Rethinking insurance in your estate planning

Estate planning
Matters Beyond Wealth

How insurance can be used as a proactive, planning tool to preserve and enhance the wealth we leave behind

“I wish we could call it something other than insurance... it's one of the most efficient tools and it's one of the few tax-preferred tools that we have left in our tax planning arsenal for our families.”
Robin Goodman, Vice President of Insurance, Trust, and Estate Planning at RBC Wealth Management Financial Services

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Transcript

Intro Speaker:

Hello, and welcome to Matters Beyond Wealth with your host, Leanne Kaufman, president and CEO of RBC Royal Trust. For most of us, talking about subjects like aging, late life, and estate planning isn’t easy. That’s why we’re going to help get the conversation started on this podcast while benefiting from the insights and expertise of some of the country’s top experts. We want to bring you information today that will help to protect you and your family in the future. Now, here’s your host, Leanne.

Leanne Kaufman:

Hello. I’m Leanne Kaufman and welcome to RBC Wealth Management Canada’s Matters Beyond Wealth. When most of us think of life insurance, the first thing that probably comes to mind is risk protection. “How do I ensure that my loved ones continue to enjoy their standard of living after I’m gone and can no longer contribute to the family income? How will my loved ones pay off the mortgage on our home after I’m gone? Or perhaps as simple as, “I don’t want my funeral cost to eat into my loved one’s inheritance.” Few of us really understand the way that insurance can be used as a proactive, estate planning tool, not only to cover costs, but actually to preserve and enhance the wealth that we can leave behind.

I’m pleased to welcome Robin Goodman, Vice President of Insurance, Trust, and Estate Planning at RBC Wealth Management Financial Services as my guest today. With over 20 years of industry experience, Robin provides advanced trust estate and succession planning to clients, including business owners with a specialization in tax-effective life insurance applications. Previously, Robin practiced law in Toronto and worked with the Ministry of Finance for Ontario in the Tax Policy Division. Robin has been a prolific writer and speaker in the area of life insurance in estate planning, and has been used as an expert resource in the area by lawyers and accountants across the country. In addition, she has contributed to several books and journals on the topic, and I’m proud to call her a close colleague of mine. Robin, thanks for being here with me today to talk about why insurance matters beyond wealth.

Robin Goodman:

Thanks, Leanne. I’m really excited to be here.

Leanne Kaufman:

You’ve worked at the intersection of estate planning and insurance for quite a long time, as we just heard. What is the biggest myth that you hear when it comes to using insurance as part of an estate plan?

Robin Goodman:

I’m not sure that I can find one myth. There are so many that I hear people say when we’re talking. I think the biggest myth, actually, is that life insurance is something that you only need if you don’t have wealth. A lot of people think of insurance, as you described it, as something that’s there for protection, and it’s really there for protection if you don’t have other resources to adequately provide for your family. The reality is that that is absolutely one of the very fundamental purposes of insurance and one of its great uses, but it can be used for so many different things. Quite frankly, the wealthier the family is, the more insurance becomes appealing to them. It’s just how we structure it that really changes.

Leanne Kaufman:

Then beyond those simple examples or reasons that I opened with to use insurance, what are some of the most common examples that you discuss with clients in the estate planning context?

Robin Goodman:

There are two different approaches to insurance, and it really starts with the very first sentence in the conversation. I listen for two words. I listen for the word if and/or I listen for the word when. If the sentence starts with, “If I die before X, before I pay off my mortgage or before my kids finish university,” or whatever the timeframe is, that’s one type of insurance planning that we use and that’s temporary or term insurance. That’s really, truly protection. That’s a cost because it’s like car insurance. You’ve got it there to protect yourself, but you’re really hoping you don’t have to cash in on it.

The other sentence that I hear is, “When I die, I’m going to want to provide for my family. I’m going to want to create a legacy. I’m going to want some equalization for my children. Some are going to be in the business and others aren’t going to be in the business. I’m going to want to create a longer-term legacy for children and grandchildren.” Or, “I’m going to want some tax efficiency in my wealth.” So it’s not that I need it, but I’m going to want it. That is permanent insurance, and that really gets us into a whole different kind of planning. As we get into our families with more wealth, that’s the kind of insurance conversation we’re talking about. We’re talking about equalization. We’re talking about wealth generation and wealth preservation, and we’re talking about a succession of wealth, or a transfer of wealth, down to the next generation, to generations beyond that or, importantly, to charity. There are so many uses for insurance.

Leanne Kaufman:

That’s really when you start talking about it as that proactive tool versus that protection feature. Let’s talk about those benefits of insurance for Canadians, is tax the biggest driver or are there others?

