Estate Planning for Blended Families

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(Posted on Feb 9, 2015 at 07:22AM by Tom Wetzel)

Avoid Disinheriting Your Children


In today’s family it is not unusual for spouses to enter the marriage with children from previous relationships. Parents work hard at getting these children to functionally blend together to create a happy family environment. Often overlooked is what happens on the death of one of the parents. In most cases special consideration for estate planning is needed to avoid relationship loss and possibly legal action.  

Typically spouses leave everything to each other and when the surviving spouse dies, the remainder is divided amongst the children. The problem? Even with the best of intentions, there is no guarantee that the surviving spouse will not remarry and inadvertently disinherit the deceased’s children.
 

6 Estate Planning Considerations for Blended Families

The Family Home

  • In the situation of the family home being owned by one parent prior to the marriage, the other spouse may consider purchasing an interest in the family home. In this situation, consider owning the home as tenants-in-common to allow for each spouse to manage their interest in the home separately.  


  • Provisions can be made in the will for the surviving spouse to remain in the home until the time of their choosing (or death) before passing on the interest to their respective children.

Registered Retirement Savings Plans

  • To take advantage of the tax free rollover from their RRSPs each spouse should consider naming each other as beneficiary.  If there are no additional investments or assets to pass on to the children, consider using life insurance as the least costly way to provide a legacy for the children.

Other Assets and Investments

  • If each parent has other assets or investments that could provide income in the event of death, a qualifying spousal testamentary trust could direct that the surviving spouse receives all the income from the trust with the possibility of making encroachments on the capital for specific needs.  Upon the surviving spouse’s death, the remaining trust assets will be distributed to the appropriate children.

Choose a Trustee Carefully

With trusts being vital to effective estate planning, careful consideration has to be given as to whom will be a trustee.  For blended families, children of one parent may not be comfortable with the choice of the trustee for their inheritance.  Some situations may call for multiple trustees or perhaps the services of a trust company.

Although effective, using testamentary trusts might result in some children not receiving their inheritance until the death of their step parent.  Life insurance may be the ideal solution.  Proceeds from life insurance will guarantee that the children will be taken care of upon the death of their parent.

Advantages of Life Insurance for Blended Family Planning:

  • Can be an effective way to create a fair division of assets when one spouse enters the marriage with significantly more wealth;


  • Death benefit is tax free and could be creditor and litigation proof;


  • Ability to name contingent owners and beneficiaries (including testamentary trusts);


  • Death benefit could be used to create a life estate under a testamentary trust, providing income to a surviving spouse with the capital going to the appropriate children at the surviving spouse’s death;


  • With a named beneficiary proceeds pass outside of the will so cannot be challenged under any wills variation action;


  • Provides for a significant measure of control and certainty as to when and where the proceeds will end up.

The Elephant in the Room

It is important to remember that whatever planning options are used, total and open communication within the family is essential to maintain family harmony and ensure everyone is aware of the state of affairs.  Full discussion will avoid misunderstandings and reduce uncertainty as to what the future may hold for everyone in the family.

Planning for blended families should involve professional advice in creating solutions that satisfy the objectives of both spouses and their respective children.  Call me if you require help in this area or use the social sharing buttons below to share this article with a friend or family member you think might benefit from this information.

Get Your Corporate Dollars Doing Double Duty

(Posted on Feb 9, 2015 at 02:32AM by Tom Wetzel)

Owners of very successful private corporations are well aware of the importance of cash flow.  Many are protective of how they allocate corporate capital so that business ventures are adequately funded and investment opportunities are not missed.  


The Immediate Financing Arrangement offers an opportunity to provide life insurance coverage and accumulate wealth on a tax-advantaged basis without impairing corporate cash flow.


What is an Immediate Financing Arrangement (IFA)?


An IFA is a financial and estate planning strategy that:

  • Combines permanent, cash value life insurance with a conservative leverage program allowing the dollars allocated to the life insurance premiums to do double duty by still being available for business and investment purposes;

  • In the right circumstances and when structured properly so that all possible tax deductions are used, an improvement in cash flow could result.


Who should consider this strategy?


IFA`s are not for everyone. For those situations that best match the necessary criteria, however, significant results can be achieved. The best candidates for an IFA usually are:

  • Successful, affluent individuals who are active investors or owners of thriving privately held corporations who require permanent life insurance protection;

  • Of good health, non-smokers, and preferably under age 60;

  • Enjoying a steady cash flow exceeding lifestyle requirements;

  • Paying income tax at the highest rate and will continue to do so throughout their life.


How does it work?


  • An individual or company purchases a cash value permanent life insurance policy and contributes allowable maximum premiums;

  • The policy is assigned to a bank as collateral for a line of credit;

  • The business or individual uses the loan advances to replace cash used for insurance purchase and re-invests in business operations or to make investments to produce income.  This is done annually;

  • The borrower pays interest only and can borrow back the interest at year end;

  • At the insured’s death the proceeds of the life insurance policy retire the outstanding line of credit with the balance going to the insured’s beneficiary;

  • If corporately owned, up to the entire amount of the life insurance death benefit is available for Capital Dividend Account purposes.


Proper planning and execution is essential for the Immediate Financing Arrangement.  However, if you fit the appropriate profile, you could benefit substantially from this strategy.


If you wish to investigate this strategy and whether it can be of benefit to you, please contact me and I would be happy to discuss this with you and/or your accountant.  As always, feel free to use the sharing icons below to forward this to someone who might find this of interest.














