When it comes to estate planning, there are a few key things to keep in mind in order to minimize taxes and ensure your assets go to the right people. By transferring assets efficiently, you can make sure your loved ones receive the inheritance you intended them to have. In this blog post, we will go over some of the best ways to transfer assets to your heirs and minimize your tax liability.
One of the best ways to protect this asset is efficient tax planning.
While manipulating tax laws to avoid taxes may be deemed as tax evasion, there is nothing off beam about saving a major portion of your hard-earned money for your children’s future.
In Canada, property that is left behind falls under deemed disposition. This means that the government considers the deceased’s property as disposed of at their fair market value and the heirs inheriting the property will be taxed on the capital gains. Fortunately, there are ways to free yourself of unnecessary and avoidable tax deductions.
One of the most financially savvy moves is to invest in insurance. Although insurance was not originally designed to be an investment, with perks such as easy asset transfer and efficient tax savings, it often works out that way.
If you wish to both protect your wealth, as well as build it for yourself as well as your children’s future, there are three types of investments you can indulge in.
- Life Insurance
- Health Insurance
- Insured Investment
How can life insurance help build and protect your wealth?
Life insurance gives you more than a couple of options when it comes to building and protecting your wealth and minimizing your income taxes.
First, there is permanent insurance. This, as the name suggests, is insurance for a lifetime and offers tax planning as an added benefit. You can use permanent insurance to clear off any liabilities at death ensuring easy property and savings transfer.
With Universal Life Insurance, you can open up investment accounts that help with your tax-preferred savings. At the same time, it also gives you the same lifelong protection as permanent life insurance.
Finally, there is the Participating Life Insurance. This combines the protection perk of permanent life insurance with the tax-preferred growth of universal insurance. With this insurance, you are also paid dividends as part of your investment income that can be used in turn for buying more insurance coverage, reducing your annual premium, earning interest, etc.
Protect your wealth with Health Insurance
It’s also important to buy health coverage beyond that which is offered by your employer. Health insurance plays a significant role when it comes to cash savings and earning additional income which can be used to sustain wealth and maintain properties.
Health insurance can fall into three categories each with its unique set of benefits.
- Disability insurance will cover any loss of income stemming from a disability or illness.
- Then there is the critical illness insurance that covers a wide range of illnesses and gives you a lump sum of payment.
- There is the long-term care insurance which covers costs that individuals accrue at the later stage of their lives when they become dependent on others.
Buying one or more of this insurance can cover inevitable costs at various stages of life which ultimately boost your tax-saving income. Taxpayers can use this boosted savings in their old age or as an asset that is transferred to their offspring.
Boost Your Wealth with Insured Investments
Insured investments are another way to accrue tax-related benefits, boost your savings, and avoid the associated costs at the time of property distribution. Insured investments act as contracts that offer potential creditor protection and help bypass probate through named beneficiaries.
There are primarily three types of insured investments taxpayers can make use of.
- Insurance GICs
- Payout annuities
- Segregated fund products
1. Insurance GICs
These are similar to bank GICs and offer several benefits. Chief of these is flexible maturity terms for various life stages and guaranteed rates of return regardless of market fluctuations. This is great, especially in old age, when one is averse to high risk.
For individuals who are already 71 years young, payout annuities can be a convenient choice to handle their RRSP funds. After reaching the age of 71, taxpayers must convert their registered savings into some kind of income by the end of the year.
2. Payout Annuities
With payout annuities, you can generate a passive income that increases annually to counter inflation. Moreover, this guaranteed income is enough to cover your everyday expenses making it easier to stack your savings. You can also choose to receive the income over a specified period. Then there is the preferential tax treatment for non-registered funds.
3. Segregated Fund Products
The third type of insurance investment are segregated funds products. These products are similar to mutual funds however, they have guarantees that are backed by the insurance companies who carry them. They are perfect for individuals looking for growth, flexibility, protection, and income to inflate their overall savings. These funds can grow while the portfolio is diversified to various asset classes. Segregated fund products provide guarantees like an insurance contract on maturity and death benefits. These guarantees can account for either 75% or 100% of the market value in the investment or the deposits you make. Another reason segregated funds are a great vehicle for saving is that the deposits are creditor protected. This means the funds can be easily transferred to a named beneficiary upon death.
Investing in segregated funds is the perfect way to protect the assets that you have worked so hard for and cover any liabilities and tax levied on your capital gains. Moreover, while these types of funds were more costly in the past, recent years have seen a notable decline in their fees. Today you can find segregated funds with fees that are comparable to mutual funds. Nevertheless, the peace of mind that comes from bypassing probate and generating risk-free income is more than enough of a reason for financially-savvy folks to invest.
Choosing the Best Insurance Investment
Before buying insurance, you must take into account your personal and financial goals and make sure that the latter aligns with the terms and conditions of the insurance policy. It is also important to consult an experienced financial advisor for sound tax advice.
Ask yourself how you would like to distribute your wealth between charities, and your family and transfer your hard-earned assets to your heirs. The right type of insurance is the one that aligns with the most financially significant stages of your life and provides hassle-free coverage during the difficult hours of illness and death.
Insuring your life and investments is a selfless move towards minimizing taxs and increasing your tax returns not only for yourselves but also for your loved ones in times of need.
Additional Ways of Tax Minimization
You can also indulge in legal tax avoidance while you generate your income with proper planning throughout the year and not just at the year-end. In order to meet your financial goals and cash savings here are some supplementary tax minimization strategies.
1. Income Deferral
The Canada Revenue Agency (CRA) does not touch your pension plans, retirement saving plans, and universal life insurance until you decide to withdraw this money and use them during your lower tax bracket days. To take advantage of the lower tax bracket, you can defer your capital gains and other income until the upcoming year. This is called income deferral and is an efficient way to reduce overall tax burden.
2. Income Splitting
Income splitting refers to transferring money to low-income family members to avoid higher taxes. This could mean your spouse with a lower tax bracket or your children. You can split income among family members and legal entities in one of the following ways:
- Hiring your spouse or children
- Setting up a retirement plan according to the taxable income
- Establishing a college savings plan for your children
- Prioritizing investments in trusts that use income splitting strategies.
3. Income Spreading
With income spreading, you can shift income from one year to the next to maintain a lower tax bracket and reduce your income taxes. This also involves delaying business or commission income and is an easy way to evade taxes.
4. Income/Tax Saving Vehicles
You can avoid tax problems and maximize your capital gains dividends and interest income by moving this income to specialized tax shelters which ensure lower tax rates.
5. Tax Credit Planning
Tax credit planning is another great way of tax minimization. This allows you to take advantage of available tax credits that stem from flexible spending accounts. These credits are typically reserved for charities, donations.
When deciding to incorporate tax strategies into your financial plan, you should always consult your accountant. Your financial planner and tax accountant can work together to ensure you incorporate the best tax strategy based on your goals and long term plan.