Using Life Insurance to make an impact
Throughout our lives, we’re working to build up our assets. We may have savings in our RRSPs. We may have properties – things like a family cabin, family farm, an income property. Throughout our life, we’ve been building what we have.
When we die, we pass through the “wall of death” – and everything we own bounces off and stays on the other side. In tax terms, it’s known as a Deemed Disposition. Basically, the CRA treats the things you own as if you sold them. Anything that hasn’t been taxed yet, is taxed as if it was sold.
Now there are some things you don’t need to worry about too much. You won’t pay Capital Gains on your primary residence, for example. And typically assets will pass from one spouse to the other, tax-free.
So it’s really when the second person in a couple dies – or a single person dies – that all this tax becomes due. If you have a bunch of RRSPs or other assets that are tax-deferred, this means that you could pay income tax on all of these at the highest marginal rate: up to 48% in Alberta (49.8% in BC). If you had an estate worth $1 Million in BC (easy to do with real estate there), you could owe the Province over $13,000 in Probate fees (estate tax) on top of that.
So how do you pass on your estate to your heirs – and keep that estate intact?
Donating money to charity In the year of your death, you can donate up to 100% of your income – for that year and the year before on your terminal tax return to a registered charity. The charity gives you a tax receipt that you apply against your taxes. How this helps: You’re making a donation to a cause you believe in, and leaving a legacy that offsets your tax burden. The catch: This money is going to your charity instead of your heirs.
The Legacy Fund
To pay for this charitable donation, you buy a Joint Last to Die insurance policy. This will only pay out when the second person on the policy dies (that is, when your tax bill comes due). As a result, it’s significantly less expensive than two single insurance policies would be. This insurance pays for your charitable donation.
In your will, you name the charity that you’re donating to. They issue a tax receipt as before. But this time, you’ve accomplished three things:
You’ve left a legacy through your donation
You’ve kept your estate intact for your heirs, and
You’ve significantly (or entirely) reduced your tax burden
Would you like to know if this plan will work for you? Please contact us today to find out!