Your Legacy: Creative Income Tax Payment

I hope your year is off to a great start, despite the challenges we all continue to face with the pandemic.?

I'd like to talk more about business owners, real estate investors and their families. As I've discussed previously, it's no?surprise that these individuals receive a substantial?tax bill upon selling a portion or all of their assets.??

Taxes on Capital Gains are simply a fact of life that you cannot get away from. It can be quite deflating when you work hard your entire life and then need?to worry about giving a portion of your proceeds to?your silent partner, the CRA. They always come to collect.

Creating Tax-Free Dollars to Pay the Tax

You can protect your family from significant taxes with a tax-free solution that provides liquidity when your family really needs it.

As Benjamin Franklin famously stated, "...in this world nothing can be said to be certain, except death and taxes." Taxes can't be avoided but they can be minimized significantly with some creative planning.

Consider how income taxes would be magnified upon your death. I have worked with people who are proud of the wealth they have accumulated. When they tell me how much they are worth, I ask if that number is gross or net. Invariably, there are taxes due upon death which can significantly erode the estate. In many cases, they haven't given it enough thought and don’t understand their options to lessen this erosion.

It's difficult to approach the topic of your demise with any sort of enthusiasm, so let's talk about someone else's scenario - Joe and Sarah. Joe and Sarah wanted to consider?the "what ifs" so they could protect their family.

Joe passed away and legally speaking, on that date, its deemed that all his assets are sold. This means a significant tax bill is coming because of those Capital Gains as well as the Registered Assets like RRSPs and RRIFs.

Since Sarah is still alive, his assets/their assets can be transferred to Sarah without tax implications. If she keeps everything, she won't owe income tax until she passes away. Income taxes can be due as early as 6 months after her passing.

Upon Sarah's death, there are 4 ways her beneficiaries can pay the tax bill:

1. Cash

It's likely that most business owners and real estate investors don't have much money lying around. If Joe and Sarah had a significant amount of wealth, they likely utilized their money in strategic ways. It's all invested in their business or real estate portfolio or other investment vehicles.

2.?Borrow Funds

This might make some sense on the surface, but it's important to note that borrowing means that the loan must be paid back and there will be interest on that loan. The feasibility of this option will depend on the individual situation and what the interest rates are like at the time. However, it is an expensive solution to the tax problem.

3. Selling Assets?

The business or part of the business can be sold. This is a reasonable approach for beneficiaries who are looking to pay off the tax and get whatever money is left as their inheritance. With real estate properties this can be an easier decision vs. a family business.

However, if the estate plan for Joe and Sarah states to leave a business or real estate to the next generation, selling assets may not make any sense.

4. Life Insurance

You might be thinking, life insurance?! Life insurance is quite a unique product. Many people simply view it as a cost but in order to maximize its value, you need to think differently about it.

It has received a bad rep over the years, mainly because of pushy insurance agents that are more product-focused vs. people-focused. Most people know what life insurance is but they don’t know what it can do and how it can be used in various ways to help.

Joe and Sarah did not want to put their family in the position to have to borrow money or sell the family business to pay the income taxes. They wanted to preserve their estate and legacy. So, they chose life insurance as the tool to create capital to pay the tax.

While businesses and real estate are illiquid assets, life insurance proceeds are virtually immediately liquid. Typically, within weeks, the life insurance proceeds are paid to the beneficiaries. It’s not only the quickest option but it’s also the least expensive.

For pennies on the dollar, Joe and Sarah created a tax-free payout of the insured amount upon their passing (If the policy is set up as a joint life and last to die policy, the cost is much less than a single life policy). Many people view this option as an unnecessary cost. Yes, there is a cost but when compared to the other options, the cost is often much less than the alternatives.

Consider this, Joe and Sarah bought the policy and viewed it as an investment for the future of their children.

These decisions must be based on your individual situation and what legacy you want to leave behind. With it being a New Year, it's the perfect time to kick-start your estate protection planning.

The key is having clarity about what your goals and objectives are. You can preserve everything you worked for.

You can only receive clarity from going through the important detailed estate planning exercise.

Please connect if you would like to enquire about engaging in creative Estate Planning.

Attached are links to my most recent podcasts that you may find interesting.

- Happy Planning

??? New Podcast: Mayor of Money

The Mayor of Money podcast features wonderful guests and topical discussions around wealth, risk management, planning, entrepreneurship, real estate and development.

3 Part Series?Ralph Benmergui, Canadian television and radio personality,?speaks with Rick Goldring about his political career,?the Brant Street pier, what it's?like to win an election and what it's like to lose,?family, life growing up and much more.?

Home & Commercial?Renovations?Rick speaks with Jay Bradburn, Co-Founder of The Bradburn Group of Companies.

Blendable Employee Benefits?Rick Goldring speaks with Adam Hussey,?Co-Founder?and Taylor Weber, Growth Manager?of Blendable about customized plans for businesses - with a twist.?

Insurance to Protect Your Legacy

Our goal this year is to present a series of newsletters that help you to?better understand your insurance options as well as the creative ways to use it.

If you have any insurance questions, please reach out.?

Your Feedback Matters

As we continue to provide you with timely, relevant resources, we welcome your feedback on new topics you'd like to hear more about.?

If you have a specific?topic of interest, please do not hesitate to let us know.?