Insurance as a Tax-Savings Vehicle for Estate Planning

By Nizam Shajani, CPA, CA, MBA

October 16, 2020

Tax in Estate Planning

“What counts is not the mere fact that we have lived. It is what difference we have made to the lives of others that will determine the significance of the life we lead.” – Nelson Mandela

Tax efficient planning will impact the amount of tax your estate pays on your passing and leave a legacy with an impact on the lives of those you leave behind. The year of your death may be your largest income and tax year and as many of life’s major events – should be planned for. A lack of planning could see near half your estate go to the tax authorities or an uneven distribution of wealth to your beneficiaries where this was not the intent.

When you pass – all your assets are deemed to be disposed of a fair market value. And when you dispose of an asset, any gains are taxable. However, as an exception to the fair market value rule – on death your assets may transfer to your spouse at your cost base – resulting in no taxable gain. This is done so your spouse is not overburdened with your tax bill – otherwise your assets would be considered sold at fair market value and any gains would result in taxes payable. This is not the case when your assets are transferred to anyone else, such as your children.

Although assets are transferred to your spouse tax deferred, income generation capacity may be lost and should be considered. Business partners may also be left in a lurch and may learn that their new partner is now their former partner’s widow. It is therefore important to address succession due to death with your business partners.

Another significant consideration is the tax due on a last to die (between a couple). Once the second spouse passes – there is a deemed disposition of assets and this could result in a large tax bill. It is as if all the assets were sold and profits were realized. A couple’s children may not be in a position to afford this bill and may be relying on income generated from the family business or investment portfolios –which may now have to be disposed of to pay the taxes due.

Situations of an uneven tax burden may also arise. A common example is where the estates principle residence is left to once child and their vacation property left to the other – both at the same market values. The after-tax result is the principal residence is transferred tax free (using the estates principle residence exemption), whereas the vacation property may have a sizable deemed taxable capital gain – resulting in a large amount of taxes due.

Proper planning with our team could save your estate a considerable amount of tax and mitigate the risk of tax liabilities or unintended outcomes on your death. We work closely with lawyers and insurance advisors with an integrated approach to estate planning.

Insurance to Mitigate Tax Risk

One way to mitigate tax risk for an estate and often recommended to our clients is insurance. Insurance can be a cost-effective way to alleviate the concerns of tax that could not be eliminated on death and is often included as a recommendation within the estate plan for our clients.