Glen Jackman – Page 10 – Adviceon Library

How can I reduce business owner risks?

Life Insurance. Start-ups and smaller companies are especially vulnerable to potentially devastating financial risk because they often lack considerable company sophistication and in-house risk-control expertise. We will help you gain control of your financial trouble. We help business leaders provide appropriate life insurance to pay off debts and the mortgage, educate the kids, and provide income for a spouse or a disabled dependent.

Disability Income Replacement Insurance. We’ll review your need for income replacement insurance to help replace your paycheque in case you get hurt or sick.

Key Person Insurance. We will assess your need for an insurance policy designed to hire the right person if a key individual becomes sick or dies.

Critical Illness Insurance. A critical illness can wipe out a small business if business owners develop cancer, a heart attack, or a stroke. We have many plans to protect you from such concerns.

Note: Life insurance taxation varies in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide significant business strategies relative to succession or an estate.

Considerations when designing an Estate

Estate planning is a process that allows one to determine how their assets will be distributed upon death. As we prepare to pass our lifetime assets to our heirs, there are key components of an estate plan that should be given careful consideration.

The fundamental component of any estate plan is the Last Will and Testament commonly referred to as the will. It is also important that an individual maintains and updates their will and two powers of attorney documents: 1) for property such as real estate, bank accounts, and investment assets, and 2) a power of attorney for personal health care.

Review your estate planning documents

Life changes can affect the integration of each of the above strategic solutions. Therefore, it is important to review the above aspects of an estate plan every three to five years. For example, there may be a change in family structure, so beneficiaries may need to be reviewed. Or, if you remarry, your existing Will may automatically become nullified.

Your net assets can change Keep an eye on your net worth. Other life changes that require updating your estate plan include changes in your net worth, or if the value of your residence or investment changed. If you have significant changes in net worth, have your accountant make sure that the best tax arrangements are in place.

Business strategies to protect your net assets If you are the shareholder of business assets, make sure that a buy-sell agreement is in place in the event of your death or disability, assuring that every owner is covered with life and disability (income replacement) insurance.

An estate plan may benefit from using formal trusts to reduce taxes. Life insurance products such as segregated funds and term funds can also be used to circumvent or minimize probate or government estate administration taxes (EAT) or attending legal fees. In most cases when a beneficiary is named in a life insurance policy, proceeds will pass and the capital in most cases will transfer on a tax-free basis to beneficiaries, thus avoiding probate or EAT scrutiny.

For an estate plan seeking to transfer large capital assets to named heirs, it would be wise to discuss these capital-transfer techniques with an accountant and/or tax lawyer.

How can I minimize the need for estate probate?

There are a few tactics whereby you can reduce the need for an estate to be probated by the government:

• Defer possible probate by holding assets jointly. Probate fees may be charged when that asset is transferred later through the will of the second spouse.
• Establish a person as a beneficiary on your life insurance policies independent of the estate. This way, all monies pass to the heirs tax-free. If the estate needs probating, this portion of the assets will not be included in the estate, as the death benefit will flow directly to the heirs circumventing scrutiny. Life insurance strategies are excellent financial tools to circumvent probate on larger wealth transfers to heirs. Family wealth can be positioned to pass through life insurance policies, delivering tax-free benefits without probate. Any tax due on policy investments will be taxed to the estate of the deceased policy owner. This method has frequently been used to transfer inter-generational estate wealth in the millions. Your advisor can keep you up to date on potential taxes in the estate.
• Name your beneficiaries on your registered investments such as RRSPs and RRIFs. Insurance products may allow you to side-step probate in this way. To protect themselves, banks and trust companies will probably require probate or a letter of indemnity from the estate’s lawyer if the assets are significant. If your spouse is your beneficiary, consider a secondary beneficiary should your spouse die at the same time you do.
• Consider setting up a spousal testamentary trust in your will to avoid double probate. When the second spouse dies, the assets can be distributed via the trust directives as opposed to a will.
• With your spouse, set up mutually-owned property as ‘joint tenants with rights of survivorship’ to transfer these assets automatically outside of the will.

