Theory Transamerica s Tax & Estate Planning Team & Transforming Needs into Meaningful Solutions ISSUE 1 FALL 2007 Practice Letter from the Editor by Dina Stigas Welcome to the premier issue of Theory & Practice, a quarterly newsletter brought to you by Transamerica Life Canada s Tax & Estate Planning Team. This newsletter is dedicated to providing you, the advisor, with the tools and knowledge to better serve your clients. Each issue will feature topics that are relevant to your business, such as Transamerica s sales concepts; case studies; and technical articles regarding legal, taxation, and accounting issues. The name Theory & Practice reflects the mandate of the newsletter and the expertise offered by Transamerica s Tax & Estate Planning Team: to communicate well established principles and to transform needs into practical, innovative, and meaningful solutions. Theory & Practice is a resource tool for you and our goal is to provide you with articles that are helpful and insightful. As such, we are interested in your feedback. Please feel free to email us at theoryandpractice@aegoncanada.ca with your questions, comments, or ideas for future articles. We look forward to serving you. In this Issue: Meet the Team Corporate Estate Planning and the CDA Decoding the Probate Mystery Low Cost, Permanent Life Insurance Team Bios For advisor use only
Theory & Practice Corporate Estate Planning and the CDA by Serge Lessard Meet the Team by Mitchell Singer On behalf of Transamerica s Tax & Estate Planning Team, I am pleased to formally introduce you to our group. We are a unit of four dynamic individuals carrying out a common goal. Our objective is to work with advisors to develop, present and close cases that require additional attention and care. As AVP of Tax & Estate Planning, and a lawyer, I serve Ontario and the Atlantic provinces. I joined the Team in February 2004 and have both field and head office experience at two other insurance companies. Chris Geldert, Chartered Accountant, is the Tax & Estate Planning Specialist supporting the Western Region. He joined Transamerica in November 2005 and his ability to effectively communicate with accountants is invaluable. In January 2006, Serge Lessard, a lawyer, joined the Team. He is the Tax & Estate Planning Specialist for the province of Quebec and has exceptional presentation and training skills. Dina Stigas, a lawyer with experience in Wills, Trusts, and Estates, joined us in March 2007. Dina works at our Head Office and provides continued support for the development of our industry-leading sales concepts. Transamerica s Tax & Estate Planning Team has been assembled to help you, the advisor, expand your business. Whether your cases require prepackaged concepts or more customized solutions, we will demonstrate that Transamerica provides value when servicing your personal and business markets. To access our Tax & Estate Planning Team, please contact your Transamerica Sales Director to arrange a meeting. The capital dividend account (CDA) is a notional account that allows the tax-free withdrawal, in part or in whole, of the death benefit of a life insurance policy owned by a private corporation. 1st Example: ABC Inc. is both the policyowner and beneficiary of a $500,000 T10 insurance policy on the life of Kevin, the sole shareholder. The adjusted cost basis of the policy is $10,000. Upon Kevin s death, Transamerica will pay a $500,000 non-taxable benefit to ABC Inc. Since a payout in consequence of the death of a life insured is not a disposition, it is a non-taxable benefit to the beneficiary, regardless of whether the beneficiary is an individual or a corporation. Mary-Ann, Kevin s spouse and sole beneficiary of his shares (via spousal rollover) wants to withdraw the $500,000 as dividends. If there were no CDA, the $500,000 dividend would be taxed as a common dividend (as opposed to an eligible dividend). Supposing the average national marginal tax rate is 30%, then Mary-Ann would pay $150,000 in tax on the $500,000 dividend. Why is the availability of the CDA beneficial? Besides depositing $500,000 into its bank account, ABC Inc. will record in its books that it can pay a non-taxable dividend amount to its shareholder. The amount that is credited to the CDA is the death benefit received, less the policy s adjusted cost basis to the corporation, ie. $500,000 - $10,000 = $490,000. Thus, ABC Inc. will pay a $490,000 non-taxable, capital dividend and a $10,000 taxable dividend to its new sole shareholder, Mary-Ann. The tax payable on the $10,000 dividend will amount to $3,000 ($10,000 x 30% = $3,000). The tax savings created by the use of the CDA in this illustration is enormous! 1
Transamerica s Tax & Estate Planning Team Decoding the Probate Mystery Alberta Estate Size $10,000 and under > $25,000 to $125,000 > $125,000 to $250,000 > $250,000 $25 $200 $300 $400 Fees (Taxes) by Dina Stigas Clients will often inquire about probate and the associated costs when turning their minds to estate planning. Although clients should be referred to their lawyers and/or accountants for professional advice regarding these matters, it is helpful to have some understanding of the topic. In Canada, except Quebec, when a person dies with a valid Will, the Executor (also referred to as the Executor and Trustee or the Estate Trustee) appointed under the document is responsible for administering the estate of the deceased. In order to be able to deal with the assets of the estate, the Executor will typically need to apply to the appropriate court for a Grant of Letters Probate, also referred to as probate. Probate verifies that the Will was properly executed and that it is the last Will. Once the court has issued the Letters Probate in respect of the Will, the Executor will provide a notarial copy of the Letters Probate with the Will attached to those financial institutions and individuals that require proof of the Executor s authority. In