Strategies for Multi-Generational Planning

The Sandwich Generation was a term coined by Dorothy Miller in 1981 to describe adult children who were “sandwiched” between their aging parents and their own maturing children. There is even a term for those of us who are in our 50’s or 60’s with elderly parents, adult children and grandchildren – the Club Sandwich. More recently, the Boomerang Generation (the estimated 29% of adults ranging in ages 25 to 34, who live with their parents), are adding to the financial pressures as Boomers head into retirement.

It is estimated that by 2026, 1 in 5 Canadians will be older than 65. This means fewer adults to both fund and provide for elder care. Today, it is likely that the average married couple will have more living parents than they do children.

What are the challenges?

The truth is that many members of the Sandwich Generation find the circumstances are both emotionally and financially draining. In the past, women have been looked upon to provide the primary care giving in the home while men take care of the income needs. Today, roles have changed with the majority of working age women employed outside of the home. As a result, financially, both parents are looked upon to provide for the family. For The Sandwich Generation helping their parents and their children at the same time, creates stress that can affect both their mental and physical health.

Risk Management in the Sandwich Generation

Having an effective financial plan becomes key in dealing with the challenges. As the main breadwinner in this situation, it is possible that three generations are dependent upon you. One of the first issues to be addressed then is how you protect your revenue stream.

Steps to Minimize risk for the Sandwich Generation

  1. Have an open and clear discussion about family resources and needs – The older generation needs to have a discussion with their children so that everyone knows what steps have or have not been taken to provide for the senior’s care when they are no longer able to care for themselves. This would also be a good time to initiate or continue any talk about what liquidity needs exist for taxes, long term care, funeral costs and last expenses etc.
  2. Complete a life insurance needs analysis – Where there is not sufficient capital to continue family and dependent’s income at the death of a breadwinner, life insurance can provide the necessary funds required to maintain lifestyle, pay debt, reduce mortgages, fund children’s education and provide money for aging parent’s care. Life insurance is an affordable way to guarantee future security.
  3. Review your disability and critical illness coverage – If there is not sufficient income that will continue to be paid should you become unable to work due to sickness or accident, consider long term disability coverage. Critical illness insurance will provide needed capital in the event of diagnosis of a life-threatening illness or condition. Not only will this provide financial support but will also improve your chances of recovery without the financial stress that often accompanies such a condition.

  4. Investigate Long Term Care Insurance
    – Having the appropriate amount of LTC insurance will help to reduce the stress of having to care for a parent when they are no longer able to fully care for themselves. Consider having all the siblings share the cost.
  5. Draft a Living Will or similar Representation Agreement – Making your wishes known to your loved ones in the event you are no longer capable of making medical decisions will go a long way to providing comfort to all concerned when difficult choices need to be made.

As you can see, being part of the Sandwich Generation can be very stressful – emotionally and financially. Having someone to talk to or being part of a support group dealing with this issue, will certainly help manage the emotional challenges.

Let’s connect soon to discuss what strategies you may need to implement to provide the financial security your family needs.

Copyright @ 2024 FSB Content Marketing Inc.- All Rights Reserved

Optimizing Wealth Through Asset Re-Allocation

If you are an active investor, your investment holdings probably include many different asset classes. For many investors, diversification is a very important part of the wealth accumulation process to help manage risk and reduce volatility. Your investment portfolio might include stocks, bonds, equity funds, real estate and commodities. All these investment assets share a common characteristic – their yield is exposed to tax. From a taxation standpoint, investment assets fall into the following categories:

Tax-Adverse

The income from these investments are taxed at the top rates. They include bonds, certificates of deposits, savings accounts, rents etc. Depending on the province, these investments may be taxed at rates of approximately 50% or more. (For example, Alberta 48.0%, BC 53.5%, Manitoba 50.4%, Ontario 53.53%, Nova Scotia 54.0%).

Tax-Advantaged

These investments are taxed at rates lower than those that are tax-adverse. These investments include those that generate a capital gain (stocks, equity funds, investment real estate, etc.), or pay dividends. The effective tax rate on capital gains varies depending on province from approximately 24% to 27%. For non-eligible dividends, the range is between approximately 37% to 49%.

