The objective, generally, in estate planning is to minimize taxes and preserve the estate for the beneficiaries. Since tax legislation deems most capital property to be disposed of for fair market value at death, there could be a substantial tax liability to the estate. This capital gains tax can be deferred on death where such property is transferred to a surviving spouse. Many clients relying on this tax deferral forget that at some point the taxes must be paid. Tax cannot be deferred beyond the surviving spouse’s death. Increases in property values and changes in tax laws could result in a potentially significant tax liability at the surviving spouse’s death.
RRSPs and pension can present another tax problem at death. These retirement plans can also be transferred to a surviving spouse. Any amounts held under such plans at the death of the surviving spouse must be taken into income in his or her estate.
Although, effective lifetime tax minimization strategies (e.g. gifting, estate freeze, trusts) can reduce the tax liability at death, the estate could still be subject to considerable tax. Life insurance on a joint-last-to-die basis can, depending on the age and health of the individuals, provide a less expensive means of funding to cover the tax liability in the estate and preserve the estate for the beneficiaries.
There are several ways to deal with ownership under joint policies and each has its own implications. Since the life insurance is to become payable on the second death, it is important that the ownership structure should be established to ensure that such ownership does not create unnecessary complications at the first death. With joint ownership, both spouses, while living, have equal rights under the policy. At the first death, the deceased’s ownership is generally intended to go to the surviving spouse.
However, there is not an automatic transfer of ownership unless the policy wording clearly indicates this intention. Otherwise, there must first be evidence that the surviving spouse is the intended owner of the deceased’s interest in the policy. Such evidence might include letters probate or letters of administration. This can be a costly and undesirable process where it would not otherwise be necessary to probate the will or seek letters of administration. This result can lead to delays and, of more concern, frustrated clients.
The most common forms of ownership under a joint last-to-die policy are set out below:
The ownership of a policy is established at the time of application. It can, however, be amended at any time.
This release deals with estate preservation through the use of life insurance. As such, it deals only with ownership issues as between spouses. In such cases there are generally no tax implications on transfer of the deceased’s ownership interest. Where the policy held under a joint ownership is between parties other than spouses, tax implications would depend on the tax law applicable under the circumstances.