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The Best Way to Insure Your Mortgage

(Posted on Jan 25, 2015 at 11:29PM by Tom Wetzel)
If you have a mortgage it makes good sense to insure it.  Owning a debt free home is an objective of any sound financial plan.  In addition, making sure your mortgage is paid off in the event of your death will benefit your family greatly.  

The question is should you purchase this coverage through your lending institution or from a life insurance company?  A good rule of thumb to follow when searching for advice?  Ask an expert!

So, while it might be convenient when completing the paper work for your new mortgage to just sign one more form, be aware that it might be a costly decision.

8 reasons to purchase your mortgage coverage from a life insurance advisor

Cost

Term life insurance available from a competitive life insurance company is usually cheaper than mortgage life insurance provided through the lender.  This is especially true if you qualify for non-smoker rates.

Availability

If you have some health issues, the lenders mortgage insurance may not be available to you.  This may not be the case with term life insurance where competitive underwriting and substandard insurance are more readily attainable.

Declining coverage

Be aware that the death benefit of creditor/mortgage insurance declines as the mortgage is paid down.  Meanwhile, the premium paid or cost of the coverage remains the same.

With term life insurance the death benefit does not decline. You decide how much coverage you want to have.  This gives you the flexibility to reduce the amount of coverage and premium when the time is right for you.  Or keep it should another need arise or in the event you become uninsurable in the future.

Portability 

Term Life insurance is not tied to the mortgage giving you flexibility to shift it from one property to the next without having to requalify and possibly pay higher rates.

Flexibility

Unlike creditor/mortgage insurance term life insurance can be for a higher amount than just the mortgage balance so you can protect family income needs and other obligations but pay only one cost-effective premium.

When you pay off your mortgage you will no longer be protected by creditor/mortgage insurance but term life insurance may continue.   Also, unlike mortgage insurance you are able to convert your term life insurance into permanent coverage without a medical.

The beneficiary controls the death benefit

With creditor/mortgage insurance there is no choice in what happens to the money when you die.  The proceeds simply retire the balance owing on your mortgage and the policy cancels.

With term life insurance your beneficiary decides how to use the insurance proceeds. For example, if the mortgage carries a very low interest rate compared to available fixed income yields, it might be preferable to invest the insurance proceeds rather than to immediately pay off the mortgage.

Can your claim be denied?

Often creditor/mortgage insurance coverage is reviewed when a death claim is submitted.  Creditor/mortgage insurance allows for the denial of the claim in certain situations even after the coverage has been in effect beyond that 2 year period.

Term life insurance is incontestable after two years except in the event of fraud.

Advice

Your bank or mortgage broker can advise you on the best arrangement to fund your mortgage but advice on the most appropriate way to arrange your life insurance is best obtained from a qualified insurance advisor who can implement your life insurance coverage according to your overall requirements.

Your mortgage will probably represent the single largest debt (and asset) you will acquire.  Making sure your mortgage doesn’t outlive you is the most prudent thing you can do for your family. 

Contact me if you think it is time to review your current insurance protection or please feel free to use the sharing icons below to forward this to someone you think may benefit from this information.

Whole Life: A Whole New Investment Class

(Posted on Jan 6, 2015 at 03:58PM )
 
 
The recent developments in investment markets and the volatile performance that has resulted have brought about a new appeal to an old workhorse.  For investors looking for a diversification in their investment portfolio and a more tax efficient fixed income investment alternative, a compelling argument can be made for the use of Whole Life Insurance.

Why is Whole Life Insurance a good investment?
 
  • The tax advantaged steady growth, combined with significant estate benefits are the primary reasons why Participating Whole Life is now being thought of as a new investment class. 
 
  • Unlike other accumulation policies such as most Universal Life policies, mutual funds and other equity investments, the cash and dividend value of a Whole Life policy cannot decrease as long as premium payments are made.
 
Who should consider Whole Life Insurance as an investment?
 
  • Anyone looking for stable returns on their investment portfolio
 
  • For those that have corporations and are accumulating surplus, the use of Whole Life in the corporation not only provides the same stable, tax deferred returns but also provides opportunities for Capital Dividend Account planning. 
 
What is Whole Life Insurance?
 
  • It is permanent life insurance protection – meaning it won’t expire before you do!
 
  • It has level guaranteed premiums for the life of the policy.
 
  • It has tax advantaged cash value growth. 
 
  • It can pay annual dividends (participating whole life).
 
  • Dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax advantaged growth is “paid-up additions”.
 
  • Paid up additions are blocks of single premium life insurance which also pay an annual dividend
 
  • The assets of the participating pool are professionally managed and largely in fixed income investments.  Management fees are extremely low (as low as 0.072% management fee) and the funds have very little volatility. 
 
  • This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred.  At death it is paid to the beneficiary tax-free. 
 
Can I access the cash value of the policy?
 
  • During the lifetime of the insured, the cash values can be accessed by way of partial or total surrender, or policy loan. 
 
  • Income tax may be payable on withdrawals. However, one alternative to avoid paying income tax is to use the policy as collateral and borrow from a third party lender.  And if structured properly, the interest on the loan may be tax deductible.
 
Favourably compares to a long term, high yield bond
 
  • Today most portfolio managers recommend that a prudent investor have a diversified portfolio with a significant portion in fixed income investments, such as bonds, term deposits, etc.
 
  • Many investment managers suggest one third to 40% of an investment portfolio be in these types of investments for balanced growth.
 
Including participating whole life in your portfolio can produce some significant results, and reduce overall volatility.
 
Whether investing as an individual or via a corporation, the significant results that can be achieved by using Participating Whole Life are worth investigating.
 
Please call me if you think you would benefit from this strategy or use the social sharing buttons below to share this article with a friend or family member you think might find this information of value.

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