Once a will has been probated paid the estate administrative tax (EAT), the executor can start transferring assets as directed by the will. Some assets can be transferred easily within a short period of time. Others have to wait until the estate expenses have been paid, including any final income taxes due to Canada Revenue Agency (CRA), after which they will issue a tax clearance certificate.

Can insurance replace my income if I am sick or hurt?

A spirit of independence and optimism is typical of many business owners. It is important to realistically plan for your financial security should you become disabled.

When you own your own business, you do not have the security of group insurance that employees have. After several years, you may find that you are drawing a substantial income from a successful venture.

Disability planning brings us face-to-face with a reality check. If you become disabled, would your business continue to generate the same profits? If not, how would you meet your mortgage payments and pay for your groceries? When we are independent-minded, we tend to be optimistic, to the degree that we might believe one of the following money myths.

Money Myth #1. I will borrow the money until I get well. Reality: Few people will lend money to a disabled person. It’s hard enough to borrow money when you’re in perfect health with a steady income.

Money Myth #2. I’ll live off my savings. Reality: How long would your savings last? Using up your savings at an age when you ought to add to your investments may ruin your retirement plan.

Money Myth #3. I’ll sell off some or all of my business assets.
Reality: How many assets does your business own, that are not required for its successful operation? Who will pay fair market value to one perceived as liquidating out of a dire need for cash? The timing may not coincide with market demand for your assets.

Money Myth #4. My business will pay me a salary. Reality: Your partners may need to hire someone to fulfil your responsibilities. Flip the perspective around. If your partner became disabled, how long could you keep paying him or her a salary in addition to the salary for the replacement? If you are a sole proprietor and disabled to the degree you cannot work, how could you hire and train someone to work hard enough to produce his own salary and yours?

Business Owner Disability Insurance Check-List

Income Replacement Insurance Pays you a cheque to cover a major portion of your present income drawn from the company.
Key-Person Insurance Pays a benefit to enable the business to hire a replacement.
Office Overhead Insurance Helps you pay for day-to-day overhead and salaries.
Buy-Sell Insurance Creates the cash to allow your partners to buy out your interest, or vice versa, based on a written agreement.

Understanding Fixed versus Variable Mortgages

Fixed Mortgage Rate: A fixed mortgage rate allows the home buyer to lock in a rate for the duration of the mortgage term, for example, over five years. The advantage of the fixed rate is that your rate will not fluctuate, and you can count on planning how much your mortgage payment will be for the term.

Variable Mortgage Rate: A variable mortgage rate means that the interest rate will change depending on the lender’s prime rate. For example, if your lender’s prime rate goes up or down, your mortgage payment will reflect that difference in interest during your mortgage term, which will affect your mortgage payment amount.

Solving Capital Gains Tax Exposure

Capital gains from a business, cottage, second residence, rental property, or non-registered investment are subject to taxation when the property is disposed of. How and when the property is disposed of requires serious consideration, as the tax implications can be enormous.

Here are some areas where capital gains tax may develop:

If you own a Family Business Many family businesses have accrued large capital gains over time, due of course to the success of the businesses. When sold, the business will incur a taxable disposition that could be subject to high taxable capital gains.
If you own non-registered Investments Any capital asset that is held outside of an RRSP, whether a stock, GIC, or investment fund to name only a few, will be taxed on the difference between its fair market value at time of sale, and the cost of the asset. The difference between the purchase price and the sale price will be either a taxable gain or loss.
If you own a Cottage When you sell your cottage, or you and your spouse die, capital gains tax will be triggered on the difference between the cost and the fair market value at the time of sale. One major consideration is how to keep the cottage in the family.

Assuming the kids want the cottage, how can the tax problem be handled? What if there are not enough assets in the estate to pay the taxman? If there are not enough assets or cash to pay for the tax bill, it may be that the cottage has to be sold.

Can A Solution Cost Pennies on the Dollar?