Tax-Deferred

Tax-deferred investments include those investments which are held in Registered Retirement Savings Plans or Registered Pension Plans (such as an Individual Pension Plan). One advantage of these investments is that the contribution is tax deductible in the year it was made. The disadvantage is that the income taken from these plans is tax-adverse as it is taxed as ordinary income and could attract top rates of income tax.

The growth in cash value life insurance policies such as Participating Whole Life and Universal Life is also tax-deferred in that until the funds are withdrawn in excess of their adjusted cost base while the insured is still alive, there is no reportable taxable income.

Tax-Free

Very few investments are tax-free in Canada. Those that are tax-free include the gain in value of your principal residence, Tax-free Savings Accounts (TFSA’s) and the death benefit of a life insurance policy (including all growth in the cash value account).

While Canada is not the highest taxed country in the world (that distinction belongs to Belgium) it is certainly not the lowest. (According to the Organization for Economic Co-operation and Development, Canada sits as the 23rd highest taxed country in the world). It is also true that in addition to the taxes Canadians pay while they are living, the final insult comes at death.

Generally speaking, you have three beneficiaries when you die. You have your family, your favourite charities, and the Canada Revenue Agency. They all take a slice of your estate pie. Most people would rather leave more to their family and charities than pay the CRA more than they need to.

As our estates grow, they include funds that we intend to leave to our children and possibly to charity. They also include funds we are likely never going to spend while we are alive.

The secret to optimizing the value of your wealth for the benefit of your estate is to reallocate those assets that you are never going to spend during your lifetime from investments that are tax-exposed to those that are tax-free.

One of the best ways to do this is through life insurance. As mentioned earlier, assets which are tax-free include the death benefit of a life insurance policy. Systematically transferring funds from the tax-exposed investments to, for example, a Participating Whole Life Policy, not only eliminates the reportable tax on the funds transferred, it greatly increases the overall size of the estate to be left tax-free to your beneficiaries – your family and your charities.

Case Study

Let’s consider Ron and Sharon, aged 58 and 56 respectively. They have been told that they have a liquidity need of approximately $1,000,000 which would become payable at the second death. They are also unhappy about the taxes they are paying annually on their investments. They elect to reallocate some of their assets to a Participating Whole Life policy for $1,000,000 last-to-die policy with premiums of $35,000 per year for 20 years.

Over this period, they will transfer a total of approximately $700,000 of investments exposed to income tax to a tax-free environment. If we assume that their life expectancy is 34 years, the Whole Life policy will have grown to a death benefit of approximately $2,630,000*. This represents a pre-tax equivalent yield over this period of approximately 11%. Not only is there more than enough to pay the tax bill but there are funds left over for the family and any charitable donation they wish the estate to make.

In addition, with the transfer from a taxable to tax-free investment, income taxes that would have been paid during their lifetime has also been reduced. Along the way, the Participating Whole Life policy has a growing cash value account which could be borrowed against should the need arise. At the 20th year for example, the cash value of the policy (at current dividend scale), would be approximately $1,071,000.

This case illustrates only one example of how it is possible to optimize the value of an estate through asset re-allocation. By using funds you are never going to spend during your lifetime, you can create a much larger legacy to benefit others while reducing the total cost of your tax bill.

If you would like to investigate this concept to determine the value it can provide you and your family, please be sure to contact me. As always, please feel free to share this information with anyone you think would find it of interest.

* Values shown are using Manulife’s Par 100 Participating Whole Life policy assuming the current dividend scale with premiums paid for 20 years.

Donating to Charity Using Life Insurance

If you are interested in creating a legacy at your death by making a charitable donation, you may wish to investigate using life insurance for that purpose. There are different ways you can structure life insurance for use in philanthropy. The most common are:

Gifting an Existing Life Insurance Policy

If you currently own a life insurance policy, you can donate that policy to a charity. The charity will become owner and beneficiary of the policy and will issue a charitable receipt for the value of the policy at the time the transfer is made, which is usually the cash surrender value of the existing policy.

There are circumstances, however, where the fair market value may be in excess of cash surrender value. If for example, the donor is uninsurable at the time of the transfer, or if the replacement cost of the policy would be in excess of the current premium, the value of the donation may be higher. Under these conditions, it is advisable for the donor to have a professional valuation of the policy, done by an actuary, prior to the donation.

