Estate Protection for your Client

Your client has worked hard all of their life. They’ve accumulated some assets, perhaps even more than they will need for a secure and comfortable retirement. However, the ownership of some of these assets will result in a tax liability upon your client’s or their spouse’s death. As an Advisor, you have both the knowhow and the tools to not only assess your client’s assets, but also guide them in protecting their estate and ensuring that their hard-earned dollars go directly to their loved ones.

Your client’s assets can be divided into three groups:

  1. Assets of a capital nature such as shares in public/private companies or a second home or vacation property.
  2. Assets that generally produce income upon your client’s death such as registered assets (RRSPs or RRIFs) or assets that are taxed as income such as interest bearing assets (GICs or money market funds).
  3. Assets that are either fully tax paid or do not attract tax upon death such as cash and TFSAs, a principal residence, as well as the tax-free proceeds from a life insurance policy.

Typically, your client will have four options when it comes to providing the liquidity needed to pay the taxes due upon death:

Liquidate assets – Business cycles and the state of the markets are critical in the value of an asset. Your client has no way of knowing what this will be upon death. Further, the sale of assets by an estate often signals to a purchaser that there is a degree of urgency, which does not help the seller – your client’s estate – realize full value.

Borrow funds – This typically entails using assets as security – not ideal. In estate situations, the main objective is usually to distribute the client’s assets to their beneficiaries. Borrowing against the assets, which will likely require pledging them as security, makes this more difficult. Further, it is not possible to predict the market conditions at the time of death. Financial institutions go through cycles, as do loan rates.

Create a cash reserve – This can be done systematically throughout the course of a lifetime but in the context of an estate situation, a cash reserve is not a practical option as your client does not know when death will occur and whether there will be ample cash available at that time.

Purchase life insurance – Life insurance, purchased in advance, removes many of the risks associated with funding the tax liability upon death. The death benefit provides liquidity at exactly the time it is needed, and in Canada it is paid tax-free to your client’s named beneficiary.

The most practical, and cost effective, method to transfer the risk of funding a tax liability is to purchase life insurance.

PPI’s ‘Protecting your Estate’ applet (Advisor login required) in Toolkit Direct helps you identify and analyse your client’s current and future tax liabilities, so you can work with them to determine the best way to deal with the risk to their estate. Used in combination with the ‘Insurance Needs Analysis’ applet (Advisor login required,) you can now provide your client with a complete picture regarding what their income needs are on death, as well as how to cover any tax liabilities.

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Protecting Your Estate