Estate Planning, Tax Planning

The Insured Annuity Strategy

Case Study – Virginia

Client Facts

Client Information: Virginia

Client’s Needs & Wants: Provide a tax-free payment on death to her granddaughter

Background

Virginia has recently received a $150,000 inheritance from the estate of a relative. Virginia was not expecting this inheritance and is fortunately well equipped for retirement already. In other words, she does not require this money as part of her retirement income needs. Virginia would love to pass this money along to her grandchild as part of her estate plan, but there are some factors she is wary about.

Problem

Because her grandchild is a minor, Virginia wants to hold on to the funds until she passes away. She wants the $150,000 to appreciate over time to maximize the amount gifted to her grandchild, but does not want to be out of pocket for annual investment taxation. Her Tax-Free Savings Account is nearly maxed out, so that is not an option for the $150,000.

How does Virginia accomplish the following?

  1. Competitive investment return on the $150,000
  2. No out-of-pocket tax to pay each year
  3. Gift the money to her granddaughter after Virginia passes without incurring probate fees or taxation

Solution

A solution that solves every problem mentioned above is an insured annuity strategy. Here is how it works:

  1. Virginia, in good health, is approved for a $320,000 Term-100 whole life insurance policy. Her granddaughter is named as the sole beneficiary of the policy (in Trust until she turns 19).
  2. To cover the cost of the premiums for the life insurance policy, Virginia is going to purchase a life annuity with the $150,000 inheritance she received.
  3. After accounting for a small amount of tax each year on the annuity income, Virginia is left with ~$8,600 of annual, after-tax income from the annuity – the exact same amount as the annual premium for the insurance policy.

End result

Not only will this strategy cause Virginia no change to her after-tax cash flow, she has successfully converted her $150,000 inheritance into an eventual $320,000 tax-free payout to her granddaughter. No probate fees, no investment management fees, no stock market risk, no out-of-pocket taxes (while alive or on death), and no accessibility for potential creditors. This strategy checked every box for Virginia.

Contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca for more information or to receive a quote for an insured annuity.

DISCLAIMER: life insurance and annuity amounts are impacted by a number of health, lifestyle, age and other factors. Numbers will fluctuate based on the individual circumstances and interest rates.