Clients often use life insurance to help heirs cover the capital gains tax on a family cottage or other asset after their death
Determining whether life insurance makes sense for a retiree requires a deep dive into their retirement and estate planning goals, as well as a careful cost-benefit analysis.Life insurance can be a valuable estate planning tool for some retirees, whether for offsetting tax liabilities, equalizing an estate, or charitable giving.
One of the most common scenarios, she says, is retirees looking to even out their estate between beneficiaries when a real asset such as a second home is involved, as life insurance payouts are distributed to the beneficiary tax-free, outside of the estate. Another typical situation, she says, involves retirees who own a family cottage or rental property and are looking for a way to help their heirs cover the capital gains taxes on the asset after their death.
To find the best solution, advisors need to take a comprehensive look at the client’s budget, whether assets can be set up more tax-efficiently, and what they’re trying to accomplish – whether providing protection for a spouse or covering final expenses. “It might take clients a year or two – or more – to wrap their heads around it and see the benefit that they really do want to keep the cottage in the family but there are no means to pay the capital gains,” she says. “So, it really becomes the only solution.”
Paying the capital gains tax on the family cottage is one example, he says. Another is to replace defined benefit pension income for a spouse from a second marriage when the pension holder passes away, if they originally elected for the survivor benefit to go to their first spouse.
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