Posted: 2 Oct '11
The Solution to Leaving Your Legacy Intact
This is a continued thought from my last blog written on September 12, 2011. The blog suggested that life insurance might be the right financial tool in Estate planning.
The only way to explore this is to first ask the question, where will the money come from to pay the tax bill in the estate on the last death?
These are the only 4 funding alternatives to consider.
- The estate or your children could go to a bank and borrow the money needed to pay the tax bill or
- You could start a savings account today, putting money aside each year to make sure you accumulate enough in this account to pay the taxes or
- Just let it happen. I’ve heard this one, when I die the kids will have my estate and they can just use what I leave to pay the taxes owed. Why should I worry about the taxes when I’m dead or
- You could own a life insurance policy and let the tax free life insurance proceeds pay the taxes.
It’s a mistake for people between the age of 55 and 65 to not be thinking about this future tax liability that their children will have to deal with some day. We work hard for our money we plan ways to reduce our taxes each year. We plan our savings so we have money for retirement. And then we stop short, saying whatever happens when I’m gone so be it? Why? Why give 25 to 40% of your estate to the tax man without at least looking at the funding alternatives to see if there could be a better way.
In the last post I started the example of 500,000 in a professional corporation or company and 500,000 in your RRSP’s by age 55. After running the projection the estimated tax bill in 27 years would be 718,000 dollars, owed the tax man on the last death.
Could life insurance be the most cost effective?
Let’s look at the present value cost using the 4 funding alternatives. The bank loan would cost 507,000 dollars and the savings account would cost 361,000 dollars. Doing nothing and letting the kids pay the tax bill would cost 420,000 dollars and the cost of a life insurance policy would be 243,000 dollars.
The savings to your estate by using life insurance are substantial and should not be overlooked. Take a look at your assets, and ask someone to help you project your final tax bill. First you might be surprised how large it will be and second you will have an opportunity to look at the alternatives and I know you will find life insurance is the most cost effective solution to leave your legacy intact.