Robin Goodman:

For most Canadians, tax is important and managing tax is important. I haven’t met too many people who tell me that they want to pay more tax than they have to. Although most people are really comfortable paying tax, they just want to pay only as much as they have to pay. Life insurance is, by definition, an asset that is tax-sheltered. You put your dollars into the insurance policy and then when it pays out, it pays out tax-free. So actually, if you listen to the way I’m describing it’s really, for many people, an investment, but it’s just a very, very tax-efficient investment. As a result, anytime we’re talking about insurance, there is a tax part to the conversation.

For most people, if we’re not talking about it purely as protection, then we’re talking about it largely as an estate planning tool. As I said, the goals really are, “How can I preserve my wealth as tax-efficiently as possible? How can I extract dollars from my corporation after my passing, either so that my estate can pay tax, or that I can get some money out to my kids or grandkids or charity, as tax-efficiently as possible?” There were a variety of reasons, a lot of it is about legacy and preservation, but there’s always tax that comes into it because of the nature of what this asset actually is.

Leanne Kaufman:

It sounds a little complicated and a great area where someone would need some professional advice, from an expert like you or other colleagues that work in this area. Maybe just for a very simple example, can you give us one scenario where…maybe the equalization, what would that client scenario look like?

Robin Goodman:

For a business owner, that’s a very common worry. It’s not uncommon for us to talk to business owners where they’ve built this business, this is their baby, and they really are hoping not to sell it. It’s sort of the family legacy, and they want to be able to pass it down to the next generation. Sometimes, there are no children who can step into their shoes and keep that business going. Sometimes, there’s one or two, but very rarely do we have a situation where there are all the children in the family who are going to step into the business and equally run the business. The challenge always for that business owner is, “I love my children equally. How do I treat them equally?” Of course, we talk about the difference between fair and equal, and they’re not always the same thing.

To the extent that you want to equalize, as the expression goes, so that we want to be able to leave the business primarily in the hands of one of the children and maybe create a fair gift for the other, we often look at life insurance. We can look at insurance that is funded by the business, in some fashion, and allows us to take some value from within the business and convert it to insurance proceeds, which, if we structure it properly, can be extracted as a tax-free dividend out to the estate. That’s kind of the equalization conversation: “I love my kids equally. I can’t leave the business to everybody, what else can I find to leave to my non-active or non-business participating children.” With the understanding that most business owners don’t have wealth outside the business, the business is their primary asset. That’s really what we’re looking at.

Leanne Kaufman:

That’s a great example, thanks for sharing it. What about during someone’s lifetime? Can life insurance be beneficial to them while they’re still alive?

Robin Goodman:

Yes, it can, and again that’s probably one of the myths that I hear people say is, “Nice that we’re talking about this, but this is for after I’m dead and not while I’m alive.” I’ll have some people say, “What do I care? Not my problem, it’s the kid’s problem.” I don’t hear many people say that, but sometimes I do hear people sort of flippantly say that. Insurance can be something that is efficient during lifetime as well. There are three ways that people see the benefit of it during their own lifetime. Number one: We can use it to make their estate more tax efficient. When I say estate, I mean at your death and during your lifetime. Anytime we’re going to make your estate more tax-efficient that’s something that’s attractive to people.

I’ll just give an example of that. When we’re talking about insurance, and if you think about the way I described it before, you deposit X into an insurance policy and at your passing, it pays out X plus a factor. That X plus a factor, if we think about it as an investment, is really growth. If the insurance policy is structured properly, then that growth is tax-deferred and when it pays out, it pays out tax-free. For many people who have surplus wealth and who are looking at their wealth and saying, “Boy, oh boy, taxes are very high right now. The market is up and down right now. I want to invest my money somewhere. I don’t think I’m going to consume it during my lifetime. I do think it’s going to survive me and get paid out after my death anyway. What’s tax-efficient? Where can I invest this money so that it’s tax-efficient?”

Very often, insurance becomes a really, really good alternate investment. Even during lifetime, it gives them a tax-deferred vehicle to invest their money that they weren’t going to consume anyway, and it grows. These policies can be structured so that there is a liquidity component embedded into the policy, it’s referred to as cash surrender value. That cash surrender value, that liquidity, is actually available during lifetime. We can structure the policy so that it’s not just a promise to pay at death from the insurance company, it’s an asset that if you needed to or wanted to, you could either borrow against it or you could withdraw, so there is a lifetime benefit to it.

As well as interest rates are going up, I think we’re going to see more and more uses of a sort of type of insurance product called an annuity. An annuity is an investment that you make that provides you lifetime income. We sometimes refer to it as insurance against living too long, because you’re going to have income for the whole rest of your life. We will even back it with a traditional life insurance policy, which protects you against dying too soon. So now, we’ve got an insurance product that protects you on either side of the spectrum of death: Too soon or too late. There’s lots that we can do with it that you can think of as benefiting you during lifetime, as well as just this promise to pay at death.

Leanne Kaufman:

As you said, a different asset class, think of it as an investment for the right circumstances.

