As the saying goes, only two things in life are certain: Death and taxes. In respect to taxes, there are ways to reduce payments required upon a death in the family. In Canada, the greatest transfer of wealth will occur over the next several decades as the population ages and the estates of the elderly transition to their heirs. The expected one trillion dollars of accumulated assets is attracting interest. Are heirs prepared to manage large sums of money, real estate and investments? Effective planning can reduce the emotional and financial challenges of a poorly prepared will, or no will at all, the erosion of an estate to taxes, probate fees, legal and accounting costs and the possibility of tarnishing family relationships.

One effective tool to minimize the impact of all these issues upon death would be under the umbrella of an insurance policy.

Employing the benefits offered in a life insurance makes sense to potentially: Reduce the risk of financial ruin to your family or business; protect a business partners’ interest; maximize the value of your estate and transfer wealth to your heirs; reduce a corporate tax bill and protect the value of your business; take advantage of the ability to designate a beneficiary and bypass probate.

Could there be risk of financial loss to your loved ones in the event of an unexpected death? Are others dependent on your ability to generate income? Do you have partners in your business? Does your corporation hold surplus cash, perhaps in a holding company that is not required for day-to-day operations? Are you looking for tax effective strategies to transfer the proceeds of your estate to your heirs?

If you can answer “Yes” to any one of these questions, perhaps a discussion about the use of life insurance should be addressed.

How can personal non-registered assets be transferred to heirs in a tax effective manner? The life insurance strategy is called “Transgenerational Wealth Transfer.” Non-registered assets are subject to annual tax on the growth of the money; an important consideration is the annual taxes and estate taxes upon death. If current assets of non-registered money are not required while living and the intention is to designate these monies to heirs, an opportunity with life insurance can be considered. Purchasing a permanent life insurance policy with the ability to accumulate cash value, allows the growth of the premiums paid into the policy to be tax exempt (within limits). Proceeds of the life insurance go to the beneficiary tax free, maximizing the transfer of wealth to the next generation. The policy can be purchased on the child or grandchild of the owner, allowing wealth from the elder to transfer effectively from one generation to the next.

How does a business transition wealth to heirs through life insurance? The strategy is called a “Corporate Asset Transfer.” When it comes to reducing your tax bill and protecting the value of your business, business owners can significantly increase the after-tax value of their corporation by using the passive assets in their business. How does it work? Let’s use a practitioner as an example: Susan is the Medical Director of her clinic, a private corporation. After 15 years in practice she has generated significant profit and, as a result, her business is thriving and operating smoothly. At age 50 she’s considering her options for succession of the business. Her primary concern is to transfer the business—or proceeds of the business—to her children in a tax effective manner, while enhancing the estate value. She currently has $250K in her corporation’s holding account. The funds are invested conservatively in a balanced fund earning six per cent annual return. Last year when she had factored in the annual tax paid on the investment (corporate tax rate 45 per cent), the net return was 3.3 per cent. Upon death this account would be subject to capital gains taxes and estate fees.

Insurance offers an alternative to reduce corporate tax. Although complex, Susan’s corporation becomes the owner and beneficiary of a $1M life insurance policy on Susan’s life. Over a period of five years the sum of $250K would be invested into the policy, allowing it to grow tax sheltered in an investment suitable to Susan’s risk tolerance. This has the ability to greatly reduce Susan’s corporate tax bill. At time of death the corporation receives the insurance money, then pays out the death benefit minus the Adjusted Cost Basis (all premiums paid minus the cost of the life insurance ) as tax free dividends, through the Capital Dividend Account( CDA). The ACB is paid out as at taxable dividend, benefiting from favorable tax rates.

Who qualifies? This strategy is best suited for practitioners who are incorporated, between the ages of 50-80. As in the example, you will require the business to purchase life. If you don’t already have a policy, you will need to be in good health to qualify for insurance. Your intention is to pass “locked-in” wealth from the business to your heirs. You have surplus cash flow available in your business. Finallly, you’re interested in a tax sheltered, flexible investment to house a portion of your corporate investment.

Critical to the strategy is qualifying for life insurance. During the earning and growth years of a business it would be prudent to purchase a low cost, fixed term, guaranteed, renewable and convertible life insurance policy. Getting insurance in place early preps an ND to utilize this strategy later on in his/her career. Age being another relevant factor in cost, applying earlier is better. As affordability is critical in having this strategy work, effective planning makes sense. Life insurance affords the individual or business with certainty and assurance to deliver their assets to whom they want and when they want, while maintaining control.

Published in the BCNA Bulletin Spring 2013

Insurance concepts and corporate tax strategies can be complex. The information in this article is presented for general knowledge and the content should not be relied upon as containing specific financial, investment, tax or related advice. Practitioners must seek their own independent professional advice to discuss their own personal circumstances before implementing this type of arrangement.

E&OE/2013 SBILLAN Wealth solutions doing business as SB Wealth Solutions;

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