Wednesday, May 1, 2013

Use Estate Bonds to lower tax

An estate bond is a tax-efficient strategy that gives you a large and immediate estate value.  More than that, it’s a wealth accelerator that allows you to pass on assets to your heirs or shareholders, tax-free.  And it can be used to provide tax-free retirement income. 

The benefits are many

An estate bond gives estate value that’s far greater than what your assets might earn in a taxable investment portfolio, and the cash values are tax-sheltered. You can choose to take tax-free retirement income using the cash values and, if done properly, your assets are nearly creditor-proof.

How it works

Setting up an estate bond is simple. Using a whole life insurance policy, you can begin to move your money from open savings accounts into an exempt life insurance contract.  A couple aged 45 who deposit $22,000 per year for 20 years (a $440,000 investment) would create an immediate death benefit (starting with the first payment) worth over $1 million.  Whole life policies tend to offer relatively fair yields through their dividend scale.  Cash account growth in a whole life policy could push the death benefit to over $1.8 million by age 65. If they live until 95, the total death benefit number is close to $5 million.  

If you own a corporation, your death benefit could be paid into your company’s capital dividend account, which tracks the tax-free amounts a company receives from various sources. These funds can in turn be paid out to shareholders tax-free. 

If you’re concerned you may need asset liquidity, the cash values that build up in the policy create a cash surrender value. Depending on the product, you can either borrow money from the policy or pledge the policy as collateral and borrow money from a bank.  The policy used as an example above could have a cash value of over $740,000 by the time this couple turns 65.  Up to 90% of this amount is generally available for non-taxable income through a collateralized loan.  

In both cases, you can pay the money back, simply pay the interest, or let both ride. And, you can arrange for the loan to come due when you die, at which time the loan will be paid and the balance of the policy’s proceeds will go to named beneficiaries or your estate.

Finally, to make an individual policy creditor-proof, the beneficiary must either be irrevocable or the beneficiary must be your legal spouse, child, grandchild, parent or grandparent. Stepchildren don’t count.

The five-year test is another rough guideline that will be applied when considering the protected status of a policy in bankruptcy proceedings. If you declare bankruptcy within five years of the policy being established, the assets will likely not be protected. If it’s shown that you intended to shelter money from creditors, courts will likely cancel any protection.

The estate bond can multiply your savings and help provide a larger tax-free legacy.

To find out how the use of permanent insurance to create retirement income and dramatically and immediately increase the value of your estate, please contact me at  416-230-2703 or 705-798-0062

Tuesday, March 19, 2013

Use annuities instead of bonds

Pairing the most plain-vanilla type of annuity—called a single-premium immediate annuity—with stocks, retirees can generate income more safely and reliably than if they use bonds for that piece of their portfolio, says Wade Pfau, a professor who researches retirement income.
To arrive at that conclusion, he plotted how 1,001 different product allocations might work for a 65-year-old married couple hoping to generate 4% annual income from their portfolio.
Using 200 Monte Carlo simulations for each product allocation, and assuming returns based on current market conditions, the winning combination turns out to be a 50/50 mix of stocks and fixed annuities, Mr. Pfau says. If inflation accelerates more than the markets now expect, inflation-adjusted annuities would become more attractive, he adds.
"There is no need for retirees to hold bonds," he says. Instead, annuities, with their promise of income for life, act like "super bonds with no maturity dates," he says.
But immediate annuities have one big drawback: The buyer loses access to his or her savings in exchange for those guaranteed payments. In other words, if you have a sudden long-term-care need or some other type of emergency, there's no way to recapture a large chunk of cash. As a result, some retirees and their advisers are using variable annuities with guaranteed income benefits instead. These annuities allow investors to withdraw more than the set annual amount in an emergency.
Mark Cortazzo, a certified financial planner, typically recommends that people preparing to retire figure out their basic, nondiscretionary annual expenses and use a variable annuity with guaranteed benefits to make up for whatever portion of that total won't be covered by Canada Pension Plan, Old Age Security, and any pensions. That way, they can pay their bills throughout retirement and afford the risk of investing much of the rest of their savings in stock funds, he says.
"If they've got a guaranteed cheque that's covering their needs, it's a lot easier for them to stick it out when there's a storm coming" in the stock market, Mr. Cortazzo says.

