Asset Protection – How to Get it Right

Asset Protection – How to Get it Right

It is as true today as it was 2500 years ago when Lao Tzu said: “When the student is ready, the teacher will appear.” For the last five years I have been teaching risk management solutions at the university level. During this time I have learned that to be a good teacher one must also be a persistent researcher in the search of better solutions for clients’ most shared needs.

The aim of this month’s article is to proportion the lesson I learned from a recent lunch I had with Andrew Rogerson, one of my teachers, a lawyer at who has developed a specialty niche in Toronto that focuses on Estate Planning and Asset Protection both Onshore and Offshore. Our conversation was chiefly focused on legal solutions a client may use to avoid asset protection strategies being set aside by the courts.

At the beginning of our lunch Andrew made the point that all credit protection strategies should be made at a time when the client is clearly not insolvent or on the eve of bankruptcy. Andrew clarified this by stating: “Planning must be justifiable in terms of non asset-protection objectives.”

He illustrated this concept by recounting the merits of the case of Ramgotra (1996) where the Supreme Court of Canada held that the settlement of funds transferred from non exempt RRSP’s into a RRIF managed by an insurance company should continue its exemption position from creditors’ hands. The Court’s rationale was that the transaction was part of a authentic retirement planning exercise. This was so, already though the end consequence was the move of funds out of the reach of Dr Ramgotra’s creditors. The exact course of action by which Dr Ramgotra managed to keep his RRIF proceeds was as follows. He transferred non-insurance managed RRSP’s into an insurance administered RRIF in 1990. This was done in good faith at the suggestion of his Certified Financial Planner. The disposition took place within 5 years of bankruptcy.

The court held, however, that although the assets vested in the trustee in bankruptcy, the trustee could not deal with them and had to return them to the bankrupt (Dr Ramgotra) upon the bankrupt’s release. This was because the Bankruptcy & Insolvency Act (“BIA”) precludes the trustee from dealing with assets that are exempt from execution or seizure. The court held that there was no evidence of fraudulent intent. The move was done in good faith as part of normal prudent retirement planning.

The Insurance Advantage

As it stands as a general rule of thumb, all assets of an individual or entity are security for unpaid debts owing to a creditor. This applies whether or not the individual or entity is bankrupt. Traditionally, life insurance products have been given special protection against the claims of creditors under provincial legislation. The legislation, which is fairly consistent across Canada, is intended to protect the rights of the beneficiaries under the contracts. consequently products offered for sale by a life insurance company are generally creditor protected.

The definition of insurance products in all provinces includes annuity contracts. Most RRSPs and non-registered investments issued by insurance companies take the form of an undertaking to provide an annuity and as such fall under the definition of life insurance under provincial legislation. Many provinces do not provide creditor protection for non-insurance RRSPs and no province provides creditor protection for non-registered monies held in non-insurance investment vehicles.

Creditor protection during the lifetime of the owner can be achieved in two ways; by making an irrevocable beneficiary designation in a life insurance contract or by designating as beneficiaries certain family members stated in provincial insurance legislation.

After the death of the life insured, where an appropriate beneficiary has been designated, the creditors of the deceased are prevented from seizing the policy. The death assistance of the policy is specifically excluded from the estate of the owner. This is because the proceeds flow directly to the beneficiary and are exempt from the claims of creditors.

It should be noted that creditor protection only exists where the policy is owned by an individual. Policies owned by a corporation offer no direct creditor protection however a properly implemented corporate structure can unprotected to creditor protection. Where creditor protection is important, it is advisable to name different or contingent beneficiaries within the protected class, since the exemption from seizure can be lost if the designated beneficiary dies.

Insurance products fall into two categories; life insurance policies, and deferred annuity contracts. When hearing of ” a life insurance contract” most people think of a traditional life insurance policy where one pays a regular stream of premium payments and a death assistance is paid to a designated beneficiary upon the insured’s death. However, accumulation and investment products sold by life insurance companies are “deferred annuity contracts” and as such also qualify as life insurance policies.

Cash can be accumulated within a traditional life insurance policy unprotected to certain maximums imposed by the Income Tax Act. Within these maximums the investment growth is not unprotected to accrual taxation. This is commonly referred to as an “exempt policy”. Furthermore, in most circumstances, the policy fund or cash value is paid out to the designated beneficiary as a tax free assistance in addition to the confront amount of the policy. This characterize makes accumulating and investing funds within an exempt policy by an individual an attractive tax deferral and estate planning tool, particularly when combined with the additional value of creditor protection.

These structures offer tax minimization solutions that can not be obtained by run of the mill investments. For example there are specialized instruments governed under insurance legislation that provide benefits that create the following end results:

  • All personal deposits can be structured to be deductable over time.
  • Large annual deductions are provided each year against income for the rest of your life or sooner. Money would be invested on a deductable basis, the money grows tax free.
  • The individual retires tax free, dies tax free, and all the while having your savings protected from your creditors.
  • The personal deduction creates on a cash on cash return every year, year in and year out in a plan where tax will never be paid as you use the funds for either retirement or investing.

As we finished our lunch Andrew left off our meeting with sharing a truism that I found to be the gem of the complete afternoon. “Peter the sign of a true specialized is someone who knows when its time to know when to seek out other professionals with complementary skills in areas of asset protection and insurance contracts. A dangerous specialized is someone who does not know that they don’t know but acts as if they do. The problem with this is clients don’t know the difference until it’s too late!”

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