Any subsequent premium payments made to the policy by the donor after the transfer to the charity will receive a charitable receipt.

Gifting a New Life Insurance Policy

In this situation, a donor would apply for a life insurance policy on his or her life with the charity as owner and beneficiary of the policy at the time of issue. All premiums made by the donor on behalf of the charity would be considered as charitable donations.

Gift of the Life Insurance Death Benefit

With this strategy, an individual would retain ownership of the policy but would name the charity as the beneficiary. Upon the death of the insured, the proceeds would be paid to the charity and the estate of the owner of the policy would receive a charitable receipt for the death benefit proceeds. The naming of the charity can be made at any time prior to death. There is no required minimum period that must be satisfied prior to naming the charity as beneficiary.

As long as the life claim is settled within 3 years of death, the executor of the estate has the option to claim the life insurance donation on:

  • The final or terminal return of the insured;

  • The prior income tax year’s return preceding death of the insured;

  • Both the current and prior year tax returns with any excess amount able to carry forward for the next five subsequent years;

  • Any combination of the above.

With this strategy, there are no charitable receipts issued while the insured is alive, only after death when the insurance proceeds are paid to the named charity.

Replacing Donated Assets to the Estate

There may be circumstances where a sizeable donation is made to a charity that would greatly reduce the value of the estate that would be left to family or other heirs. For donors who are concerned that their heirs would receive less than originally intended as a result of this donation, purchasing life insurance to replace the donated asset is a possible solution.

The previous headings represent the ways in which life insurance can enhance or complement philanthropy. As well, life insurance can be a valuable addition to a charitable giving program in that it enables the donor to bequeath a larger donation than otherwise would be possible with just hard assets alone.

If you have been or are contemplating making a significant charitable donation, be sure not to overlook how life insurance can enhance your gifting plans.

Basic Planning for Young Families

As a young family, you will be facing a lot of new challenges that you may or may not be prepared for along the way. Whether it’s children, a mortgage, or unexpected expenses that come up, now is the perfect time to start thinking about all the potential pitfalls that may arise.

In this article we want to share some of the ways that insurance can help you stay ahead of these issues, as well as how to prepare yourself for some of life’s obstacles that you and your family may face.

What Issues Should You Worry About the Most?

Now that you’re starting a family, your life is just one piece of the puzzle. Your spouse and any children are also top priorities, meaning that you should consider what could happen to everyone in a variety of scenarios. Here are some crucial questions you and your partner should discuss;

What happens if one of us dies? – While this question may seem a bit morbid, it’s a necessary possibility to plan for, particularly if you are a one-income household. Even with two breadwinners, chances are that your bills and financial responsibilities are too much for one person, meaning that you need to supplement any lost income as a result of one of you passing away.

What happens if one of us becomes disabled? – Disability can cripple a family unit almost as much as death. Not only do you have to worry about losing income because you or your spouse can’t work, but you will likely have mounting medical bills that will exacerbate the situation.

Even if one of you can still work, is the disabled spouse able to care for the children? Will his or her disability impact their ability to do simple tasks, like buying groceries, picking the children up from school or even changing diapers? If the worst should happen, you need to be ready.

How are we saving for future expenses, like college or retirement? – If you’re like most Canadians, you probably worry about having enough money saved for your children’s post-secondary education and your retirement.

As a young family, you may believe that retirement is an event that’s too far off to consider right now, but the fact remains that when you begin saving for retirement will have a significant impact on how comfortable your retirement will be. Sooner rather than later is advisable for both retirement and university savings. Remember, kids grow up fast and you will want to be ready to help them avoid crippling student debt.

How Insurance Can Help

Worrying about the future can be stressful, which is why it’s imperative that you and your spouse put a plan into place. Thankfully, insurance policies can help create peace of mind for both of you, so let’s look at some of the options available;

Life Insurance

Regardless of your current financial situation, if you or your spouse dies suddenly, it can derail your plans, and it could put your family at risk of accruing debt. When discussing life insurance plans, here are a couple of things to consider;

The Differences Between Term Insurance and Whole Life?

