Peter Boys, Boys Financial Services

Case Study – Estate Conservation

Chess And Will

This was an interesting client case for estate conservation and estate growth that I started working on 15 years ago and the first major estate planning project that I partnered up with Manulife’s tax and estate planning group. This case involved a retired farm couple in their mid 70s, who had a very significant wealth, but who were also very concerned about the high taxes they were paying every year. This struck me as very odd, as they were working with a PFP at their local bank and with a senior CA at a major accounting firm in Edmonton.

A cursory overview of their current financial situation highlighted the reasons why, as they had almost $500,000 between the two of them in RRIF’s, well over a million in GIC’s earning between 8% and 10% annual interest that they were not spending. Plus to add more fat to the tax fire, almost $180,000 in stocks and bonds. Two very obvious facts then sprung to mind: they were stuck in the top marginal tax bracket every year between their RIFF’s and the interest accumulating from their GIC portfolio and the dividend and interest income from their other investments. The tax bill to their final estate alone from their RRIF’s, if they both passed away in a common disaster would be $190,000. I asked them at the discovery meeting what they wanted to happen and they both said they wanted their two children to share equally in their undiminished and full estate value. To which I replied, “That’s not what’s going to happen, as the biggest tax bill that you will ever pay will be from your final estate value on your joint demise.”

They were shocked at the huge potential tax shrinkage that would happen, especially as no one had ever discussed this issue with them before. I then suggested that I work with them and with their current professionals and with help from Manulife’s tax and estate planning professionals. With all of us working together, we could all come up with the financial strategy to help solve some of their more immediate tax issues and their estate’s huge ultimate tax issue. They gathered up all of the financial documents that I asked them to come up with and from this we figured out their current net worth, their year tax liability and a strategy to help solve several other issues. They both had health issues which we had to work around, to enable them to qualify for a joint last-to-die life insurance policy.

The solution we came up with was a $1 million joint last-to-die maximum funded, face plus universal life insurance policy, with annual premiums of $52,000 a year. You can imagine how this was received when I first discussed this with them! We went through details as how to this was going to work to fix their problems. If they were both to die prematurely, the life insurance payout would both conserve and enhance their estate value on a tax-free basis. It would also offset the tax payable on their RRIF’s and the tax on the capital gains in their stock portfolio, the embedded capital gain was over 60%, as they had some bank and oil stocks they had owned for over 50 years.

Secondly, as the $1 million life insurance policy was a face plus plan, any excess annual payment over the base policy premium cost would build cash value growing at a guaranteed 3.5% inside the policy  on a tax deferred basis. That’s like earning over 5% in a tax exposed investment! As the allowable annual overfunding was around $100,000 based on their age and the face value of the policy, we now had a way to roll their bank GIC’s as they matured into the policy, with no more taxable annual interest. In 12 years we would have all their GIC’s deposited inside the policy, at while point it would carry itself without any additional funding.

Thirdly, we made provision that they could leverage this growing cash value for income if needed. We set up a line of credit with Manulife Bank for $200,000 using the policy cash value for security that they could access in an emergency. I am sure they will never need to do this, as we also fine-tuned their other investments to provide adequate income for as long as they both might live. Every year we calculated how much of their stock portfolio needed to be gifted directly to their favored charities, to minimize or eliminate any tax payable. The net result of this process what they were both able to enjoy a comfortable retirement, never wanting for money. Unfortunately the husband passed away several years ago.

Now, 15 years later, their estate value has tripled as compared to them not making any of our proposed changes. With their other investments now mostly held in life insurance segregated funds, a very clean and simple estate value transfer to their two children will be possible when the wife passes on.

Another bonus for the widow was we were able to get her taxable income down to the point where she now qualifies for the Alberta subsidy on her monthly rent payment to the seniors lodge – plus very minimal claw back of her OAS payment as well.

 Image licensed through Shutterstock

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