How insurance can smooth out estate plans – and smooth over family conflicts

Family cottages typically hold powerful memories, but without proper estate planning those thoughts can turn into painful reminders.

Keri O’Driscoll, an insurance consultant for the Escarpment Advisory Group in Burlington, Ont., part of Scotia Wealth Management, describes a situation where two adult children have differing priorities. One wants to spend summer weekends at the cottage and is adamant about keeping it. The other rarely visits and, after the parents pass, would rather receive cash from a sale.

That’s where life insurance is able to intervene to head off a potential battle. A policy can quickly cover the cottage’s tax bill and compensate heirs who have little interest in owning it. Permanent policies can establish who receives money and provide a contractual payment when property changes hands following a death.

“People spend so much time accumulating their wealth that they don’t always spend time overseeing that the wealth is then distributed,” Ms. O’Driscoll says.

She adds she often encounters families who assume they can transfer a property to their children for as little as $1. But under Canada Revenue Agency rules, capital gains tax can still be calculated on fair market value. Assets are also generally deemed sold at death, even if heirs retain them (although transfers to a spouse or qualifying spousal trust may defer the tax).

For families with substantial property or assets, these liabilities can create an urgent need for cash. Life insurance proceeds help cover the tax bill without forcing heirs to sell. The key is ensuring the proceeds are available to pay those taxes.

Insurance can also help families accommodate competing visions for assets. Parents might leave a property to the child who wants to maintain it while directing the insurance proceeds to siblings.

“That still can be considered fair. Equal doesn’t necessarily have to mean equal division of assets,” says Carrie Milne, head of sales for guaranteed wealth solutions at Manulife.

Money paid directly to named beneficiaries generally bypasses the estate and cannot automatically be used by the executor. Ms. O’Driscoll emphasizes the importance of co-ordinating policy ownership, beneficiary designations and the will, so the right people receive the cash needed to meet the estate’s obligations.

A policy’s contractual provisions enable owners to name multiple beneficiaries and assign different shares of the proceeds. Revocable designations can be changed as family circumstances evolve, while irrevocable ones generally require the beneficiary’s written consent before changes can be made, according to the Financial Consumer Agency of Canada (FCAC).

Together with wills, trusts and shareholder agreements, insurance arrangements can give surviving family members clear instructions and greater financial flexibility to smooth out what can be an emotional or rocky process, FCAC says.

Another application for insurance in wealth planning involves business succession. Ms. O’Driscoll points to buy-sell agreements, which specify that surviving owners or the company can purchase a deceased shareholder’s stake. Life insurance can finance the transaction, allowing heirs to receive value while the remaining owners retain control without draining operating capital.

For the arrangement to work as intended, the policy’s ownership, beneficiaries and coverage must align with the legal terms of the buy-sell agreement and the company’s valuation, she says.

The stakes extend well beyond the wealthiest of entrepreneurs. A survey by the Canadian Federation of Independent Business found that 76 per cent of small-business owners intend to exit within a decade, though just 9 per cent have a formal succession plan.

Manulife’s tax and estate planning group also recommends funding buy-sell obligations in advance rather than depending on asset sales or bank loans. Insurance can’t guarantee business continuity, but it can help prevent an agreed buyout from becoming a financial crisis.

Covering all or a portion of the buyout with a policy gives the agreed ownership transition a much better chance of proceeding without problems arising, Ms. O’Driscoll says.

She advises a review of estate plans every few years, or following births, marriages, divorces or significant changes in wealth, to ensure insurance policies and other planning aspects still reflect the family’s intentions.

Whether for business succession or other transfers of assets, it’s essential for family members to clearly understand the arrangements, says Tom Deans, author of The Happy Inheritor.

“Advisors are being called upon more than ever to begin important family conversations,” he says, suggesting that meetings bring together family members, accountants and lawyers before any assets change hands.

What matters is discussing wishes and plans openly “so that there are no surprises.”