Tuesday, February 12, 2013

How to move from an RRSP to a RRIF

Whether a RRIF is opened at 60 or 71, the most important aspect is structuring a portfolio correctly prior to conversion, says Robin Muir, a certified financial planner and managing partner of Hatch & Muir LLP in Victoria.
After years spent paying into a registered retirement savings plan (RRSP), investors eventually have to use the funds as post-retirement income.
RRSPs must be collapsed by Dec. 31 of the year in which the holder turns 71. If RRSP savings are not put into a tax-deferred income plan by that time, the entire value of the RRSP becomes taxable income.
A registered retirement income fund, or RRIF, is one of the most common options Canadians choose to convert RRSP savings to tax-deferred income.
“There are generally five types of RRIF, including self-directed, fully managed, guaranteed interest, mutual fund, and segregated fund,” says Tom Hamza, president of Investor Education Fund, a Toronto-based not-for profit organization founded by the Ontario Securities Commission. “The choice depends on the level of flexibility you are looking for.”
Investments in a RRIF continue to accumulate earnings. “Restrictions apply to withdrawals, not to returns,” says Mr. Hamza. But once set up, no contributions can be made to a RRIF, nor can it be terminated except by the holder’s death.
While 71 is the maximum age, conversion to a RRIF can begin at any time depending on the income needs of the holder.
A formula based on age and the value of the RRIF at Dec. 31 of the previous year is used to determine the minimum annual RRIF withdrawal. Minimum withdrawal amounts increase with age.
For example, at age 71 the minimum withdrawal amount is 7.38%. If the value of a RRIF is $100,000 on Dec. 31, the holder must withdraw $7,380 over the course of the following year. If the holder is 83, the minimum amount is 9.58% or $9,580; at 90 it is 13.62%.
There is no upper limit on the amount that can be taken out of an RRIF. However, while all withdrawals are taxable at year end, withholding tax applies to amounts above the minimum.
Under certain circumstances, the tax burden can be reduced. Delaying opening a RRIF until you are 65 or older offers the option of income splitting with a younger spouse. Income splitting can also help to reduce OAS clawbacks.
“While the full minimum amount must be withdrawn from the RRIF, up to half can be given to a spouse and is attributed to her taxable earnings,” says David Ablett, director of tax and retirement planning with Investors Group in Winnipeg. For example, if $20,000 is withdrawn from a RRIF, up to $10,000 can be allocated to a spouse for tax purposes. Federal and provincial pension income tax credits may also be available.
Electing to use a spouse’s age to calculate the minimum withdrawal is another option. This lowers the amount taken out of the account and may also reduce taxable income.
Whether a RRIF is opened at 60 or 71, the most important aspect is structuring a portfolio correctly prior to conversion, says Robin Muir, a certified financial planner and managing partner of Hatch & Muir LLP in Victoria.
A portfolio should have between 20% to 30% in cash, GICs or short term bonds that can be drawn from, while leaving growth investments intact, he says. This should be phased-in before converting to a RRIF, allowing a cushion so that equities can be sold by choice rather than by necessity to replenish the cash flow pool for annual withdrawals.
After death, what happens to an RRIF depends on whether or not a beneficiary has been named. Naming a beneficiary ensures that the RRIF is excluded from the calculation of probate fees on an estate.

If a spouse is named, they can automatically start receiving payments from the RRIF. A financially dependent child or grandchild can purchase a term annuity or transfer it to their RRSP.
“When seeking RRIF advice, be sure to get it from someone who understands drawing down wealth not just accumulating it,” Mr. Muir says, “so you don’t run out of money before you run out of life.”

Kathryn Boothby, Postmedia News | Feb 11, 2013