Mastering Real Estate Taxes
With Great Real Estate Comes a Great Tax Burden
Consider, for example, Sandra* and David*, a West Vancouver couple in their late 60s. Since the 1980s, the couple has accumulated various real estate assets, including farmland, commercial properties, and storage warehouses. Their initial investments of about $5 million have matured into a portfolio valued between $20 and $25 million. Upon their passing, however, Sandra and David’s children could inherit a substantial tax burden of around $3.75 million – $5 million million in capital gains tax on their real estate holdings.
What are their options?
Option A:
Liquidate
Liquidate all of some of the estate and pay the capital gains tax with the proceeds. This will make their family shoulder a tax burden of about $3.75 million to $5 million and miss out on potential income and future appreciation of real estate values.
Option B:
Finance
Keep the properties and get financing such as loans or line of credit from the bank to pay the capital gains tax. This will keep the wealth generated by the real estate intact, but it will cost their children around $270,000-$360,000 per year in interest.
Option C:
Whole Life Insurance
Use the tax-free death benefit that comes with Whole Life Insurance to pay the capital gains tax. This option only costs them what they paid towards the policy. For example, if they paid $100,000 towards their policy, it will still cover the costs of the capital gains tax.
The best option couldn’t be clearer. Option C has all of the benefits with none of the costs.
How could our client save millions through Whole Life Insurance?
Like all Whole Life Insurance policies, Sandra and David’s policy includes a tax-free death benefit and by going with a higher guaranteed death benefit heir specific death benefit totals around $5 million dollars, which is enough to cover their properties’ capital gains tax) they only need to pay the premiums to get this amount upon their passing.
So, even if they passed away tomorrow just one year after setting up their policy and only contributed $100,000, their children would receive a substantial death benefit, nearly covering 100% of the tax burden.
Paying Pennies on the Dollar for Capital Gains Tax
Whole Life Insurance is the optimal strategy for real estate owners to protect their legacy, reduce tax burdens, and preserve wealth for future generations. The cost of obtaining a Whole Life Insurance policy pales in comparison to the potential tax burden and it secures a substantial benefit that keeps your wealth intact.
* Case study is based on real clients. Names have been changed for privacy.
