The Estate Bond

Growing your estate without undue market risk and taxes

Often we see older investors shift gears near retirement and beyond.  Many become risk-averse and move their assets into fixed income type investments.  Unfortunately, this often results in the assets being exposed to higher rates of income tax and lower rates of return – never a good combination.

Or maybe the older investor cannot fully enjoy their retirement years for fear of spending their children’s inheritance.

The Estate Bond financial planning strategy presents a solution to both of these problems.

How does it work?

  • Surplus funds are moved out of the income tax stream and into a tax-exempt life insurance policy.

  • Each year a specified amount is transferred from tax exposed savings to the life insurance policy.

In essence, we are substituting one investment (the life insurance policy) for another (fixed income assets).

The result ?

  • The cash value in the life insurance policy grows tax-deferred and may also increase the insurance benefits payable at death.

  • Since the death benefit of a life insurance policy is received tax-free by the beneficiary this strategy results in a permanent tax shelter.

In other words, there is an increase in the funds available to heirs and beneficiaries after death and a decrease in the taxes payable before death.

 

The Estate Bond in action

Robert, aged 60, and his wife Sarah, aged 58 are satisfied that they will have sufficient income during their retirement years.  They used the Estate Bond concept as a means to guarantee their legacy to their children and grandchildren.

Investment: $30,000 for 20 years into a Joint Second-to-Die Participating Whole Life policy which is guaranteed to be paid up in 20 years

Immediate Death Benefit: $848,900

Death Benefit in 30 years: $2,075,800 (at current dividend scale)

Cash Surrender Value in 30 years: $1,589,400 (at current dividend scale) *

* If surrendered, the cash surrender value would be subject to income tax but there are strategies that could be employed to avoid this tax.  Assumes using Participating Whole Life illustrated at current dividend scale.  Values shown in 30th year at approximate life expectancy.

Alternative investment in action

Investment: $30,000 for 20 years in a fixed income investment earning 2.5% AFTER tax

Immediate Death Benefit:  $30,000

Estate Benefit in 30 years: $1,005,504

It should be noted that obtaining this rate of return in today’s fixed income environment would be challenging. 

Additional benefits of the Estate Bond

  • The estate value of $2,075,800 in 30 years is not subject to income tax. 

  • The proceeds at death, if paid to a named beneficiary, are not subject to probate fees.

  • If the beneficiary is one of the preferred class (spouse, parent, child or grandchild) the cash value and the death proceeds are protected from claims of creditors or litigants during the insured’s lifetime.

  • The use of life insurance with a named beneficiary also results in a totally confidential wealth transfer.

  • Robert and his wife can both enjoy their retirement without affecting their family’s inheritance.

The Estate Bond strategy is designed for affluent individuals who are 45 years of age or older and who are in reasonably good health. For those who meet these criteria and have surplus funds to invest, this concept can provide significant benefits and results.

Connect with me if you have any questions about the Estate Bond strategy or would like to determine if it is right for you.  As always, please feel free to share this article with anyone you think will find it of interest.

Protecting Investments for Your Heirs

Many investors over the age of 60 find themselves in a quandary regarding investments that they intend to leave to their heirs.  The primary concern involves the desire to conserve the investments they are bequeathing while at the same time earning a reasonable rate of return.  As we all know, the volatility of the equity markets can be cruel and this can be most detrimental when investments do not have time to recover after a downturn.  As a result, many mature investors choose to accept low rates of return in order to avoid loss in the funds they wish to leave to family members.

If you share these concerns, then Segregated Funds (also known as Guaranteed Investment Funds) may be the solution.  Segregated Funds are similar in performance and cost to Mutual Funds but come with some very attractive advantages.  Since Segregated Funds are offered by life insurance companies, they contain guarantees both at maturity and at death.  Upon maturity the value of your investment is guaranteed to be the higher of the market value or up to 100% of the amount invested. At death, the guarantee is the higher of the amount invested (less withdrawals), fair market value or a previously reset market value.  It is this death benefit guarantee that is particularly appealing for estate planning.

This guarantee allows for the potential of higher returns without taking on more investment risk.  Without the alternative of segregated funds, a mature investor wishing to protect capital might be forced to invest in a low interest rate fixed income vehicle, which after income tax, may return less than inflation.  With Segregated Funds that same investor could select a well managed investment fund guaranteeing that the beneficiaries could receive no less than 100 % on the funds invested regardless of market performance.

Segregated Funds usually contain a provision which will lock in gains made prior to death.  Depending on the insurance company these resets automatically occur every one to three years up until age 80.

Market volatility is not the only challenge to investments being willed to heirs.  The process of probating a will can also be of concern.  This process can be a lengthy one, sometimes lasting months, occasionally even years.  The cost of probate is also not insignificant especially if lawyers are required to assist.  Also, assets left in a will can be subject to challenge in court causing even further delays not to mention anxiety (and legal fees). Segregated Funds, however, being a product offered by a life insurance company pass by way of a beneficiary designation.  This not only by passes probate, but also does not incur any administrative or executor costs. 

The beneficiary designation also avoids any court challenges such as would be the case in a will’s variation action.  Another important consideration is that, with a named beneficiary, it can be creditor proof and not subject to litigant claims.  The confidential nature of the beneficiary process compared to the public aspect of probate is also be worth considering.

In order to assess if Segregated Funds are right for you as a mature investor, ask yourself the following:

  • Do I want better returns without taking on more investment risk?

  • Do I want to avoid probate fees and administrative costs which will reduce the inheritance I leave to my family?

  • Do I wish to avoid any delays in my heirs receiving the funds I wish them to have when I die?

  • Do I want to avoid any creditor or litigant claims on the funds I am leaving to my heirs?

  • Do I want to keep bequests that I make at my death completely confidential?

If you have answered “yes” to any of the above, then you should investigate the use of Segregated Funds in your estate planning.