One solution that can help overcome tax issues, and provide enormous estate savings, is a permanent life insurance policy. A permanent life insurance solution will create a non-taxable death benefit that can pay the capital gains tax on the accrued increase in value of a family business, cottage, second residence, or unregistered investment. The most common form of estate policy purchased is a Joint Last-to-Die Life Insurance contract. These types of policies can insure both spouses’ lives, but only pay out on the last death. The cost of the product is often more affordable than an individual policy since the insurance risk is lessened by insuring two lives.

The problem of Estate Capital Gains Tax

You and your heirs may think that all of your assets will pass over to them tax free. Let’s examine how estate taxation can erode the value of one’s property and cause business succession problems

The Family Business Many successful family businesses have accrued capital gains in the millions, from the time the owner started years ago. The tax payable is so high that the business cannot afford the liability once the owner dies, at least without liquidating. One way to cover the tax liability is to save for it. The problem arises if the owner dies too soon, or the money gets used for an emergency or a new opportunity; or if the savings goal is impossible for the company to achieve. A better method might be to simply buy life insurance to immediately cover the entire estimated liability risk, which is due at the same time the benefit is paid upon the owner’s death (or the death of a surviving spouse). A sole owner may buy enough life insurance to add additional capital to offer stability if the company were to be sold, or where a wife, son, or daughter wants to take it over.

Investments Any capital asset that has accrued value over the initial purchase price, will have capital gains (if yet unrealized) taxed in the estate. At that time if there is no surviving spouse or dependent, an RRSP will all be taxed fully as income. Again, life insurance allows the payment of any gains tax and/or a capital replacement of the estate’s lost RRSP value.

The Cottage Perhaps you acquired a cottage that has increased in value from next to nothing, over several years of inflation while people have sought after vacation properties. Just like the business, a cottage can have capital gains growth. Thus, that asset can also later present you with a tax liability. If you die, or sell it, capital gains tax will be triggered on the portion that exceeds the amount originally invested. Consider passing the cottage on to the children. Personal life insurance, purchased with after-tax dollars, can offer a non-taxable death benefit to pay the tax. You can buy additional life insurance for business needs, or create future income for a spouse, or dependent child, if necessary.

Does your family want to keep the cottage after your death? If so, would you want them to inherit the cottage together with a large income tax bill? Where the property passes to the deceased’s spouse, taxation of the capital gain may be deferred. Once it passes to the next generation, tax is finally due at once.

The most effective and least expensive way to cover any capital gains tax liability on a family cottage is to purchase a life insurance policy on the owner(s) for the projected amount due in the estate. Purchase a permanent life insurance plan. These plans often offer a competitive rate of return on your investment and the full amount is payable at death entirely tax-free. An additional benefit is that by virtue of the life insurance guarantee, the entire coverage needed is available after the payment of just one monthly premium. If you die, your beneficiaries will have the cash to pay the debt, rather than having to quickly sell the cottage to pay taxes due. Consider taking out a permanent policy on your life (or a joint policy that insures your spouse as well) that will increase in value to meet the tax on the rising capital gain on your cottage property.

Education planning has serious financial consequences

As parents, we need to consider the effect that education will have on the future income and lifestyle of our children. When Steve Jobs of Apple knew he had a short time to live, he became assertively interested and vowed that he would do everything in his power to ensure that his son received a good education.

As the Internet brings many changes quickly, we are seeing many manufacturers moving plants overseas. Stephen Covey, the best-selling author of The 7 Habits of Highly Effective People, predicted a need for technological education several years ago, echoing what we see everywhere: manufacturing increasingly calls for brain work rather than metal-bashing that empower the industrial age — further making a point:

The winds of education reform are beginning to stir once again. Our collective conscience is being nudged. And there’s a good reason. The world has moved into one of the most profound eras of change in human history. Our children, for the most part, are just not prepared for the new reality. The gap is widening. And we know it.

Parents see the chaos, the economic uncertainty, the stress and the complexity in the world, and know deep down that the traditional three “R’s” — reading, writing, and arithmetic — are necessary, but not enough.

Today robotics and artificial intelligence call for another education revolution. This time, however, simply cramming more schooling in at the start is not enough. People must also be able to acquire new skills throughout their careers.

