How Life Insurance Can Reduce Taxes
Smart people pay closer attention to tax minimization strategies than other people do. The fewer taxes you have to pay, the more of your money you can keep. If you are in the higher income-tax brackets, taxes are one of your biggest expenses.
When you have used up the traditional tax-minimization strategies, such as investing in RRSPs and tax-free savings accounts (TFSAs), you can turn to more sophisticated approaches, such as insurance strategies and charitable giving, to reduce income taxes.
Permanent Life Insurance Tax Strategies
Specialized insurance strategies involve the use of permanent life insurance products, such as whole life and universal life. While these products provide life insurance protection, they also have a savings component. You can contribute substantially more than the premium of the policy, and that excess amount is invested within the policy to grow tax-free.
The savings accumulated in such a policy can be used to supplement retirement income while you are still alive. Upon your death, the proceeds from the policy, including accumulated assets, can be: distributed to your estate or to beneficiaries tax-free; to cover estate tax liabilities and probate taxes; or donated to charity.
If you are 10 to 15 years from retirement and have maximized your RRSP and TFSA contributions your should consider using specialized insurance strategies. This strategy would be appropriate for people who have disposable income but do not have adequate life insurance coverage.
2017 Permanent Life Insurance Rule Changes
New rules for permanent life insurance will be effective in 2017 and later years will provide for fewer income-sheltering benefits because the amount of accumulation room that qualifies for tax-exempt status will be lower than the current threshold. These changes take into consideration increasing life expectancy and changes in interest rates and inflation since 1982, when the current tax rules relating to the sheltering of income in insurance policies came into force.
All insurance policies acquired prior to Dec. 31, 2016, will be grandfathered under the old tax rules.
Life Insurance for Charitable Giving
You can also minimize taxes with charitable giving and foundation planning. While most people donate directly to charities, you can use life insurance to get a bigger bang from your buck and a charitable tax deduction.
With a private foundation, gifting can be controlled by the donor and his or her family. A foundation also can provide a philanthropic legacy that survives the founder's death.
For example if you donate securities with a low cost base and a sizable capital gain to a foundation. You would avoid paying taxes on the gain, but receive a tax receipt for the full donation.
These life insurance strategies are minimizing taxes while you are alive. The money remains in the foundation and continues to grow tax-free. The operation of the foundation can be passed on to your heirs, creating a charitable legacy.
You can also donate shares of a private company and real estate to a charity. However, proposed new rules surrounding the capital gains exemption may be extended to gifts of private-company shares and real estate beginning in 2017. The proposals would allow the capital gain realized from donated cash proceeds derived from the sale of a property to be exempt from taxation. The gift must be made within 30 days of the disposition (the sale) and the property must be sold to a purchaser who is not affiliated with the donor or the qualified recipient.
If all of the cash derived from the sale is donated, the entire capital gain realized on the sale will be exempt. Otherwise, the exempt portion of the capital gain will be pro-rated, based on the portion of the cash donated from the total proceeds.
Please contact us today to find out which specialized insurance strategy would work best in your situation.