Leave a (tax) wise legacy

There comes a point when more income stops making your retirement better. Instead, it only brings problems, namely, a heavier tax burden. 

If you’re in this camp, you may be looking at your monthly CPP payments and wondering, ‘Why bother?’ Taxes will take most of it, leaving control in the government’s hands.

But that doesn’t have to be the case.

With strategic tax planning, you can stay in control of your money, directing it to family and causes you care about.

With strategic tax planning, you can lower your tax burden, keeping your money in your hands so you can leave a legacy with the next generation and causes you care about

Leaving a legacy with life insurance

One of the best ways to protect your CPP from the government’s hands starts by taking out life insurance and funding it with your CPP benefits. 

From there, you have three main choices, each with its own specific benefits. We’ll walk you through them so you can decide which option suits you best.

Life insurance strategy #1 

The most straightforward option is to appoint your favourite charity the beneficiary of your life insurance. This way, your estate will get a tax receipt when you pass, lowering the tax burden on your children and grandchildren, while making a positive impact at your chosen charity.

Example

You take out life insurance on yourself with a payout of $1 million at your death or on a joint-and-last-to-die* basis and make the charity your beneficiary. Then, you pay the premiums with your CPP benefits. Upon your death (or the death off your spouse, depending on the choices you made), the life insurance will generate a $1 million charitable gift, and the estate will receive a tax receipt. This could save the estate over $500,000 in taxes. 

*Joint last-to-die life insurance, also known as survivorship life insurance, covers you and your spouse under a single policy. The death benefit is paid out only after both of you have passed away. 

Life insurance strategy #2

The second strategy is less intuitive but can lower your tax burden today. Instead of naming your favourite charity the beneficiary, you name them the owner and beneficiary of your life insurance policy. This way, your premiums will be counted as a charitable gift, allowing you to claim them on your taxes at the end of the year.

Example

You take out life insurance on yourself with a payout of $1 million at your death or on a joint-and-last-to-die basis and make the charitable organization the owner of the policy. In this case, you would get the charitable donation receipt yearly, decreasing your tax burden anywhere from $6,000-$12,000/year, depending on your retirement income and any other factors that affect your tax returns. 

Life insurance strategy #3

The third strategy leverages the fact that while inheritance is taxed, life insurance is not. So, instead of willing the remaining balance of your RRSP/RRIF to your family, you stipulate in your will that it is to be donated. As long as the charity is named as the direct beneficiary of the RRIF, your estate gets a charitable donation tax credit for the same amount (or up to the eligible donation limits). This tax credit can fully offset the tax on the RRIF income in most cases. Then, to replace the inheritance that was donated, you take out a life insurance policy (paying the premiums with CPP), leaving your children as the beneficiaries.

Example

Leaving an RRIF of $1 million to your family will also leave them with a tax burden of $496,000 when taxed in the highest tax bracket in Manitoba (50.4%). So, once the estate is settled, your family would receive less than half of their inheritance. 

You take out life insurance on yourself with a payout of $1 million at your death or on a joint-and-last-to-die basis and make your family the beneficiaries. Knowing your family is taken care of, you can then stipulate that your remaining cash (usually in the form of an RRSP/RRIF) goes to a charity you care about. This ensures your family gets taken care of without government interference, while ensuring your money goes to a cause you care about.

Other tools to help you leave a wiser legacy

Depending on your needs and your current plans, leveraging your life insurance may not be possible (or advisable) for you. In that case, you have other tools at your disposal to make the most of your CPP payments.

RESP

You can use your CPP benefits to start a Registered Education Savings Plan (RESP). This allows your savings to grow tax-free (with the balance getting taxed in your child or grandchild’s hands when withdrawn) and even benefit from government top-ups of $500 for each $2,500 of RESP investment.

Life insurance (for your kids/grandkids)

You can use your CPP benefits to invest in life insurance for your children or grandchildren while they are young and healthy. This is inexpensive and will build up a cash value every year that premiums are paid. This allows the transfer of your wealth without needing to move through the government’s hands first.

Your money, your legacy

You’ve spent decades of your life earning the money you have. You want to ensure it creates a legacy that reflects you and your values. By sidestepping taxes as much as possible, you increase the impact of your wealth.