You and your heirs must understand that not all of your assets will pass over to them tax-free. Let’s delve into the pressing issue of estate taxation, which can significantly erode the value of your real estate property and potentially cause business succession problems.

The 2024 federal budget will impose higher tax rates on capital gains realized after June 25. This could pose significant risk implications for family businesses, investments not in registered accounts, and cottage owners. Many of these individuals have witnessed a dramatic increase in the value of their properties in recent years. The capital gains tax will surge from 50% to 66.6% on capital gains over $250,000, potentially leading to a substantial increase in tax liabilities.

Capital Gains on the Family Business Many successful family businesses have accrued capital gains in the millions from the time the owner started years ago. Surprisingly, the tax payable can be so high that the business cannot afford the liability once the owner dies, at least without liquidating.

Family Business Life Insurance Strategy One way to cover the tax liability is to save for it. The problem arises if the owner dies too soon, the money gets used for an emergency or a new opportunity, or if the savings goal is impossible for the company to achieve. A better method might be to simply buy life insurance to immediately cover the entire estimated liability risk, which is due at the same time the benefit is paid upon the owner’s death (or the death of a surviving spouse). A sole owner may buy enough life insurance to add additional capital to offer stability if the company were to be sold, or where a wife, son, or daughter wants to take it over.

With the capital gains tax increase of 2024’s budget consider re-assessing your life insurance needs.

Capital Gains on the Cottage Perhaps you acquired a cottage that has increased in value from next to nothing, over several years of inflation while people have increasingly sought after vacation properties. Just like the business, a cottage can have capital gains growth. Thus, that asset can also later present you with a big tax liability. If you die or sell it, capital gains tax will be triggered on the portion that exceeds the amount originally invested. Consider passing the cottage on to the children. Personal life insurance, purchased with after-tax dollars, can offer a non-taxable death benefit to pay the tax. You can buy additional life insurance for business needs, or create future income for a spouse, or dependent child, if necessary.

Does your family want to keep the cottage after your death? If so, would you want them to inherit the cottage together with a large income tax bill? Where the property passes to the deceased’s spouse, taxation of the capital gain may be deferred. Once it passes to the next generation, tax is finally due at once.

Cottage Ownership Life Insurance The most effective and least expensive way to cover any capital gains tax liability on a family cottage is to purchase a life insurance policy on the owner(s). A married couple can purchase a joint last-to-die permanent life insurance policy for the projected amount due in the estate. The full amount is payable on the second spouse’s death.

An additional benefit is that by virtue of the life insurance guarantee, the entire coverage needed is available after the payment of just one monthly premium. If you die, your beneficiaries will have the cash to pay the debt, rather than having to quickly sell the cottage to pay taxes due. Consider taking out a permanent policy on your life (or a joint policy that insures your spouse as well) that will increase in value to meet the tax on the rising capital gain on your cottage property.