The following grid estimates the effect of educational decision-making on a child’s education. Income and future lifestyle can be severely affected by poor choices. When a child has the capacity and talent for a higher level of educational goal-setting and achievement, this needs to be developed appropriately.

What ways can we plan for our Child’s education? Consider using both the traditional Registered Educational Savings Plan (RESP) and the Tax-Free Savings Account (TFSA) as an educational savings vehicle. A TFSA offers parents another tax-efficient method to provide for education planning.

Using the TFSA for Educational Planning

Canadian residents age 18 or older can contribute up to a TFSA.

TFSA Contribution Limits

2009 to 2012: $5,000
2013 and 2014: $5,500
2015: $10,000
2016 to 2018: $5,500
2019 to 2022: $6,000
2023: $6,500
2024: $7,000

Contributions are not deductible from your taxable income. You can add any unused contributions of your annual limit, cumulative back to 2009.

Using the RESP for Educational Planning

You can save for a child’s education using the RESP. The Government of Canada will also help you save money through the Canada Education Savings Grant (CESG).
Your advisor can help you understand what RESP options is available to you in your province.

Universal Life Insurance (UL) offers adjustability

With a permanent Universal Life Insurance (UL) policy, there are many options and tax advantages available within the plan. Death benefits may vary, funds can be invested in tax-sheltered accounts, cost and types of insurance can be manipulated – all to the benefit of the consumer’s goals! What are the primary benefits of Universal Life (UL) for Estate Planning? The options abound:

• The death benefit is adjustable. The amount of life insurance can be increased or decreased to reflect an insured’s changing needs, and there are multiple options available when creating a plan. Typically, a person will choose an increasing death benefit that will pay out all life proceeds as well as any cash in the plan at time of death. Or, a person could choose a plan that pays out the death benefit as well as all premiums paid into the plan. This option ensures that family assets will not be eroded due to premium payments for the life insurance policy. A person may also choose a level death benefit, however the advantages of this structure are limited. Or, if a person eventually is insured, or does not require their current amount of insurance on their policy, they can simply reduce the death benefit. In the end, a policy’s death benefit can be structured to suit the needs and goals of the insured.

• Insure multiple lives in a UL plan Several lives can be insured or added to one plan, including a spouse and children. Business associates may also be named as multiple insured’s on a business policy.

• Special riders can be added In some cases, term riders can be added to the policy, allowing for a structured policy that addresses insurance needs now and in the future. For example, you can structure a policy with permanent Universal Life insurance as a base amount, then add a Term 10 or Term 20 rider.

• Disability riders can be added Policies may provide a disability rider called a waiver of premium. Upon disability, the policy premium can be waived until such a time as the person is no longer disabled.

• Create capitalized income for a surviving spouse Life insurance proceeds can be structured as an annuity, thereby providing lifetime income for the surviving spouse.

• Capital creation can be deferred Alternatively you can arrange to have the death benefit paid after the second spouse’s death to maximize the value of your family’s inheritance or meet your estate’s tax liabilities. These policies are typically called Joint Last to Die policies.

Universal Life Insurance

There are many compelling reasons to combine your investments in a tax-advantaged life insurance policy. Tax advisors have been pointing their wealthier clients to these unique policies for years. Let’s examine some of the tax benefits, investment options, overall features, and for whom they are best suited. Depending on the insurer, there can be many possible options, but all enjoy some of the following essential elements.

