By Farzin Remtulla, Principal and Financial Advisor

As accountants, you play a crucial role in helping your clients navigate the complexities of estate planning and tax minimization. While tax strategies like estate freezes and post-mortem tax planning are essential to managing future tax liabilities, they often leave a critical issue unaddressed: estate liquidity. Without a sufficient liquidity plan, even the most well-structured tax plans can lead to unnecessary financial stress for executors and beneficiaries. Life insurance has proven to be a cost-effective and tax-efficient asset that will provide estates with instantaneous liquidity to meet financial obligations while producing a generous financial return.

When it comes to life insurance, we want to be your trusted partner. With many years of combined experience and dedicated training in both life insurance and tax & estate planning, we seamlessly integrate our insurance solutions with your existing tax plans. Most of all, we make sure that your clients are provided with the right solution after pursuing a thorough understanding of their insurance needs, financial position and objectives.

Understanding Tax Liabilities

Upon death, Canadian residents are deemed to dispose of their personal capital property at fair market value, triggering capital gains tax on accrued gains. This tax can be deferred if assets are passed to a surviving spouse, but upon the spouse’s death, a substantial tax liability generally becomes due.

The most significant tax liabilities typically arise from:

• Corporate shareholdings
• Recreational Properties
• Marketable securities and other passive investments

Additionally, post-mortem tax issues such as double taxation can arise when shares in a private company are taxed upon death and again when corporate assets are liquidated and distributed to beneficiaries as dividends. Traditional post-mortem planning strategies, like the pipeline plan and the 164(6) loss carryback plan, are critical to eliminated double taxation but again do not provide liquidity to cover the ultimate tax bill.

The Liquidity Challenge in Estate Planning

There are four primary ways to generate estate liquidity:

1. Cash Reserves – Often insufficient and reduce estate values dollar-for-dollar

2. Financing – Involves leveraging estate assets, carrying interest rate risk, and potentially reducing future borrowing capacity. Can also have negative tax consequences and/or be tax inefficient when corporate assets are being leveraged to fund estate liabilities.

3. Asset Sales – May disrupt long-term legacy planning, and force sales at inopportune times.

4. Life Insurance – Provides immediate liquidity to cover estate taxes, prevents forced asset sales, minimizes tax exposure, provides a healthy financial return.

A Tax-Efficient Solution: Corporate Owned Life Insurance

Corporate-owned life insurance is an optimal strategy for addressing estate liquidity needs while offering significant tax advantages:

• Tax-efficient premium funding – Premiums are paid with corporate dollars, which are taxed at lower rates than personal income.
• Capital Dividend Account (CDA) – Upon death, insurance proceeds create CDA, allowing for tax-free extraction of insurance proceeds.
• Tax-sheltered growth – Investment growth within a life insurance policy is not subject to annual taxation.
• Immediate Liquidity – Provides estates with liquidity when most needed.

Leveraging Life Insurance for Enhanced Planning

For business owners who want to preserve corporate cash flow while securing liquidity for their estate, insurance financing can be an attractive option. This generally involves borrowing against the cash surrender value (CSV) of a policy thereby reducing the immediate cash outflow required for premiums to the after-tax cost of interest when properly structured. Insurance financing is not for every client but can be of great value to clients that fit the right profile.

Conclusion

Accountants are key players in ensuring their clients’ estate plans are both tax-efficient and financially sustainable. While tax minimization strategies are important, they must be complemented with liquidity solutions to prevent unnecessary asset erosion. Corporate-owned life insurance provides a cost-effective and tax-efficient means to meet estate liabilities while preserving wealth for future generations. By integrating insurance planning into estate strategies, accountants can help clients achieve seamless wealth transitions and protect their financial legacies.