifting using life insurance strategies are attractive since they provide an opportunity to donate a larger gift (than you may otherwise be able) to your most cherished organization(s). Some or all of a death benefit can be set up in such a way to also provide a tax credit to your estate upon your donation. There are several ways to set up control and ownership and a comprehensive estate plan will account for your needs, tax considerations and the specific details of the charity of your choosing.
5. Business planning
Life insurance is often used in business succession planning for multiple shareholders or a family business. A common example is when business shares are distributed to those active in the business. For most business owners, their business is the biggest asset in their estate and can require complex planning when it comes to passing assets to children who are not active in the business. Life insurance ensures those loved ones are taken care.
Everyone’s circumstances are different and estate plans should be too. A proper plan will be constructed based on your needs and will only include those products and strategies that are the best fit for you. For guidance and help building an estate plan for your family, please connect with us.