Contributed by Glenn Stewardson, Financial Planning Advisor, Assante Capital Management Ltd.

In the past week I have met several couples who have taken out a life insurance policy to pay the tax bill on the second death. The couples do not want their final estate value to decrease for their children.

In one way this makes sense, but I would like to offer an alternative to ‘paying the tax’.

With a Registered Retirement Income Fund (RRIF) the government has allowed a spousal rollover to push the tax bill out to the surviving spouse’s death. We generally think this is a good idea as the investment assets in the RRIF account will continue to grow tax-deferred.  But, that tax deferral needs to be dealt with on the second death.

So, the life insurance policy, Joint Last to Die ( JLTD) pays out tax-free on the surviving spouse’s death to the estate to pay the RRIF tax bill.  The RRIF is still considered taxable income on death. 

What if there was a way to gift that RRIF directly to a charity or several causes that are close to your heart? You can add the charities as beneficiaries to your RRIFs as contingent, which means that if your spouse dies first then the contingent beneficiaries are paid.

You can have multiple beneficiaries on your RRIF account, and they are paid directly from the RRIF on your death if you are the surviving spouse. One benefit of that is the RRIF account is not paid to the Estate and added to probate fees if there are any in your province. The second benefit is that even though the RRIF is still taxable income on your death, the charity donation receipts are tax deductions to offset the taxes payable on the RRIF income.

Now, what to do with that Life Insurance Policy that was set up to pay the taxes? Change the beneficiary of the policy to your children who will receive the benefit tax-free outside the estate, further reducing probate fees.

Win-win for family and causes in your community.

This is just one strategy to look at your situation through a different lens.  Several methods are available to manage a large RRIF balance and there are other ways to minimize taxation on estate assets. We always work with you to determine which strategy best suits your situation.