How Life Insurance can help with Estate Planning in BC
There’s a few reasons why Life Insurance might come in handy in your estate plan.
First Life Insurance pays our way faster than probate. Second because it pays out quick and clean, it can be used to help pay estate taxes, especially since Life Insurance pays out tax free.
Lastly, you have the flexibility to choose your beneficiaries, and adjust how much each receives with Life Insurance, and the added bonus is anything that is paid out by your Life Insurance is private.
Life Insurance pays out faster than a will going through probate.
When someone passes away, and hopefully they have a will, that will goes through probate, which is the process of proving the will, and finding all of your assets. In BC your executor would be responsible for finding all of your assets.
If your will is clean, everyone gets along, and no one fights, right now, probate is going to take 18-24 months. And that’s if everything goes perfectly smoothly.
So what happens during those two years? Well, your family still needs to pay their bills, they might have a mortgage, or other financial responsibilities they need to take care of.
What helps with this is a little bit of money that’s not tied up in an estate.
Life Insurance can help here because Life Insurance generally will pay out within a few days or weeks after a death certificate is provided to the insurance company.
Depending on the company the time frame is anywhere between 8 to 14 days for most cases.
Obviously if they need more proof or something happened it could take a little longer, but 90 percent of them are getting paid out fast.
Life Insurance can help pay estate taxes.
Another reason that people want to have life insurance as part of their estate plan is to pay taxes. This doesn’t get talked about a lot but one of the major expenses when you die is taxes.
Here in Canada, we don’t have something called an estate tax like in the US, but we do have a final tax return that needs to be filed for anybody who passes away.
And the way they calculate what you pay is through what’s called a deemed disposition of your assets, that they assume happened on the day before you die.
They want to know how much your house is worth, how much your business is worth, how much your stocks are worth, how much your bitcoin, cars, and all the knickknacks are worth.
Once they calculate the value of everything, they tax you on that amount. And that tax is payable at whatever the next tax year is, so next April that’s payable.
You don’t get years to figure this out and pay, somebody needs to pay that right away and it’s coming off your estate.
For example, say you have a ski cabin or cottage by the lake, in Canada all of those have gone up in value a tremendous amount in the last little while, and there’s a huge amount of capital gains that are going to be payable on those.
You can calculate what the tax is going to be in the future, you wont be able to get it exact but you can get a good estimate, and then you can set up an appropriate amount of Life Insurance to cover it.
A more specific example would be, say somebody’s family had bought a ski cabin at Whistler for $500,000 twenty years ago.
Now its worth $1.5 million, it’s gone up by $1 million, half of that will be subject to capital gains at whatever the marginal tax rate is.
Let’s call it 30%, half of it is $500,000 taxable at 30%, somebody has to come up with $150,000 to pay the taxes on that. And how are the kids going to do that?
Well one, they could save up the money now and invest it and hopefully they will have $150,000 when their parents die.
Two, they could take out a mortgage on the place when their parents die, but they might not be able to qualify, they might have other mortgages, they might have all sorts of other things going on in their life.
Three, they might have to sell the place to pay the taxes. But maybe they don’t want to sell it because it’s sentimental and you don’t want to lose the family cabin in Whistler.
So what you can do is say well there’s an expected $150,000 payable now but what if the parents live an extra 20-30 years, and then to appreciate that you just run some calculations.
Once you run those numbers maybe the future holds a $400 – $500,000 tax bill, so you get a $400 – $500,000 life insurance policy.
This way when the parents pass away, the insurance pays out the kids to pay the taxes and keep the cabin.
Plus Life Insurance in Canada is tax-exempt and life insurance pays out tax free.
So if you know your going to be paying taxes on your estate, well a good way to pay those taxes is to have proceeds of a Life Insurance policy ready to pay those taxes.
The privacy of Life Insurance pay outs
Another benefit of Life Insurance in estate planning is that it’s private.
If you have a Life Insurance policy and you have a properly named beneficiary on that policy, when it pays out it will pay that beneficiary directly. And that’s it there’s nobody able to challenge it to stop it.
Plus nobody’s able to find out about it unless somebody tells them, their life insurance company is not going to advertise who they gave that money to.
There’s a lot of reasons people might want things to pay out privately, maybe it’s paying privately to children from a previous marriage and the current marriage would not be okay with it but you think it’s important.
Or maybe the parents want to give more money to charity than the kids want them to so one way to guarantee that the money is going to go to charity is to put the charity as a beneficiary of your life insurance, and then you know it’s going to get there.
If you gave that money to charity in your will, and the kids are not happy with it, they can challenge it, take it to court, and the judge could reverse that decision.
In BC especially, that judge has a tremendous amount of power in how your state is going to settle if somebody takes it to court.
The Flexibility of Life Insurance
One thing that people often don’t realize about Life Insurance is you don’t have to pay the whole amount to somebody in one shot.
Maybe you don’t necessarily want to give one of your beneficiaries $1 million, $5 million, or $10 million cash because they might blow it.
One thing you can do with Life Insurance is what called an annuity settlement option.
You can say, well I want the life insurance to pay to my beneficiaries but I want to give them this much per year for X amount of years, or every 6 months, or every month.
However you set up the insurance to pay out your beneficiaries, the insurance company will pay them out like you said, and nobody can change that.
You can also put multiple beneficiaries on your policy, so if you have multiple kids, or want to include all your nieces and nephews.
You can also adjust how much each beneficiary gets, you can either set a dollar amount, or you can do a percentage.
You also don’t have to name people as your beneficiaries, you can name charities, or other organizations.
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