The Market
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The Family Wealth Transfer Plan is best suited to those individuals age 50 or older who have completed the wealth accumulation phase of their lives and are now preparing to benefit from properly planned asset accumulation. These individuals have worked diligently over the years to save and now have enough funds set aside to begin creating a family legacy.
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Clients may have a surplus cash flow invested in GICs or mutual funds. And while they do not need this money today, they are hesitant to pass it on to their heirs just yet since they don't know what may happen in the future.
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These clients want to accomplish one or more things...
- leave funds to children and/or grandchildren
- reduce taxes on investment income
- lower current taxable income
- retain complete control of assets
- avoid costly probate fees
- simplify estate transfer
- minimize the risk of Will contestability
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The Plan
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The Family Wealth Transfer Plan takes advantage of several features to help a client prepare for their retirement years and beyond. Because the basis of this plan is a universal life contract, clients can defer taxes on the accumulated investment growth within the plan.
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By depositing funds into Universal Life on a tax-deferred basis, a client does not pay income tax on investment growth within the plan until funds are withdrawn. Just as important, income earned within the plan is not reported on client's annual income tax return. Clients will appreciate the fact that as assets within the plan grow, this growth can become a substantial part of their retirement savings and/or estate capital.
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If a client wishes to transfer assets to his or her children and/or grandchildren, the Family Wealth Transfer Plan can make this possible with several advantages to the client. Using this plan, a client owns the contract, but makes the life insured a child or grandchild. At any time during the policyholder's lifetime, ownership of the contract can be changed from the original policyholder to the child/grandchild without paying taxes on the accumulated investment growth within the plan. If desired, ownership may also be transferred to the policyholder's spouse.
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If a client is concerned about future retirement income, he or she may wish to maintain ownership of the plan for an indefinite period of time. Accumulated investment growth within the plan can be withdrawn for retirement income in the event the client's financial situation changes or as the funds are needed. As well, the client has the ability to use the Family Wealth Transfer Plan as collateral for a bank loan, either for spending money or for investment purposes.
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A transfer of ownership of the policy may be completed without adverse tax consequences if the transfer qualifies under subsection 148 (8) of the Income Tax Act. This subsection allows the client to transfer ownership of a policy on a child or grandchild to the child or grandchild during the client's lifetime without having to pay tax on the tax-deferred accumulation at the time of the transfer. The taxes would only be due when the new owner withdraws funds from the plan. Clients should consult an income tax professional for advise based on their individual cincumstances. (See also Leverage Insurance & Collateral Financing.)
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To provide for the possibility that the transfer of ownership is not completed during the client's lifetime, the client may wish to designate a successive owner. By naming a child or grandchild as a successive owner of the plan, the tax-advantaged inter-generation wealth transfer can occur even after the client's death. Using such a designation, the plan can be passed outside of the client's Will to avoid probate fees; minimize the risk of contestability; and protect the original intent of the Family Wealth Transfer Plan. The tax consequences of holding the policy at death and the available alternatives to minimize taxes should be reviewed by the client with a tax professional.
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Questions and Answers
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Questions a client may have regarding the Family Wealth Transfer Plan
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Q: Can a Single Premium be deposited?
A: Any deposit amount is allowed for the Family Wealth Transfer Plan. However, only amounts up to the maximum premium can be tax-deferred during a policy year. Amounts in excess of the maximum premium can be deposited into the Shuttle Account. Although taxes on funds held in the Shuttle Account are payable each year, as funds in this account are transferred into a universal life policy, future taxes will be lower.
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Q: Can the life insured be an adult child / grandchild?
A: Yes. The life insured can be the client's child, grandchild, great-grandchild or an individual who was legally dependent upon and in the custody of the owner when he or she was younger. As well, the life insured can be the spouse of the client's child and/or adopted children. While the age of the life insured does not matter, the client should consult an income tax professional to ensure that the life insured qualifies under the applicable Income Tax Act provisions. The age of this individual will determine the cost of insurance.
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Q: Can a client own insurance on their child / grandchild?
A: Parents and/or grandparents have an insurable interest in their children and/or grandchildren. However, considerations such as financial underwriting and other insurance coverage currently in place may be a factor in determining whether the client may own insurance on his or her child or grandchild.
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Q: Can the plan be transferred at any time?
A: The life insurance policy can be transferred at any time, provided the new owner is legally able to own the contract. In most provinces this will be age 16. Please check the applicable age restrictions in your province.
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Q: If a loan is secured against the plan, can the loan interest be deducted for income tax purposes?
A: If the loan is for investment purposes, interest paid may be deductible. If the loan is to provide additional funds for personal purposes, perhaps to purchase a car, then interest payable on the loan is not deductible. Please consult an income tax professional for further information.
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Q: If a successive owner is named, will the client's estate pay probate fees on the plan?
A: If ownership is transferred upon death using a successive owner designation, assets within the plan may be passed outside the client's Will, eliminating probate fees. However, this will depend on the client's individual circumstances, so please consult an estate planning professional.
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Q: How much insurance can be purchased?
A: Any amount of insurance can be purchased depending upon the desired purpose. For example, a client may wish to begin an insurance program for his or her children to maximize the death benefit rather than the tax-deferred account value. To minimize taxation within the plan, the client is advised to have a zero balance in the Shuttle Account in three to ten years. This will allow for maximum long term growth on a tax-deferred basis.
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Q: Can the successive owner be a minor child?
A: A policy may be transferred to a successive owner who is a minor child, however, certain restrictions will apply with respect to dealing with the policy by the child and the child's legal guardian until the child reaches the age of majority. Please consult an estate planning professional for further details, including advice as to the income tax consequences of such a transfer.
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The Family Wealth Transfer Plan illustration compares deposits to Universal Life versus money invested in a GIC. It will also deduct the probate fees that may be payable on a GIC if this money is passed through the client's estate. A precise comparison can be made by requesting the Shuttle Account to accumulate on an after-tax basis.
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