Here are some ideas to help you protect your hard-earned wealth.
First, if you haven`t already done so, prepare a comprehensive financial plan. If you determine that you have surplus assets you are unlikely to need during your lifetime, even under very conservative assumptions, consider ways you can protect these assets from high taxes and creditors.
Three options include:
1. Making lifetime gifts or loans to low-income family members
2. Purchasing a tax-exempt life insurance policy
3. Charitable giving
Lifetime gifts
Do you have surplus assets that you will definitely not need during retirement? Are you also planning on providing funds to your children or grandchildren in the future anyway to help with things such as paying for education, purchasing their first home, starting a business or paying for their wedding? If so, then it probably does not make sense to continue exposing the income from these surplus assets to your high marginal tax rate.
Instead, consider giving some of these surplus funds to family members now, either directly or through a trust if you do not want the children to have control of these assets. There will be no attribution on any investment income earned on the gifted funds if the child is 18 or older and no attribution on capital gains if the child is under 18. If you are concerned about direct gifts to your children, then lending funds to a family trust and providing your children with only the income earned on the lent funds is another effective strategy as you can call the loan principal back any time.
Tax-exempt life insurance
Do you have surplus assets that you know will be passed on to your heirs when your estate is settled? If so, it probably does not make sense to continue exposing the income from these assets to your high marginal tax rate. If there`s an insurance need, consider speaking to your insurance advisor about putting these highly taxed (typically interest-bearing) assets into a tax-exempt life insurance policy where the investment income can grow on a tax-free basis. This way, the amount of tax that would normally be paid to the Canada Revenue Agency (CRA) on the income earned on these surplus assets could instead be paid to your beneficiaries in the form of a tax-free death benefit. If need be, you could access the investment account within the life insurance policy either directly or through tax-free policy loans, which could be repaid after death with part of the death benefit.
Charitable Giving
If you want to give some of your surplus assets to charitable organizations, you have many options that can help you create a charitable legacy, while providing some tax relief. These include giving directly to qualified charitable organizations, creating a private foundation or donating through a public foundation.
Recent tax changes also make it more attractive to donate publicly listed securities such as shares that have appreciated in value. Now, when you donate publicly listed securities directly to a qualified charity, you are completely exempt from capital gains tax.
Note that due to the potential of escalating health-care and long-term care costs, it is essential that you are prepared for these contingencies before redirecting your surplus assets. Critical illness insurance, long-term care insurance and easy access to credit are a few options to consider with your advisor.
This article was supplied by Colin MacAskill CFP, CIM, a Vice-President and a Financial Planner and Investment Advisor with RBC Dominion Securities Inc. Member CIPF. Colin welcomes your call on his direct line 604-257-7455.