Term Insurance

  • With term life insurance you pay premiums for a specified duration (i.e., 20 years).

  • Your monthly payments are relatively inexpensive.

  • The policy either terminates or renews at a substantial cost at the end of the term period.

  • This kind of policy is excellent if you want peace of mind while the kids are still young

  • Or if you want to avoid high initial premium prices.

Whole Life Insurance

  • Whole life insurance is a permanent plan that can provide protection for as long as you live.

  • Some Whole Life policies become paid up (e.g. 20 pay Life) and stay in force until death or the policy is surrendered.

  • With this type of coverage, you could have a policy on which you have not paid any premiums for decades and when you die your family will receive the death benefit.

  • Another advantage of whole life insurance is that you can contribute money that can also help with retirement. Should you require funds while you are alive, you can borrow against the cash value of your policy or cash surrender the policy in the unlikely event you don’t need it.

Disability Insurance

As we mentioned, a disability can hurt your family as much as a death can. Depending on your employer, you may be eligible for disability insurance through a group plan. One thing that you don’t want to solely rely on, however, is government benefits such as the Canada Pension Plan. Unless you’ve been paying into CPP for many years, your disability benefits most likely would not be enough to cover expenses and lost wages.

Instead, it’s probably best to get an individual disability insurance policy so that you know you’re covered and won’t face any financial shortfalls.

Investing in Your Family’s Future

University education and retirement are two massive expenses for which you should be prepared. Also, if you don’t have a house yet, you should plan on paying a mortgage for up to 30 or 40 years as well. Here are some tips to help you save money for these life events;

Start Early

You may think that saving for these things means that you have to put most of your paycheck away each month. However, even if you save $25 a week, that’s better than nothing. Over time, the money will grow and earn interest, meaning that you can wind up with a significant amount when the time comes.

Open a Registered Educational Savings Plan

When it comes to planning for post-secondary education, an RESP is an excellent way to put aside money for your children. The government will also pay a bonus of up to $500 per year (to a maximum of $7,200) on eligible contributions. There is no annual maximum contribution limit, but the lifetime maximum is $50,000.

Contribute to an RSP (if no company pension plan)

Registered Savings Plans allow you to invest for your retirement and deduct your deposit from your income for income tax purposes. Usually, the maximum allowable contribution is the lesser of 18% of your previous year’s earned income or the maximum contribution amount that changes each year. The maximum contribution for 2023 is $30,780.

Open a Tax-Free Savings Account

Perhaps even before starting an RSP, consider opening a Tax-Free Savings Account.

  • An individual aged 18 and older may contribute up to $6,500 to a TFSA. This can be done every year with the maximum limit adjusted for inflation and rounded out to the nearest $500.

  • Funds contributed to a TFSA are not tax-deductible, but the growth and any withdrawals are tax-free.

  • If you have not contributed to a TFSA, you have been accumulating deposit room for the years you did not contribute. As of 2023, that deposit room has increased to $88,000.

There is an old saying, that people don’t plan to fail, they fail to plan. The sooner you start that planning the more effective it will be.

As always, please feel free to share this information with anyone you think would find it of interest.

What the Wealthy Know about Life Insurance

If you have ever thought that life insurance was something you wouldn’t need after you reached a certain level of financial security, you might be interested in knowing why many wealthy individuals still carry large amounts of insurance. Consider the following:

  • A life insurance advisor in California recently placed a $201 million dollar life insurance policy on the life of a tech industry billionaire;

  • Well-known music executive David Geffen was life insured for $100 million;

  • Malcolm Forbes, owner of Forbes Magazine, was insured at the time of his death in 1990 for $70 million.

While life insurance is most often looked upon as a vehicle to protect one’s family or business, the question that springs to mind is why individuals with wealth need life insurance?

The most common factor connecting people of wealth is that they have a substantial amount of deferred income tax that must be paid upon death. In addition, they often have a strong desire to make a substantial donation to a favourite charity or educational institution.

“Life insurance is an efficient way to transfer money to your heirs.” – Malcolm Forbes

In Canada, individuals are deemed to have disposed of all their assets at fair market value when they die, which often results in taxable capital gains and other deferred taxes coming due. Paying premiums for insurance that will cover these taxes is almost always less expensive and more efficient than converting assets.

