Patricia Lovett-Reid

It may well be that in this world nothing can be said to be certain except death and taxes, as Benjamin Franklin famously noted, but it's even more stressful when death and taxes have to be dealt with at the same time. One way to minimize the impact on your loved ones is by making sure you have a solid estate plan. The role of a proper estate plan is to protect your money so as much as possible goes to the people and charitable causes you want it to — and as little as possible gets paid to the government.

A sometimes-overlooked aspect of estate planning is the value of life insurance as a means of protecting your worldly wealth. After a lifetime of building your assets, life insurance can provide a tax-efficient way to transfer all you've worked for to your family or charities.

If you are married at the time of your death, your assets may pass to your spouse, tax-free, but eventually those taxes will have to be paid. When your spouse dies, their registered investments and accumulation of non-registered assets become taxable.

There are two key ways in which life insurance can play an important role in estate planning: preservation and creation. Life insurance proceeds can be used to preserve the assets of the estate by being used to pay funeral expenses, pay down debt and addressing tax liabilities. This way the estate itself can be left fully intact for beneficiaries. When such outflows are not significant, tax-free insurance proceeds can be used to create an instant estate for your beneficiaries.

Estate preservation:
Among funding requirements upon death are capital gains taxes. In CRA talk, when a person dies, the Income Tax Act considers him or her to have disposed of capital property he or she owned immediately before death, at a price equal to the fair market value of such property at that time. This means that for property such as shares in a corporation, mutual funds and cottage properties, which have appreciated in price since they were acquired, there is an accrued capital gain, which triggers a tax liability. Fifty per cent of the capital gain must be included in the deceased person's final income tax return as a taxable capital gain.

Funds provided by life insurance can be used to settle the tax liability, which is especially valuable if the beneficiaries wish to retain the property to keep it in the family, say, or because market conditions are currently unfavourable. If capital property is inherited by the surviving spouse or common law partner, the tax liability can be deferred to the time when the surviving partner disposes of the property or dies.