You can earn and accumulate tax-deferred interest. A tax deferral aspect of the policy allows that you may effectively increase the after-tax yield of your investments and policy cash value over the long term. The fund from which the cost of internal cost of insurance offers interest-bearing accounts over various term periods. Comparatively for example, if you are nearing a 50% tax bracket and your after-tax yield on interest-bearing term deposits is a low 2.5%, you would have to earn 5% pre-tax. The UL deposits conversely are protected from secondary annual taxation on interest earnings until taken out.
The tax savings can pass tax-free to your beneficiaries. This offers an estate planning advantage. With your first premium payment, you secure a substantial death benefit in relation to premiums paid. If you hold the policy for several years, you can begin to create tax-advantaged growth within the policy. If the policy’s cash value grows, your entire principal, plus untaxed interest, including the remaining life insurance value, pass totally tax-free to your heirs.
The cost of insurance is paid with pre-tax dollars. The cost of insurance can eventually be paid from this growing interest-earning side-fund. Once enough money is held within the fund, over a long period, the cost of insurance is paid from some of these untaxed monies. Depending on the insurer, the insurance in the plan can be an annual term, 10-year term, or term to age 100, or a combination of term periods. Premiums for this insurance relate to your age, health, and smoking status. The premium costs are initially calculated to pay for the insurance and to increase the reserve cash fund designed to build funds that can be used to prepay future ongoing premiums.
The premium payments are flexible. You can pay what is referred to as a minimum premium. If you want to pre-fund the policy with more money, you may be able to increase your annual premium on a monthly, annual, or occasional lump sum basis, up to a specified maximum. A maximum premium is calculated and pre-set in order to keep your policy exempt from accrual taxation. Once your cash value increases, you may be able to reduce or skip premium payments altogether, without jeopardizing insurance coverage.
The premium payment periods are flexible. Some policies may have a minimum annual premium for several years. A well-funded policy’s money reserve (cash account) can continue to grow even as it pays for the cost of insurance. If you want to accelerate your tax-deferred interest savings, you may be able to increase premium payments. If you choose to select a limited-pay premium period, and interest rates are low, you may need to pay for several more years to compensate for the low-interest rate. Conversely, if interest rates are high, you may be able to shorten your premium-paying period. Once you stop paying premiums, the insurance, administrative charges, and cost of any additional benefits and riders would continue to be paid (deducted) from your side-fund’s reserve account value.
There are additional riders and extra benefits. In some cases, term riders can be added to the policy, allowing for simple, low-cost insurance on the life of the insured and his or her children. Some policies provide a disability rider, which could provide income in the event that the owner is disabled. Additionally, a waiver of premium rider could possibly pay for premiums.
There is potential creditor protection on the cash value. Special insurance laws may protect these policies from creditors, which could preserve the cash reserves if a business faced economic turmoil. However, a business owner cannot quickly hide money in a tax-deferred cash reserve if he or she knew there was potential bankruptcy looming on the horizon.
You can borrow against your cash account’s reserves. The cash surrender value (CSV) is just another name for the remaining cash in the side fund. If you had $100,000 in that fund, you would be able to borrow against it or withdraw it with some potential taxation. If you cancel the policy later in life, you should receive most of this cash value. However, there may be taxes due on a portion of the funds when withdrawn or when the whole policy is cancelled. For this reason, alternatively, a loan against the cash value may make more sense; which would allow the money to stay within the fund without accrual taxation, on reserve, while continuing to earn tax-free interest.
Funds are accessible. It is essential that such policies are well funded and that you monitor your cash reserves to avoid the cost of insurance overly reducing them (the cost of insurance can increase the older one gets). The tax-deferred funds can then grow to become a considerable liquid asset and result in an increase in your net worth. By carefully managing the cost of insurance (and perhaps reducing the insurance as the funds rise in value), you can minimize the reduction of the value of the tax-deferred account. While funding the policy sufficiently you continue to pay for the upcoming insurance premiums with pre-tax dollars
The tax deferral is a long term strategy. If you withdraw too much money too early, there may be applicable taxes due, and a surrender fee may apply. Early withdrawal may reduce the functionality of the strategic advantage because any increasing insurance cost can deplete smaller reserves.

The long-term benefit is the potential tax-advantaged investment growth that can outperform similar investments held in a taxable interest bearing vehicle. Policies can allow for future withdrawals to provide for special financial needs or additional retirement income. Premiums are always paid with after-tax dollars from the fund (which includes the initial tax-paid principal used to make deposits). This allows a good portion of any future withdrawals, in most cases, to be paid out tax-free. Moreover, the major benefit is that the entire death benefit including the cash value passes to the heir’s tax-free at death.

Talk to your advisor about any legislation changes that may affect taxation.