Bequest Insurance

Marrying Annuities & Insurance:

Using the Back-to-Back Strategy to maximize your giving, minimize your tax, secure your future, and take care of your heirs

Insurance and annuities are powerful financial tools. In the right situations, people can use a back-to-back strategy to enhance after-tax income rather than suffer lifestyle constraints from low interest rates, while also providing generous bequests to charity and their heirs. This fictional example shows how this can be done.

Eva is a retired 65-year-old widow and mother of two living in a rental apartment in Toronto. Eva has three key goals in life:

• To live comfortably.
• To leave her children residual funds from her estate.
• To donate generously to her favourite charity.

She is living off Old Age Security and Canada Pension Plan funds, deductions from RRSP/RRIF savings currently worth $150,000, and $1,836 per year in after-tax income made on 2.7% interest earned on $100,000 in GICs. With income less than $39,000 a year, Eva's tax rate is 22%.

Eva has assigned her charity as the beneficiary of the residue of her RRSP/RRIF, and has bequeathed whatever is left of her GIC savings to her children.

But Eva's interest income is so low and the cost of living in Toronto going up, Eva feels she is eating too quickly into her RRSP to pay her bills, and worries she can't achieve any of her goals if she outlives her money.

She goes to her financial advisor to ask him if there is a better way for her to manage her finances and to improve her income without increasing her investment risk. He guides her through some highly beneficial strategic changes.

1. Eva purchases a $100,000 whole life insurance policy and assigns her children as its co-beneficiaries. Her annual premiums are $2,815.
2. Using her $100,000 in GICs, Eva purchases an annuity. Her insurance broker ensures she gets the highest rate of return. Although Eva no longer retains access to this capital, her annuity guarantees her after-tax income of $6,200 annually, for life.
3. Eva uses $2,815 from her annual payments to cover her insurance premiums. She's thrilled this will guarantee her children an inheritance of $50,000 each. She also bequeaths any tax funds generated by her charitable tax credits to her children.
4. To help Eva live more comfortably, she now has $3,385 in after-tax dollars from her annuity payment. Because of this increased income, Eva cuts back her RRSP deductions to the minimum amount she must take out annually, reducing her income tax.

Eva peacefully passes away, 20 years later, at age 85.

This chart allows you to see how Eva's Back-to-Back Strategy has allowed her be happy that she has achieved all her life's goals.

EVA'S ORIGINAL FINANCIAL PLAN	EVA'S NEW BACK-TO-BACK STRATEGY
EVA'S ANNUAL INCOME	EVA'S ANNUAL INCOME
From $100,000 GIC  earning 2.7%  -  $2,700	From $100,000  Annuity  -  $6,546
Income tax payable at 22%  ($594)	Life Insurance premium  ($2,815)
	Income tax paid on $1,572 interest  ($346)
Eva's net GIC income - $2,106	Eva's net Annuity income - $3,385
EVA'S ESTATE	EVA'S ESTATE
CHARITABLE LEGACY GIFT	CHARITABLE LEGACY GIFT
Donation of RRIF - $80,000	Donation of RRIF - $100,000
Charitable tax credits - $32,000	Charitable tax credits - $41,000
EVA'S ESTATE TAXES	EVA'S ESTATE TAXES
Income tax on RRIF ($25,600)	Income tax on RRIF ($28,650)
Minus tax credits from donation - $32,000 =	Minus tax credits from donation - $41,000 =
Income tax owed - $0	Income tax owed - $0
Probate taxes/fees ($5,000)	Probate taxes/fees - $0
	Tax credit balance of $12,350 generates
	Refund of $8,580 from previous year's taxes
EVA'S BEQUEST TO HER CHILDREN	EVA'S BEQUEST TO HER CHILDREN
GIC Residue  - $100,000	Life insurance policy - $100,000 (tax free)
Minus probate/fees taxes of $5,000 =	Plus tax refund from previous year (due to
Total bequest to children - $95,000	charitable tax credits) - $8,580 =
	Total bequest to children - $108,580

NOTE: In this fictional example, Eva's annuity income was determined based on the best rates available in September 2013, and a prediction of Eva's lifespan using mortality tables. As an Ontario resident, Eva's charitable tax credit is about 41%; tax credits vary from province to province. This example shows how it is possible that a large charitable tax receipt could significantly reduce or eliminate taxes owing on the estate, but depending on the value of the donation and estate, this may not the be case for every individual. However, if charitable tax credits are greater than all taxes owed in a donor's terminal year, the unused balance can be applied to recover taxes paid in the year prior to the donor's passing - which provides another opportunity to pass on more to beloved beneficiaries and charities!

Through an innovative 'back-to-back' annuity and insurance strategy, you can be long remembered for your charitable generosity, while securing your future and allowing you to leave more to your loved ones.

Contact us today to find out if this strategy will work for you.