TAXES PAYABLE UPON DEATH
You’ve certainly heard the saying there are two truths in life: “we all eventually die” and “we pay taxes even in the year of our death.” As funny as it sounds, it is absolutely true. We know that, if we are a couple, and the first spouse dies, all assets or inheritances can be transferred to the surviving spouse without any impact on taxes, as long as the notarial will is well done. The fiscal impact is felt upon the death of the last person from the couple. If you are single, and your assets are passed on to your children directly, there will also be an impact on taxes depending on the type of asset you own.
Generally, the primary residence and the TFSA are not taxable. On the other hand, RRSPs / RRIFs, secondary homes, income property and management companies (holding companies) are taxable according to the market value upon the date of death. Before allocating the goods or the inheritance, children will get a tax bill and must pay it. Thus, this could significantly reduce the amount transferred to the estate.
These taxes are inevitable, and we can calculate the whole thing in order to take into consideration, depending on life expectancy, what the expected amount will be. There is a sure way to free up the cash needed to pay these taxes and keep the estate value intact and that is through the use of a joint life insurance policy payable upon the death of the last person. Canadian insurers have been around since the 1870s-1880s and are very profitable and secure. It’s about risk calculations and seeing the profitability of purchasing a policy within your family and protecting your assets.
To better understand, here is a specific example. We have a 79-year-old couple who have a RRIF, a primary residence, a cottage and an income property. We calculated the tax payable once they reach the age of 90 and 95. Children are involved in this calculation and strategy. We have set the average tax payable at approximately $ 250,000. The couple do not spend all of their annual income and have extra cash. It is therefore suggested to take out a joint life insurance (Mr. and Mrs. together) of $ 250,000, the death benefit of which will be payable upon the last to die.
We are able to shop for the cheapest premium on the market and it comes in at $ 11,214 per year and is fixed for life. In order to validate the profitability of the insurance, if we had invested this same premium ($ 11,214 per year) in a fully guaranteed investment product (fixed income securities only) and, in 11 years (life expectancy), we had to pay $ 250,000 tax-free to the children, a NET AFTER-TAX return of 11.4% would have been required. And even if this couple survived to age 95, they would still have to earn a NET AFTER TAX return of 3.80%. That’s hard to beat when looking at it on an estate level.
In conclusion, we must look at life insurance as important financial allies in the strategy of wealth management both during life and upon death. It’s a great financial product.