Thursday, December 22, 2016

Life Insurance: Your Money's Life After Debt


Paul AdamIn a post last week, I made reference to the argument that estate assets should be taxed after death, for just the CRA, though! Many people, sadly, depart owing substantial sums to creditors, on mortgages, banks debts, credit cards, and other unfortunate contingencies of life.
the betterment of society. How fortunate are those of us who die with debts owing to

In such a situation, is there a way to protect at least some assets for the collectors after death and preserve a legacy of sorts? Life insurance does offer a way to use smart investing and smart estate planning to pass your money on to your beneficiaries after you die, at least up to a point.

The Supreme Court of Canada has been satisfied for the better part of 60 years, at least since the decision in Kerslake v. Gray, [1957] that when a person names a beneficiary of a life insurance policy under the Insurance Act, the proceeds of that policy do not form part of the deceased's estate, where they would become fair game to the taxman and to various creditors.

Provided that a person makes the appropriate arrangements during his or her lifetime to acquire a life insurance policy and pay premiums regularly, the money that accrues in that policy will be beyond the reach of any creditor of that person's estate. This province has also extended that same exemption from falling into an estate to other registered plans, like an RRSP (see Amherst Crane Rentals Ltd. v. Perring, Ontario Court of Appeal, 2004).

If you've heard the arguments that you should start investing in life insurance while you are young, let me now add another. In Moody v Ashton (Saskatchewan Queen's Bench, 2004), the Court considered whether premium payments into a life insurance policy should be exempt from seizure by a creditor, even if the policyholder was making the payments, knowing that he or she had other debts to pay and was soon to be insolvent. One might worry in such a circumstance that those regular payments to life insurance should stop, and be remitted to creditors, lest the creditors come for the entire policy!

The Court actually ruled, that as long as premiums on a life insurance policy were not being made with the specific intent to defraud creditors, by shifting money out of their reach, the insurance policy or the amount paid on premiums should be exempt from seizure.

There are limits, of course. Someone could not begin large pre-payments of premiums, or purchase additional life insurance on the eve of insolvency. This would be a too-blatant an attempt to defraud those creditors.

The reasoning in Moody has seemingly never been tested in Ontario Courts (though there's every reason to think the very thorough judgment would pass muster), and it's seemingly never been applied to regular contributions to other savings like RRSPs in the face of an impending insolvency.

But Moody showcases yet another reason conscientious last will planning, beginning when times are good, can provide a little shelter from a financial storm later in life.

- Paul B. Adam, Toronto
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