Robin Goodman:

Absolutely.

Leanne Kaufman:

Can you talk to us a little bit about how life insurance can be used for multi-generational planning?

Robin Goodman:

That’s, I’m going to say, one of my very favorite topics. I guess it could apply to everybody who’s interested in multi-generational planning, but I see it frequently with our ultra-high net worth families and our business owners, where we do know that their wealth is going to survive them. Where, in fact, in some circumstances, if we sort of apply a growth factor to the wealth, we can actually pretty confidently say that the wealth should survive the next generation also. If we just let it go sort through the traditional structure, where it goes from parents to children and then children to grandchildren, we have taxes along the way. Tax when it goes from parents to children, and then tax again when it goes from children to grandchildren. One of the structures that we will often look at is looking at a multi-generational, or a cascading, insurance structure, where we have an asset that pays out at the death of each generation.

We have insurance on parents’ lives and insurance on children’s lives, and maybe even insurance on grandchildren’s lives. It’s really there to ensure that at the end of each generation, there’s a new pop of wealth for the generation after that. It protects against any bad decisions in the hands of any one beneficiary as it relates to the wealth. It protects against the sort of traditional things that can erode wealth: Marriage breakdown, taxes, creditors, predators, all the things that we worry about as we transfer wealth down through the generations.

This creates an asset that absolutely could be guaranteed to pay out for the next generation at the death of each generation. It’s a preservation tool that people really like, and it helps avoid some of those taxes that we were talking about as it, otherwise, would transfer down through the generations. In my experience, when we’re talking to families and the families are really focused on legacy and multi-generational preservation, they really like this idea. It takes some of the wealth off the table and doesn’t all just fall into the hands of the next generation, but it stays down the family line.

Leanne Kaufman:

Right, it really helps create a legacy.

Robin Goodman:

It creates a legacy, and I’m just going to add, Leanne, that we can do the exact same thing in the charitable front. If we want a charitable legacy, we could have this cascading wealth idea with insurance that’s inside a charity. Whether it’s a family foundation or a charitable gift fund foundation, we can have that cascading insurance idea inside the foundations. Charities love it, and there are all kinds of charitable benefits to being able to do that. Again, there’s your legacy right there, you know it’s there, you don’t have to worry about it, and it’s tax efficient.

Leanne Kaufman:

Wow, Robin. I’ve learned so much in our short time together. We’re going to wrap up, but maybe you could just give us one thing that you hope listeners take away, if nothing else, from today’s conversation.

Robin Goodman:

I think the one thing that I always want everybody to remember is that insurance isn’t just there for people who don’t, otherwise, have wealth. Insurance, in fact, is a really, really, really efficient tool for people who do have wealth. You have to think about it differently, and I often tell people I wish we could call it something other than insurance just so that they can see the difference. It’s one of the most efficient tools and it’s one of the few tax-preferred tools that we have left in our tax planning arsenal for our families. Don’t worry about how old you are. Don’t worry about whether you have the wealth or you don’t have the wealth. If you’re interested in a tax-efficient estate planning tool to add to your plans (it doesn’t change them) we’re just adding to them. Then I think people should consider insurance, it’s really interesting to plan with.

Leanne Kaufman:

It sure is, and I think you’ve really helped drive home that point. That it isn’t just that reactionary or protection the if situation, but to help as a tool for the when. Thank you so much, Robin, for joining me today to share some of these benefits of insurance in estate planning, and why this matters beyond wealth.

Robin Goodman:

Thanks, Leanne.

Leanne Kaufman:

Until next time, I’m Leanne Kaufman. Thank you for joining us.

Outro speaker:

Whether you are planning for your own estate, the needs of your family or business, or you are an executor for a loved one’s estate, we can help guide you, simplify the complex, and support your life’s vision. Partner with RBC Royal Trust and ensure your legacy will thrive for generations to come. Leave a legacy, not a burden™. Visit rbc.com/royaltrust.

Thank you for joining us on this episode of Matters Beyond Wealth. If you would like more information about RBC Royal Trust, please visit our website at rbc.com/royaltrust.

RBC Royal Trust refers to either or both of the Royal Trust Corporation of Canada and or The Royal Trust Company. RBC Royal Trust and RBC Wealth Management are business segments of the Royal Bank of Canada. Please visit https://www.rbc.com/legal for further information on the entities that are member companies of RBC Wealth Management. ®/™ Trademark(s) of Royal Bank of Canada. RBC and Royal Trust are registered trademarks of Royal Bank of Canada. Used under licence. © Royal Bank of Canada 2023. All rights reserved.

This podcast is provided for general information purposes only and is not intended to provide any advice or endorse or recommend any content or third parties referenced in this publication. A professional advisor should be consulted regarding your specific situation. While information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subject matter discussed.

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