Estate Bond Canada

Why an Estate Bond?

As people become older, there typically comes a point in time when the realization strikes that they are not going to spend everything and their remaining assets represent their estate. When speaking of an estate, the first thing that comes to mind is “How can it be transferred to my heirs in the most tax efficient method?” There are many options to solving your estate issues, and maybe the estate bond concept, or combining it with other strategies, will work for you.

Would you like to give more to your family and less to the government?

Here’s the problem …

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Like many of us in Canada, your financial plan may include an element of savings that you never plan to spend. You have a portion of your non-registered investments that you intend to pass on to those you care about most. This money is invested and growing for the benefit of your heirs.

The problem is this strategy’s success is largely based on the investment’s rate of return. And, unfortunately, the higher the return, the more tax you pay. This means money you ear-marked as inheritance for your heirs will never grow to its full potential because of taxation constantly eroding the returns.

What are your options?

You can continue to pay tax on the income earned from your savings or you can invest the funds using an insurance planning strategy known as an Estate Bond.

The Estate Bond is an attractive alternative to taxable investments, offering:

• a large, immediate and guaranteed estate value
• Guaranteed cash flow with predictable annual taxation costs
• a tax-free maturity value at death
• reduced estate settlement costs, if you’ve named a beneficiary
• potential for creditor protection, if you’ve made an appropriate beneficiary designation
• liquidity, if you require it.

The Estate Bond solution.

The Estate Bond strategy typically uses a life annuity to increase cash flow and minimize taxation. With the increased after-tax cash flow you purchase an exempt life insurance policy for as much death benefit as possible. When you die, your heirs receive the proceeds tax-free, avoiding your will, probate, legal and executor fees (if they are named beneficiaries).

When you take advantage of the Estate Bond insurance planning strategy, you not only increase the size of your estate, you also reduce the amount of tax you pay.

Let’s look at an Estate Bond example.

A woman in Canada aged 60 has $150,000 set aside for her children and grand-children to inherit. She has the money invested in a secure interest bearing account earning 5% growth per year. since this is a non-registered account, she must pay the taxation on the growth each year (assuming she is at the highest marginal tax bracket of 39% in Alberta), and the remainder is reinvested to compound the growth-rate.

Based on this typical “inheritance fund” strategy, if this woman lives to age 85, she will have ammased $281,903 in her investment account for her heirs. Can she do better? Could you?

If she was to annuitize the entire sum of $150,000 toady, she would get $9,685 per year in annuity payments, of which $3,624 is taxable. Her taxes payable on that amount each year would be $1,413, leaving her with $8,272.

With the $8,272 she buys as much life insurance as she can on a fully guaranteed basis. The maximum amount of insurance she could get today is $528,500 for $8,271 per year in premium (assuming she is a non-smoker and in good health). This level of coverage would go into force on day 1 of the policy, locking in the benefit in case anything happened unexpectedly early in her life.

In order to match this guaranteed tax free benefit at age 85, this woman would have to find an investment that would pay an annual 11% pre-tax interest return every year for the next 25 years! Another way of looking at it is she has increased the value of her $150,000 by 352% immediately and fully guaranteed.  No financial institution except an insurance company can offer those sorts of guarantees in Canada today.

* The Estate Bond illustration above is based on annuity rates from BMO Insurance and Term 100 Signet rates from Manulife Financial as of June 1, 2010.