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Home Financial Health Blog Estate Bond: Immediate estate value, tax-efficient investment

Estate Bond: Immediate estate value, tax-efficient investment

by Tim Weichel

An estate bond is a tax-efficient strategy that gives you a large and immediate estate value.  More than that, it’s a wealth accelerator that allows you to pass on assets to your heirs or shareholders, tax-free.  And it can be used to provide tax-free retirement income.

The benefits are many

An estate bond gives estate value that’s far greater than what your assets might earn in a taxable investment portfolio, and the cash values are tax-sheltered. You can choose to take tax-free retirement income using the cash values and, if done properly, your assets are nearly creditor-proof.

 How it works

Setting up an estate bond is simple. Using a whole life insurance policy, you can begin to move your money from open savings accounts into an exempt life insurance contract.  A couple aged 45 who deposit $22,000 per year for 20 years (a $440,000 investment) would create an immediate death benefit (starting with the first payment) worth over $1 million.  Whole life policies tend to offer relatively fair yields through their dividend scale.  Cash account growth in a whole life policy could push the death benefit to over $1.8 million by age 65. If they live until 95, the total death benefit number is close to $5 million.

If you own a corporation, your death benefit could be paid into your company’s capital dividend account, which tracks the tax-free amounts a company receives from various sources. These funds can in turn be paid out to shareholders tax-free.

If you’re concerned you may need asset liquidity, the cash values that build up in the policy create a cash surrender value. Depending on the product, you can either borrow money from the policy or pledge the policy as collateral and borrow money from a bank.  The policy used as an example above could have a cash value of over $740,000 by the time this couple turns 65.  Up to 90% of this amount is generally available for non-taxable income through a collateralized loan.

In both cases, you can pay the money back, simply pay the interest, or let both ride. And, you can arrange for the loan to come due when you die, at which time the loan will be paid and the balance of the policy’s proceeds will go to named beneficiaries or your estate.

Finally, to make an individual policy creditor-proof, the beneficiary must either be irrevocable or the beneficiary must be your legal spouse, child, grandchild, parent or grandparent. Stepchildren don’t count.

The five-year test is another rough guideline that will be applied when considering the protected status of a policy in bankruptcy proceedings. If you declare bankruptcy within five years of the policy being established, the assets will likely not be protected. If it’s shown that you intended to shelter money from creditors, courts will likely cancel any protection.

The estate bond can multiply your savings and help provide a larger tax-free legacy.

To find out how the use of permanent insurance to create retirement income and dramatically and immediately increase the value of your estate, please contact me at tim@timweichel.ca  416-230-2703 or 705-798-0062

 

 
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