general, when applying for probate, fees (referred to as a probate tax in New Brunswick and Nova Scotia, and as an estate administration tax in Ontario) will be levied on the value of the assets that pass through the estate. Thus, the Executor will need to have valuations of the property conducted. Each province sets its own probate fees (or taxes), which may change from time to time. The following is a summary of the fees (or taxes) which are current at the time of writing: British Columbia $25,000 or less > $25,000 to $50,000 > $50,000 Manitoba > $10,000 Newfoundland Estate size New Brunswick $5,000 or less > $5000 to $10,000 > $10,000 to $15,000 > $15,000 to $20,000 > $20,000 No fee $6 per each $1,000 See above for the first $50,000, plus $14 for each $1,000 in excess of $50,000 $70 $70 + $7 per $1,000 in excess of $10,000 Amount of estate multiplied by 0.005; then add $130 $25 $50 $75 $5 per $1,000 of estate size Northwest Territories and Nunavut > $25,000 to $125,000 > $125,000 to $250,000 > $250,000 Nova Scotia > $25,000 to $50,000 > $50,000 to,000 >,000 Ontario $50,000 or less > $50,000 $25 $200 $300 $400 $70 $176 $293 $820 $820 + $13.85 for each $1,000 in excess of,000 $5 for each $1,000 $250 + $15 for each $1,000 in exess of $50,000 Continued on Page 4 2
Transamerica s Tax & Estate Planning Team Planning strategies that use the CDA may result in enormous tax savings! 2nd Example: HOLDCO is the policyowner of a Universal Life insurance policy on the life of its shareholder, Alfred and his spouse, Josie. It is a $1M joint last-to-die policy with an increasing death benefit. The cash surrender value and the fund value are both $200,000 and the adjusted cost basis is $50,000. The fund value is payable at each death. Assuming Josie dies first, HOLDCO will receive a $200,000 non-taxable benefit. The fund value payout is a death benefit and is CDA eligible. This is how the amount credited to the CDA is calculated: $200,000 - $50,000 = $150,000. Alfred, the shareholder, will be able to pay himself a $50,000 taxable dividend and a $150,000 non-taxable capital dividend. Some plans may include rated individuals as additional insureds to facilitate fund value payouts on each death. Others may provide for a corporate beneficiary other than the policy s corporate policyowner in order to maximize the CDA and not have the credit reduced by the policy s adjusted cost basis. It is always necessary to consider the impact of the CDA when including corporate insurance strategies in your clients overall estate plans. It makes a compelling sales argument since minimizing taxes while maximizing one s estate value is at the top of many clients minds. Clients should be referred to their lawyers and/ or accountants regarding the requirements and appropriateness of incorporating the CDA into their individual estate plans. Low-cost, Permanent Life Insurance by Chris Geldert Are your clients seeking low-cost, permanent life insurance? If so, perhaps it is time that you looked at Transamerica s Investment Loan Strategy (ILS). By taking advantage of the policy loan provisions provided by Transamerica, your clients might create a valuable tax deduction that can effectively reduce the cost of the insurance policy. The first step in implementing the ILS is to establish a Transamerica WealthAdvantage 4 or EstateAdvantage 4 Universal Life policy that suits your client s needs. Where the policy is over-funded, the client has the option to request a policy loan from Transamerica. Provided that this amount does not exceed the adjusted cost basis of the policy, the proceeds should be received tax-free. Policy loans issued by Transamerica on all new life insurance contracts are charged a guaranteed annual interest rate of 10%. The collateral funds held within the policy earn a guaranteed rate of return of 8%. Where proceeds from the policy loan are invested in a qualified investment, the interest on the outstanding loan might be deductible to the policyholder. If the client pays tax at a 45% marginal tax rate, then the net cost of borrowing is 5.5%, resulting in a positive interest rate spread to the client of 2.5%. The policy loan with Transamerica can remain outstanding so long as the insurance policy remains in good standing, i.e. Transamerica will never demand repayment of the loan. In order to remain in good standing, it is important that the client pay their policy loan interest each year. Payment of the interest will ensure that the policy remains in good standing and 3
Transforming Needs into Meaningful Solutions that the strategy functions as illustrated. The loan, however, can be repaid by the policyholder at any time from outside funds or from within the policy after the 15th policy year by utilizing Transamerica s internal loan repayment provision. Like the interest rates, this provision is guaranteed within Transamerica s insurance contract. Who is an ideal candidate for the Investment Loan Strategy? Your client is likely between the ages of 35 and 60. They are business owners or are sophisticated investors and own higher risk investments like real estate. As a business owner, they are not only in the top marginal tax bracket personally, but their corporation earns greater than the federal small business limit of $400,000 as well. Your client should have sufficient savings, corporately or personally, to fund the policy with after tax dollars. They should also have sufficient cash flow every year so that they can fund the 10% interest expense generated by the policy loan. Clients should understand the risks of leveraging as well. Many successful business and commercial/residential real estate owners understand these risks and in fact built their wealth by taking them. That makes them ideal clients for the strategy. It is prudent for your clients to obtain professional advice from tax, legal and/or accounting experts to determine whether and to what extent this concept is appropriate