Intergenerational Wealth Transfer Through Life Insurance

I recently worked on an interesting case with a QFS advisor. The husband purchased a policy on his wife, but he wanted to maintain ownership of it. The husband is anticipating that he will pre-decease his wife, as a result, the advisor correctly sought additional confirmation about the taxation upon the husband's death.

It is important to note that generally, any time a policy's ownership is changed, there may be a taxable policy gain to the transferor. This transfer is taxable as income, not as a capital gain. On the death of the owner there are technically two taxes to consider - the terminal return and probate. However, there are special provisions that exempt taxation in specific circumstances. These circumstances are listed below:

1. Transfer to a Spouse or Common-law Partner during life

The ITA provides for a tax-free rollover if the transfer is a result of the settlement of rights arising from the dissolution of the union.

2. Transfer to Spouse or Common-Law Partner at Death

In the event of the policy holder's death there is a tax-free rollover to the surviving spouse.

3. Intergenerational Transfers

There is an automatic tax-free rollover option when the policy is transferred to a child or the child of the recipient (grand-child), and the child or grandchild is the insured. This allows for the parents to control the policy until the grand-child is capable of assuming control of the policy.

The definition of a child could be grandchild, great-grandchild ,or even a child under 19 years of age who is entirely dependent upon the person for support.

Here is a document from Manulife for further review. If you have any questions please get in touch, I would love to chat!

Best Regards,

Ken Poniatowski, CFP®

Business Development Specialist

Qualified Financial Services