Using a Universal Life insurance policy to pass on the assets of your estate to beneficiaries is an excellent means of creating a family legacy and avoiding unnecessary taxes on the transfer. The plan is particularly useful to individuals - parents and grandparents - who have accumulated assets during their working lives and are now looking to a properly managed estate planning strategy.

Their concern might be any or all of…

• Bequeathing to children or grandchildren
• Reducing taxes on current and future investments
• Lowering taxes due on current income
• Retaining control of estate assets
• Minimizing probate fees
• Simplifying the division of the estate at one’s death
• Ensuring one’s wishes regarding inheritances are followed

The plan requires a Universal Life policy to be taken out in your child’s or grandchild’s name. This type of policy has both an insurance portion and a savings portion. You can accumulate tax-exempt savings under the policy (there is a maximum amount set by the CCRA) through a choice of investment options. The policy ownership can be transferred to your dependant at any time after his or her 16th birthday, with no tax payable on the transfer. (The Income Tax Act provides for special exemptions in the transfers between parent and child). When your child withdraws funds from the savings portion of the policy, the capital gain on those assets is taxed in the child’s hands, in most cases at a lower rate than if the tax liability was the parent’s. The funds withdrawn from the plan can be used for any purpose - education, a house purchase, a trip abroad. And of course your child enjoys the benefit of the insurance potion of the policy.

The parent can retain ownership of the plan for as long as wished, and if desired can withdraw funds from the investment portion for their own use - for example for retirement income if the need arises. The parent may use the policy as collateral for a bank loan and if the loan is for investment purposes the interest on the loan may be tax-deductible.

If it is decided that the plan ownership is not to be completed during the parent’s lifetime, the child or grandchild can be named as the successive owner of the plan. In this case the ownership will change hands at the death of the parent, outside of the Will and exempt from probate fees.

Ownership may also be transferred to the policyholder’s spouse if so desired.

Compare the Benefits

The growth possibilities afforded by the tax-protected feature of the universal plan are quite substantial. The table below shows an annual investment of $4,000 over a 10-year period on a tax-exempt life insurance policy for $400,000 with a similar $4,000 investment that is taxed annually. At the end of the 10-year period when the child turns 18 and goes to university, the parent or grandparent can either transfer the life insurance policy or give the child the investment, depending on the initial investment choice. Over the next 5 years, the student withdraws $5 000 annually from the savings portion of the life insurance policy to cover tuition expenses.

LIFE INSURANCE………………………….OTHER INVESTMENT

We have assumed a 6% rate of return on all investments in calculating these figures. The child’s tax rate is 22.20% and the father’s 37.16%.

*After tax capital accumulated

Under the plan, a child natural or adopted, grandchild, great grandchild, the spouse of a child or any person who was in your care before the age of 19 are equally eligible. The ownership transfer of the plan must qualify for tax exemption under 148 (8) of the Income Tax Act. The tax-exempt accumulation of savings within the plan is subject to certain maximums set by the Canada Customs and Revenue Agency (CCRA). The tax implications of holding the policy at death and the alternatives available to minimize taxes in that event should investigated. Individuals are advised to consult an estate planning professional to confirm if this wealth transfer strategy is best suited for their circumstances.