for them. For more information on Transamerica s Investment Loan Strategy please contact your local Sales Director or Regional Marketing Centre. Continued from Page 2 Decoding the Probate Mystery by Dina Stigas Quebec Estate Size Estate value is not relevant Saskatchewan Fees No probate fees; if probate is required, it is only the cost of the application Estate value $7 per $1,000 Yukon $25,000 or less > $25,000 No fee $140 In the province of Quebec, there are no probate fees (or taxes) because the customary form of Will signed before a Notary is considered an authentic document. The Notary holds the original Will and provides copies of the Will upon the Testator s death. Probate is only required for holograph Wills (i.e. Wills made entirely in the handwriting of the Testator and signed by the Testator), and Wills executed before witnesses, the English Form. Clients will often ask how they can arrange their affairs in order to minimize probate fees (or taxes). Generally, this may be accomplished by having assets pass outside of the estate. These assets may include: insurance proceeds; pension plans and RRSPs/ RRIFs that have designated beneficiaries other than the estate; and property owned in joint tenancy with right of survivorship. Probate fees (or taxes) may also be minimized by executing multiple wills (in jurisdictions where permitted, such as Ontario), gifting property while alive, and creating inter vivos trusts. Care should be taken when planning to implement strategies in an effort to reduce probate fees (or taxes) because there are exceptions. These strategies may sometimes trigger unwanted taxable dispositions or other consequences which may end up costing the individual or the estate more than the probate fees (or taxes) saved. Estate Size Prince Edward Island > $25,000 to $50,000 > $50,000 to,000 >,000 Fees (Taxes) $50 $200 $400 $400 + $4 for each $1,000 in excess of,000 Clients should be strongly encouraged to consult with their lawyers and/or accountants before embarking on any probate-saving mechanisms, particularly with respect to joint tenancies. 4
Theory & Practice Transforming Needs into Meaningful Solutions Transamerica s Tax and Estate Planning Team Mitchell Singer joined Transamerica in 2004 and is the AVP of Tax & Estate Planning. He holds a legal degree with a special designation in Taxation. Mitchell establishes strong consulting relations with the regional sales teams, distributors and key advisors by supporting complex cases and catering to individual estate and tax planning needs. His expertise and specialized knowledge of Canadian tax and estate planning will help you build your business and close the sale. Mitchell is also a regular speaker at industry associations and groups. Dina Stigas is a lawyer with Transamerica Life Canada and the editor of the newsletter, Theory & Practice. As the Marketing Manager of the Tax & Estate Planning Team, she is responsible for developing and promoting the company s sales concepts. Dina was previously a Will & Estate Planner at a large financial institution where she provided estate planning to high net worth clients. She is also an executive member of the Ontario Bar Association Young Lawyers Division. Chris Geldert is a Chartered Accountant who joined Transamerica in 2005. As a member of Transamerica s Tax & Estate Planning Team, he supports the Western provinces and assists advisors with building their practices through education and professional guidance. Chris is an accomplished speaker having delivered numerous presentations to various groups. He started his career at a large public accounting firm and then worked as a planning consultant with a large insurance company. Chris can help you provide valuable solutions to your clients. Serge Lessard is a Tax & Estate Planning Specialist with Transamerica who serves the province of Quebec. He is a lawyer and a financial planner who also holds the LOMA FLMI designation. Before joining Transamerica, Serge gained relevant experience in the financial industry as a sales representative, product manager, and insurance product designer. At Transamerica, Serge provides valuable support and training to advisors, clients and their accountants. Please email your questions or comments to: theoryandpractice@aegoncanada.ca. To access our Tax & Estate Planning Team, please contact your Regional Sales Director at one of the numbers below: Member of the AEGON Group British Columbia 1-866-669-6117 Prairies 1-888-220-2881 Ontario & Atlantic 1-888-245-5501 Québec 1-800-361-7242 This newsletter is published by Transamerica Life Canada ( Transamerica ) and includes material obtained from third party sources. It is for advisor use only. Any commentaries and/or information contained herein are intended for general informational and educational use only and should not be considered specific or personal investment, insurance, estate planning or tax advice or a solicitation to purchase or sell securities or insurance. While reasonable efforts have been made to ensure that the contents of this newsletter have been derived from sources believed to be reliable and accurate at the time of publication, Transamerica does not warrant the accuracy or completeness of the information contained herein. Examples given in this newsletter are for illustration purposes only. The specific facts and circumstances of each case will differ from client to client. Neither Transamerica, nor its affiliates, officers, employees or any other person accepts any liability whatsoever for any direct, indirect or consequential loss(es) arising from any use or reliance on the information, general strategies or opinions contained herein. Transamerica and the pyramid design are registered trademarks of Transamerica Corporation. Transamerica Life Canada is licensed to use such marks. Trademarks of AEGON Canada Inc. The subsidiary companies of AEGON Canada Inc. are licensed to use such marks. TE1134 9/07 5