What’s a better way to give more to your beneficiaries and less to the government?
The estate bond is a simple, well-established strategy to increase the size of your estate after-tax. You use the tax advantages and other benefits of life insurance to:
- Grow your assets
- Transfer your assets to your heirs
The “estate bond” is also known as a “legacy bond” or an “asset transfer plan”. The life insurance can be owned by your private corporation or you personally. This leads to different terms being used to identify the concept: “Corporate Estate Bond”, “Personal Asset Transfer Plan” and “Corporate Asset Transfer Plan”. The name variations make finding information more challenging.
Whatever the name, you are getting permanent life insurance optimized to provide a large death benefit.
- 1 Protecting your wealth for your heirs
- 2 How do conventional bonds work?
- 3 How does an estate bond differ from a conventional bond?
- 4 Who benefits most from an estate bond?
- 5 The steps in getting an estate bond
- 6 A corporate estate bond uses the Capital Dividend Account
- 7 Variations in how to set up an estate bond
- 8 Pros of an estate bond
- 9 Cons of an estate bond
- 10 Is an estate bond right for you?
Protecting your wealth for your heirs
As your wealth grows, you build up assets you never plan to spend but which you do not want to drop in value.
These are assets you are protecting for your heirs. They tend to be fixed-income assets like GICs and bonds. The investment returns tend to be low and heavily taxed.
How do conventional bonds work?
You generally buy a bond (or GIC) from after-tax income with a single deposit. In exchange, you get a lump sum payout at a specified time. If interest rates increase after you invest, you do not earn more interest. If inflation increases, the value of your payout drops in purchasing power.
There are two key drawbacks to fixed-income assets:
- You receive low returns.
- You are taxed on the interest you receive. Generally, the interest is reported as taxable income in the year you receive it and taxed at your marginal tax rate — your highest tax rate.
How does an estate bond differ from a conventional bond?
Permanent life insurance pays out a lump sum when you pass away. You pay the premiums from after-tax income over a short period of time, like 10 years.
Unlike a conventional bond, permanent life insurance can provide:
- Tax-sheltered investment growth
- Better growth as interest rates increase, which offsets the effects of inflation now and decades into the future.
- Tax-free payout at death
- Exemption from Estate Administration Tax if the death benefit goes directly to beneficiaries
- Attractive after-tax returns when held to maturity (death)
Depending on your situation, you could get Term 100 (premiums until age 100, no cash values), universal life (can have cash values, be quick-paid and shelter investment growth from taxation) or whole life insurance (similar to universal life, with a different investment structure).
You have the flexibility to access the cash value if required. You can have more than one beneficiary. You select how much each receives. You diversify your investments and could increase their after-tax return.
Since most cases use private corporations, we will look at the Corporate Estate Bond. You can get similar benefits with personal ownership.
Who benefits most from an estate bond?
The estate bond or legacy bond helps if:
- You are safeguarding assets for your children, grandchildren or charities. These are assets you do not intend to use personally.
- You hold low-return, high-taxed investments like GICs and bonds
- You are between the ages of 45 to 75
If you have a spouse, you can get better results with Joint Last To Die coverage because the lower insurance charges enhance the death benefit.
The steps in getting an estate bond
The estate bond concept — personal or corporate — has three steps:
- You apply for permanent life insurance.
- Once you are approved, you use nonregistered assets with low after-tax returns to fund the premiums.
- Upon your death, the tax-free death benefit goes to the beneficiaries.
A corporate estate bond uses the Capital Dividend Account
If your private corporation owns your life insurance, the tax-free death benefit goes to the Capital Dividend Account (CDA) and gets paid out as tax-free capital dividends. Here are more details.
The Capital Dividend Account is a mechanism to extract assets from your corporation tax-free. Since you pay your life insurance premiums with after-tax dollars, your corporation receives the death benefit tax-free. The question is how you extract the death benefit tax-free. The notional Capital Dividend Account (CDA) is the mechanism. The CDA gets credited with the death benefit less its Adjusted Cost Base (ACB). Amounts in the CDA can be paid to shareholders as tax-free capital dividends. Since the ACB eventually becomes zero, the entire death benefit can eventually be paid out tax-free.
Variations in how to set up an estate bond
Since carefully-selected life insurance has guarantees and flexibility, you can also achieve other goals:
- Reduce the costs by making deposits over a shorter period (e.g., 10 years)
- Get tax-free retirement income by “overfunding” to build up substantial tax-sheltered savings
- Corporate ownership: funding with “trapped” retained earnings and extracting tax-free using the Capital Dividend Account
Pros of an estate bond
When you optimize your permanent life insurance to maximize the death benefit, you have other advantages:
- An attractive after-tax return compared with your taxable fixed-income investments
- The death benefit is paid quickly, which bypasses the costs and delays of the estate settlement process
- You can use other insurance strategies, too (e.g., you can use the cash value to supplement your retirement income via an Insured Retirement Plan)
Cons of an estate bond
Permanent life insurance is not available or suitable for everyone:
- You qualify based on your health
- You are making a long-term commitment
- The longer you wait to get the insurance, the higher the cost because you are older and your health may have changed
Is an estate bond right for you?
We prepare and explain options to help you decide whether an estate bond is right for you.