Corporate Tax Planning Using Life Insurance

hey everybody Joe here from Avalon in this video I'm going to outline one way that corporate business owners can use life insurance as a tool to reduce tax increase value and get access to retained earnings on a tax efficient basis now I'm not an expert on insurance I'll be walking you through just the basics of this strategy but we'll be hearing also from our guest financial planner Lane Cuthbert later on in this video he'll take us through an example of how this tax planning strategy actually works in practice so all that and nothing else coming right up [Music] thank you [Music] first up we'll do a quick intro to different types of life insurance term life insurance is one of the more common types of life insurance it offers a set benefit for a set period of time I.E the term for a fixed cost which is called the premium the most common terms are 10 years 20 years and 30 years another less well-known type of insurance is called permanent insurance or sometimes referred to as whole life insurance whole life insurance provides insurance from your current age up until age 100 what makes this type of insurance unique however is that you're allowed to hold an investment inside the insurance policy now without getting too technical the rules allow for an investment to be held within an insurance policy as long as it doesn't cross above the MTAR line or MTAR line and because Paul wanted to see if I could say this without stumbling the MTAR Line Stands for maximum tax Actuarial Reserve line in Broad Strokes it's a federally mandated line that distinguishes an investment from an insurance the limitation is put in place because holding Investments inside of an insurance policy is a tax efficient strategy and the tax man wants his cut of the investment proceeds so what type of returns does an insurance policy get well there are several different insurance companies that offer these policies but they generally fall into these two main categories number one being participating policies and number two being non-participating policies surprise in a non-participating policy the returns are fixed at five percent for most companies in a participating policy the returns can often be higher because the participating part means that you're a co-op owner of the insurance company and unlike other passive income earned in a corporation the investment growth inside a whole life insurance policy does not affect the small business tax deduction so the investment held in your policy can grow tax sheltered without being counted towards the company's passive income limitations so now that we have a better understanding of how Whole Life policies work here comes the fun part for business owners corporately owned whole life insurance policies can be taken out on anyone with their permission of course so a business owner can use these policies as a tool to leverage retained earnings in the company for a multitude of different purposes it starts with a corporation owning a policy I.E the policy owner that policy is taken out on the life of a business owner the life insured so the corporation would use corporate dollars to pay for the insurance policy while these premiums paid are not tax deductible for the corporation they are usually still typically only taxed at the lower corporate tax rate compared to the business owner's own personal marginal tax rate so a much lower rate once the corporation starts paying premiums into the insurance policy the investment portion of the whole life policy begins to grow this is from a combination of deposits and investment returns and balance is called the cash value of this policy the cash value acts like equity in your house as it grows and becomes more valuable it can be used as collateral for a loan in our example the owner of the company is also the life insured so they can use the insurance policy to collateralize a loan which can be used on a personal level and the business owner can maximize the efficiency of this kind of strategy by repaying the loan with the death benefit of the insurance policy it's kind of morbid but a lot of tax planning is when done correctly this offers another fancy perk known as the capital dividend account credit a little-known stipulation of these policies is that when the proceeds of an insurance policy flow through a corporation are paid out to an orphan or a widow the corporation receives a credit in their Capital dividend account the CDA credit amount is equivalent to the death benefit of the insurance policy which means they can liquidate and withdraw corporate dollars tax-free using their CDA credit so what does this all mean for business owners well here's Lane with a demonstration of how this strategy can work thanks Joe for those of you who don't know me my name is Lane Cuthbert and I specialize in Advanced Insurance strategies that help business owners to reduce their personal taxes increase the value of their business and reduce the taxable burden on their beneficiaries who deal with the business after the business owner passes away and one of those strategies is through corporately owned whole life insurance so I put together an illustration let's take a look at it now so in this example we are using a female business owner she's aged 40 and she's choosing to put a thousand dollars a month of corporate dollars into this policy now there's a lot of information here but the three bits that we really want to be paying attention to are the required yearly premium the total cash value and the total death benefit so the way that we structure these policies is after the 20th year no more money needs to be put into this plan and the reason that we do that is because the investment portion is allowed to continue growing for the life of the policy with without ever risking going over the MTAR line and so this is what we're looking at in the cash value we consider all of this to be the tax-free Equity available in the policy so as this value increases it can be used to collateralize a tax-free loan against the equity of this policy now this business owner can retire really whenever she wants but let's fast forward and say at age 75 she decides to retire while at age 75 she would have 785 thousand dollars available tax-free that she could use in this policy to collateralize alone and be put towards her retirement towards investing in another business really the options are endless and the reason that banks will do this is because this policy costs nothing on a monthly basis and as long as the business owner passes away in the future the death benefit will always be higher than the equity value so let's fast forward a little further and say at age 88 in this business owner passes away and let's say that she timed her passing perfectly and spent a hundred percent of the equity that was available in her policy so say that she spent all 1.4 million dollars of the tax-free available money say she spent that well that's okay because when she passes away there would be a 1.7 million dollar death benefit that pays out and that money would be paid to the corporation now this is where we want to be very careful we don't want the money that gets paid out to go directly to the bank and pay off the loan right what we want to do is the beneficiaries would then put up some collateral so the bank is satisfied but the business owner still owes 1.4 million dollars but we want the proceeds of that life insurance to go directly to the beneficiaries the beneficiaries would then use the 1.7 million dollars pay back the loan the 1.4 right now they're debt free and they're left holding a couple hundred thousand dollars now the reason that we did that is because because when the proceeds of life insurance get paid out to a widow or an orphan it means that the corporation would receive a credit in their CDA account equal to the death benefit amount which means that the beneficiaries could then liquidate assets and withdraw retained earnings from the corporation up to the credit maximum of 1.7 million dollars so if that money is available in the corporation as they go to liquidate the business and shut it down they would then be able to take out another 1.7 million dollars tax-free so that means the beneficiaries are now holding approximately 2 million dollars tax-free and that's after the business owner spent 1.4 while she was still living so that's a total benefit of 3.4 million dollars now if you think that this example is a good fit for you you need to talk to the professionals at Avalon because understand these are extremely rough numbers so do not hold me against this if you want to know an exam people for yourself I'd happily put something together for you but at age 88 the approximate total tax savings by using this strategy is approximately 766 thousand dollars so like I said you should always consult the team at Avalon but if you think that this is the right fit for you let us know and we'll happily put together an illustration that's custom tailored to yourself so I'll pass it back to Joe alright hopefully you've learned something new about the benefits of using insurance through a corporation to add value to your business it's definitely an advanced tax planning strategy so we recommend connecting with a tax accountant as well as an experienced corporate financial advisor before getting started for some more common tax planning strategies check out the link below to our video on that subject and for more helpful content about building a thriving business you can always subscribe to this channel but thanks for watching and we'll see you in the next one cheers

Channel: Avalon Accounting

Views: 2,502

Keywords: Small Business Accounting, Small Business Bookkeeping, Small Business, Canadian Small Businesses, Online Accountant, Online Bookkeeper, Business Advice, Accounting Advice, Corporate Tax, Business Taxation, Tax Tips, Canadian Tax Tips, Build a Business

Id: KtPHNfMhqLA

Length: 9min 39sec (579 seconds)

Published: Mon Jun 19 2023