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Taxation of Life Insurance – New Rules Offer a Window of Opportunity

Permanent life insurance, such as Whole Life or Universal Life, has long been accepted as a tax efficient way of accumulating cash for future needs.  Soon the amount of funds that can be tax sheltered within a life insurance policy will be reduced by new tax rules which take effect January 1, 2017.  These changes may make 2016 the best year to buy cash value life insurance.

The changes to the tax rules regarding life insurance have resulted in an update to the “exempt test” which measures how much cash value can accumulate in a policy before it becomes subject to income tax.

Highlights of the new rules and their effect

For Cash Value Life Insurance: Read More

Recover Your Long Term Care Costs

Back to Back Long Term Care Strategy

Will your family be affected by the costs of caring for an aging loved one?

Statistics Canada states that over 350,000 Canadians 65 or older and 30% of those older than 85 will reside in long term care facilities.  With increasing poor health and decreased return on investments, the fear of facing financial instability in your declining years is real.

How will this impact your family?

Caring for an aging parent or spouse takes its toll emotionally and financially.  Adult children with families and job pressures of their own are often torn between their obligations to their parents, children and careers.  This often results in three generations feeling the impact of this care.

Is it important to you to have control over your level of care?

Consider this:

  • The cost of providing for long term care is on the rise
  • While many Canadians assume that full-time care in a long term care facility will be fully paid by government health programs; this simply is not the case. In fact, only a small part (if at all) of the costs of a residential care facility will be paid by government health care programs
  • 28% of all Canadians over the age of 15 provide care to someone with long term health issues
  • For the senior generation, the prospect of the failing health of a spouse puts both their retirement funds and their children’s or grandchildren’s inheritance at risk
  • Capital needed to provide $10,000 month benefit (care for both parents) for 10 years is $ 1,000,000 (if capital is invested at 4% after-tax) 

 

Case StudyNorman (age 64) and Barbara (age 61) have three children, aged 32-39.  While still in good health the family does have a concern for their future care.To safeguard against failing health it was decided that they purchase Long Term Care Policies to protect their quality of care and a Joint Last to Die Term 100 Life Insurance Policy to recover the costs.

The Long Term Care policies would pay a benefit for facility care in the amount of $1,250 per week for each parent.  The monthly premium for $10,000 per month Long Term Care for both Norman and Barbara is $544.17.

The Premium for a Joint Last to Die Term to Age 100 policy with a death benefit of $250,000 is $354.83 per month.

Upon the death of both parents $250,000 is paid to the beneficiaries (children) tax free from the life insurance policy, returning most if not all of the premiums paid.

Advantages of the Long Term Care Back to Back Strategy

  • Shifts the financial risk of care to the insurance company
  • Allows for a comfortable risk free retirement
  • Preserves estate value for future generations

When is the best time to put this structure in place?

  • Remember, the older the insured, the higher the costs
  • Do it early while you are still insurable!

Please call me if you think your family would benefit from this strategy.  Feel free to use the sharing icons below to forward this to someone who might find this of interest.

 

 

 

 

Should you wish to learn a little more about long term care, the Canadian Life and Health Insurance Association (CLHIA) has published a brochure which can be downloaded here

Family Business Planning Strategies

67% are at Risk of Succession Failure

If you are an owner in a family enterprise, the likelihood of your business successfully transitioning to the next generations is not very good.  This has not changed over the years. Statistics show a failure rate of:

  • 67% of businesses fail to succeed into the second generation
  • 90% fail by the third generation

With 80% to 90% of all enterprises in North America being family owned, it is important to address the reasons why transition is difficult.

Why does this happen and what can you do to prevent it?

Communicate

Family enterprises are often put at risk by family dynamics.  This can be especially true if the family has not had any meaningful dialogue on the succession of the business. And, while we are throwing around statistics, it has been estimated that 65% of families have not had any meaningful discussion about business succession.

  • Family issues can often hijack or delay the planning process. Sibling rivalries, family disputes, health issues and other concerns certainly present challenges that need to be dealt with in order for the succession plan to move forward.
  • Many times a founder of a family business looks to rely on the business to provide him or her with a comfortable retirement while the children view the shares of the company as their inheritance.
  • Sometimes an appropriate family successor is not readily identifiable or not available at all.

Decide

  • In these times a decision needs to be made as to whether or not ownership needs to be separated from management, at least until the second generation is willing or capable to assume the reigns of management.
  • If the founder needs to receive value or future income from the business a proper decision as to who is running the company is vital. If this is not forthcoming, then there may be no other alternative but to sell the company.

Plan

Tax Planning

When planning for the succession of the business an important objective is to reduce income tax on the disposition (sale or inheritance). One of the methods is to implement an estate freeze which transfers the future taxable growth to the next generation.  The corporate and trust structure utilized in this strategy may also create multiple Small Business Gains Exemptions which can reduce or eliminate the income tax on capital gains.

Just as it is important for a business owner to plan to reduce taxes during his or her lifetime, it is also important to maximize the value of the estate by planning to reduce taxes at death.

Minimize Management and Shareholder Disputes

This can be accomplished with the implementation of a Shareholders’ Agreement.   Often there are multiple parties that should be subject to the terms of the agreement, including any Holding Companies or Trusts that may be created to deal with the tax planning issues.  The Shareholders’ Agreement will include the procedures to deal with any shareholder disputes as well as confer rights and restrictions on the shareholders.

The agreement should also define the exit strategy that the business owners may wish to employ.

Estate Equalization

Often the family business represents the bulk of the family fortune.  There are times that one or more children may be involved in the company while the other siblings are not.  Proper planning is necessary to ensure that the children are treated fairly in the succession plan for the business when the founder dies.

One method often employed in this regard is for the children active in the business to receive the shares as per the will or shareholders’ agreement while the non-business children receive other assets or the proceeds of a life insurance policy.

Founder’s Retirement Plan

It is problematic that often a business owner’s wealth may be represented by up to 80% of his or her company’s worth.  It is important that the founder develop a retirement plan independent of the business so that his or retirement is not unduly affected by any business setback.

Protecting the Company’s Share Value

Risk management should be employed to provide for any unforeseen circumstances that would have the effect of reducing share value.  As previously mentioned, if the bulk of a family’s wealth is represented by the shares the family holds in the business, a significant reduction in that share value could prove catastrophic to the family.  These unforeseen circumstances include the death, disability or serious health issues of those vital to the success of the business, especially the founder.  Proper risk management will help to ensure that the business will survive for the benefit of future generations and continue to provide for the security of the founder and/or his or her spouse.

Act

Since the dynamics of family businesses differ from non-family firms, particular attention is required in the planning for the management and succession of these enterprises.  This planning should not be left until it is too late – it is never too soon to begin.

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