Now May Be a Good Time to Review your Estate Plan

Prior to the pandemic, the projected deficit for 2020 was estimated to be $20 billion. As a result of Covid-19, the actual deficit in Canada rose to over $300 billion. In 2022, due to pandemic emergency spending being eased the deficit has fallen significantly BUT still sits at almost $100 billion.

Covid-19 and its affects are influencing the way we plan for our future. During the period of lockdown and self-isolation, many people put a great deal of thought as to how to keep themselves and their families safe – not only physically but financially as well.

For some, this meant finally looking at the recommendations they had been considering about their life, critical illness, and disability coverage. For others it became a time to reassess their investment, retirement and savings plans, as we all know the results uncertainty can have on equity markets.

Then, there are the potential long-term consequences that this pandemic may have on estate planning and its primary objective of reducing the impact of taxes during life and at death.

As the national deficit has soared, the logical question remains: where is the money going to come from to help cover this? While the government may be loath to raise taxes, and politically that is something it might wish to avoid, there is no question that increased tax revenues are probably necessary.

For the past year or so, financial pundits have predicted that there may be an increase in the inclusion rate for taxation on capital gains. When the tax on Capital Gains was first introduced in 1972, the inclusion rate was 50%, meaning that amount of the capital gain would be taxed.

Over the years since, the inclusion rate fluctuated from this rate to 66 2/3% and 75%. It was lowered again in October 2000 to the current 50%. With the top personal marginal rate in Canada averaging approximately 50%, this results in the tax payable on a capital gain (realized or deemed at death) to be 25%. It is highly likely, that inclusion rate will be increased soon to help increase tax revenues to combat the huge deficit by which the country is now burdened.

If it increases to 75% (as it was from 1990 to 2000) the effective rate of tax on a capital gain will increase to 37.5%. This assumes that the top marginal income tax rate does not increase and if that is not the case the effective rate would be even higher. This will have a significant impact on the future cost of settling an estate due to the deemed disposition of all assets on death.

There are other steps the government could take to increase tax revenue. The purpose of this article, however, is not to monger fear nor is it to give the government ideas, it is more to alert you to the possibility that taxes will be going up in one form or another.

Why is this important?

It has long been an accepted strategy to provide sufficient estate liquidity to pay taxes due at death from the proceeds of a life insurance policy. In Canada we are fortunate to have permanent life insurance policies that insure an individual for their entire life with a premium that is guaranteed not to increase. It is feasible to be able to use these policies in an effective estate plan.

How will these products be priced in the future?

When pricing the product, life insurance company actuaries, pay particular attention to the prevailing long-term interest rate. For some time now, the long-term interest rate has been extremely low. This resulted in steadily increasing premium costs for permanent life insurance coverage.

Although recent economic circumstances have necessitated the Bank of Canada to increase interest rates, there is great uncertainty as to what impact the large amount of the deficit will have on long term rates.

So far, Canadian life insurance companies have not rushed to lower their premiums as a result of the increases in long term interest rates and it remains to be seen if they will. When the economy stabilizes and the government, under the pressure of the deficit, reduces the cost of its borrowing, low long term interest rates may once again be the norm, potentially increasing the cost of new life insurance.

Other factors that will increase premiums:

• Aging. Life insurance gets more expensive as you get older.

• Possible changes in underwriting guidelines could result in higher costs for some individuals.

• There are also life insurance industry accounting changes coming soon which could result in an increase in the pricing of permanent insurance policies.

How should you prepare?

It is highly probable that taxes, especially taxes on settling an estate, will increase. Combined with the possibility that the cost of new life insurance policies may also increase, now, is a good time to be reviewing your estate planning needs.

As always, please feel free to share this article with anyone you think would find it of interest.