Avoid Probate No. 7 – Investment Tools
- Describing the investment mechanisms of tax registered accounts and life insurance type products to pass wealth directly to beneficiaries
- Warning that my columns cannot be relied on as legal, tax accounting or financial planning advice
I am nearing the end of a multi-part series.
A reader challenged me to share advice about how to protect loved ones from what he called “legal terrorism”. The reader had endured a horrible legal fight over his father’s estate and pointed at probate as the evil to be avoided.
He was a little misguided. Probate isn’t the problem. The problem is having an estate to fight over. There can be no fight over an empty estate.
Strategies discussed so far in my series:
- Deplete your estate by spending all your money before you die,
- Give your wealth to intended beneficiaries while you’re alive,
- Passing wealth through joint tenancy ownership – a trilogy of columns, and
- Passing wealth through a legal mechanism called a trust.
The last strategy I plan to write about is using these investment tools that pass wealth directly to named beneficiaries without passing through your estate:
- Tax registered accounts, and
- Life insurance products.
Tax Registered Accounts
I am referring to:
- Tax Free Savings Accounts (TFSA), and
- The myriads of retirement type funds (RRSP/RRIF, LIRA/LIF and pension plans) that allow for beneficiary appointments.
All of these tax registered accounts allow you to name a beneficiary.
If you make that choice, the proceeds are paid directly to your named beneficiary, bypassing your estate.
If you choose not to name a beneficiary, the proceeds are paid into your estate to be distributed according to your will.
It would seem a “no brainer” that you would name beneficiaries but look before you leap.
One caution is tax implications.
You might find it bizarre to learn that even though proceeds are paid directly to your named beneficiary, your estate is responsible for paying the taxes. Your beneficiary gets the $100,000.00 from your RRIF, but your estate is left holding the bag on the income taxes arising from that $100,000.00 being added to your income on your death.
This massive tax hit can throw your estate plan completely out of whack. Side note – consult with an estate tax accountant about making a plan to minimize your death-triggered tax hit.
Another caution is that important will mechanisms, like appointing a trustee for a minor beneficiary, are not available unless your beneficiary designation is drafted to include them – so get a lawyer’s help to ensure this is done properly.
Life Insurance Products
It will be no surprise to anyone that you can name a beneficiary on your life insurance policy.
Some might not be aware that there are life insurance products that include an investment component. These policies allow you to sock away money within the policy, keeping it safe from creditors and leaving a tax-free payment to your beneficiary on your death.
More obscure are investment funds offered by life insurance companies called segregated funds. They work similar to mutual funds but allow you to name a beneficiary.
Before you jump into these kinds of products to avoid probate, though, you need to factor in their expense. A trusted financial planner, who will look after your best interests over their commissions, is invaluable for sorting through these options.
Get Advice
You cannot rely on my columns for investment, tax or even legal advice. I do my best to provide complex information in a clear and understandable way. I do not have investment nor tax expertise. For legal advice to be reliable, the lawyer must be fully informed about your unique circumstances.
I am not currently taking on new estate planning clients, preferring to focus on the estate administration (probate) aspect of my practice. But if you would like referrals to estate planning lawyers, investment planners and estate tax accountants that I have confidence in, get in touch with me and I’ll be happy to assist you.
