Wealth Unlocked: Life Insurance for Strategic Estate Planning

For accomplished business owners and family enterprises, capital gains taxes due in their estate can be a daunting concern. However, the horizon is not without its silver lining. The strategic integration of life insurance holds the power to efficiently fund your estate’s tax burden, ensuring that a more significant portion of your legacy finds its way to what matters most to you.

There are three potential beneficiaries to your estate: your family, charity of choice, and the government. As our Founder, Joe Pal has said, “In all my years as an advisor, I’ve encountered very few who have expressed the desire for the government to claim the lion’s share of their hard-earned legacy.” A well-planned estate strategy seeks to explore all your available options and their implications, examine tax-efficient strategies to alleviate your tax liabilities, and evaluate the distinct aspects of your circumstance to craft a bespoke plan perfectly aligned to your unique needs and objectives.

Know Your Options
Following your passing there are essentially four pathways to funding the capital gains tax liability due in your estate: cash, selling assets, securing loans, or life insurance. For those with sizeable estates, cash may prove to be an unattractive option due to the opportunity cost of keeping cash earmarked to fund the tax liability. Additionally, distribution costs are incurred to extract corporate cash to fund the capital gains tax liability due personally in an estate. The sale of assets may force unfavourable valuations or disrupt the legacy plan you worked hard to build. Securing loans may prove to be difficult as the estate needs to fund the principal plus interest and banks may not be keen to extend considerable loans to a personal estate if most assets are held corporately. That brings us to the pivotal role of life insurance.

The Tax-Exempt Advantage
Permanent life insurance products are designed to provide lifelong coverage, complemented by a tax-sheltered savings and investment component. Specific provisions within the Income Tax Act make life insurance an attractive, tax-sheltered tool for estate-planning strategies. The Act stipulates, firstly, that assets held within a tax-exempt life insurance program are not subject to annual taxation, and secondly, the estate benefit proceeds from such policies are distributed tax-free to its beneficiaries. The structure of your estate typically comprises three types of assets: non-liquid, semi-liquid, and liquid. Most substantial estates predominantly consist of non-liquid assets. Contrary to common misconceptions, the government requires fully liquid assets for estate settlement, rather than drawing proportionally from all asset classes. Consequently, liquidity emerges as an instrumental element of a well-structured estate plan. An optimal life insurance plan provides the necessary cash for financial obligations by creating instant tax-free liquidity, thereby avoiding the forced sale of assets. The tax benefit of corporate owned insurance effectively reduces the capital gains tax rate.

Bespoke Solutions
By collaborating with a trusted advisor, you can tailor the ideal life insurance and estate-planning program that aligns with your unique circumstances and wealth transfer goals. With their guidance and support, you can craft a personalized approach to maximize the tax-sheltered benefits of life insurance while safeguarding your financial legacy for generations to come.