There are three primary ways to set up the insured(s) of a life insurance policy: Single, Joint-First or Joint-Last.
This article will look at one of those three ways: Joint-Last. So, what is a Joint-Last-To-Die (“JLTD” or “Joint-Last”) policy?
Joint-Last Life Insurance is a certain policy structure in which two individuals are insured under one insurance policy.
Under this type of policy, there is one application, one policy, one premium payment, one death benefit, but two people are insured. The death benefit gets paid out on the SECOND death of the two insured.
What’s the benefit of a Joint-Last insurance policy?
TAX & ESTATE PLANNING! On the second death of a spouse, there are often significant tax liabilities since there is no longer a spousal rollover to defer taxes for certain assets (such as an RRSP/RRIF). On certain appreciating assets, the capital gains will now be realized. Canadians can utilize a Joint-Last insurance policy to inject tax-free money into their estate, which can be used to eliminate or reduce the myriad of taxes and fees that arise on death.
Case Study
Jane Doe, a widow, owns a cabin that has appreciated significantly in value in the 40 years since she and her deceased husband, John, bought it. They purchased the cabin for $50,000….it is now worth $1,050,000! When Jane passes, she is deemed to dispose of the asset for fair market value and faces a capital gain of $1 million ($1.05m – $50k). This translates to a taxable capital gain of $500,000. The end result? Jane’s estate will owe over $250,000 in tax to the Canada Revenue Agency. This does not factor in other capital gains (or applicable losses) and income inclusion from her RRIF.
Why doesn’t Jane’s executor just sell the cabin, and use a portion of the profits to pay the taxes?
Here is where the true problem lies: Jane and John were adamant in keeping this cabin in the family for their children and grandchildren’s future use, and perhaps beyond. This cabin served as the focal point for numerous family vacations and lifelong memories; selling the cabin would go against all of Jane and John’s wishes.
How will they afford the monstrous tax bill without selling the cabin to pay the tax?
Here is where the solution comes in: The Joint-Last insurance policy provides the estate with adequate, tax-free liquidity to cover the tax bill and allows the cabin to remain in the family for generations to come. Jane and John set this Joint-Last insurance policy up years ago to ensure the estate would have the necessary cash to cover the inevitable capital gains tax.
Summary
Life insurance is a highly-customizable solution that can have major benefits in the estate & tax planning field. In this case study, Jane and her husband were proactive in their planning and found an incredibly cost-effective way to fund a significant tax bill in the future.
Click here to view our article on one of the other life insurance structures: Joint-First.
For more information on this, please contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca.
DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.