When allocating your investment dollars, it is helpful to understand what investments have the highest exposure to income tax.

Fully Tax Exposed

Investments which are taxed at the highest rate of income tax:

  • Interest-bearing instruments such as bonds, savings accounts and guaranteed investment certificates;

  • Rents;

  • Withdrawals or income from registered plans such as RSP’s or RPP’s.

Tax-Advantaged

Investments which are taxed at lower rates of income tax:

  • Investments which are taxed as a capital gain;

  • Dividends;

  • Flow through share programs;

  • Prescribed annuity income.

Tax-Deferred

Investments on which income tax is deferred until the asset is disposed of or the investor dies:

  • Registered Savings Plans;

  • Individual and Registered Pension Plans;

  • Investments producing deferred capital gains.

Registered plans, in addition to having the growth tax-deferred, also have the added advantage of the contributions being tax-deductible.

Tax-Free

Certain investment assets are totally free of income tax:

  • Principal residence;

  • Tax-Free Savings Accounts;

  • Death benefit of life insurance policies.

Life Insurance as an Investment

While the death benefit of life insurance policies is tax-free, it is important to recognize that this also includes the investment gains made on the cash value portion of the policy. With this in mind, many investors have discovered that by allocating a portion of long term investments to a Universal Life or Participating Whole Life policy, the results can be significant when compared to tax exposed or tax-advantaged investments.

Life Insurance for Estate Planning

One of the main objectives of estate planning is to maximize the amount we leave to our families or bequeath to our favourite charities. What many wealthy families have learned is that one of the easiest ways to accomplish this is to reduce the portion of the estate which is lost to the government to pay taxes at death.

While this helps explain why many individuals of wealth maintain life insurance, it also underscores the advantages of life insurance to anyone who will have taxes or other liquidity needs at death. In addition, using life insurance as part of a charitable giving strategy can provide significant benefits to both the donor and the charity.

As Malcolm Forbes alluded to, for providing capital to protect your family’s future financial security, paying taxes at death and creating a charitable legacy, nothing is more efficient or effective than life insurance.

Please feel free to share this article with anyone you think would find it of interest.

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Protecting Your Family

Let’s face it, raising a family today can be financially challenging. The cost of living continues to increase, housing costs are rising along with education and extra-curricular activities for our children. It is tough to make ends meet and still have something left over at the end of each month.

Most families today require both parents to work to afford the lifestyle they enjoy. Losing one of those incomes through premature death, illness or a disability is a real risk that many families would have a difficult time facing emotionally and financially.

How do you protect your family?

  • Life insurance is designed to protect your family by providing the resource to replace income, pay off debt, and fund future education costs in the event that one of the parents dies.

  • Disability, or income replacement insurance, is designed to replace lost income if an individual is not able to work due to accident or sickness.

  • Critical Illness insurance will pay a lump sum benefit in the event of a diagnosis of many major illnesses.

If you and your spouse work for a company that provides employee benefits, you may already be insured for both life and disability insurance and in some cases critical illness. Be aware that for the most part, employee benefit programs provide only a minimum amount of life insurance, usually based on one or two years of income. If long term disability coverage is provided it may be enough for personal needs but that is not always the case. Each situation is different, so it’s important that you and your spouse review your respective plan information to ensure that you have sufficient coverage in place. There are options to top up your coverage either through your group insurance or individually.

How much life insurance do you need?

If you or your spouse dies, the family will require a lump sum of capital to replace earned income. You should aim to have enough cash for the following needs:

  • insurance to pay off any outstanding debts and mortgages

  • enough income from the invested capital to replace the lost income

  • an amount to cover future education costs

Think life insurance premiums are too expensive?

Term insurance is an affordable solution for a growing family with a tight budget. A 35-year-old non-smoking male can purchase $1,000,000 of ten-year renewable term insurance for less than $40.00 per month. A non-smoking female of the same age would pay less than $30.00 per month for the same coverage. A relatively small cost to protect a family for a total of $2,000,000 of tax free benefit in the event of an untimely death.

Let’s have a discussion about how we can build a program of protection specifically designed for your needs and circumstances. Knowing what the needs are and what protection is in place goes a long way to providing peace of mind.

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