hot business insurance ideas kevin wark, llb, cfp cifps national annual conference
TRANSCRIPT
Hot Business Insurance Ideas
Kevin Wark, LLB, CFP
CIFPS National Annual Conference
Something Old, Something New, Something Borrowed…
#1 Shared Ownership/Split Beneficiary
Both concepts involve splitting costs and benefits of a permanent insurance policy between two parties
Can provide lower cost insurance to one party and enhanced investment returns to the other party
Possible applications include buy-sell, key person and collateral insurance
#1 Shared Ownership/Split Beneficiary
Removes CSV of Policy from operating company
Capital gains exemption Sale of Opco NCPI allocations and CDA
maximization Creditor protection
1. Shared Ownership
Operating company is owner and beneficiary of face amount of universal life policy
Shareholder (individual or Holdco) is owner and beneficiary of cash surrender value
Rights and obligations set out in split dollar agreement
Issues with shareholder benefits and tax arising on future disposition of the policy
#1 Split Beneficiary
Usually arranged between Holdco and Opco
Holdco is owner - names itself and Opco as beneficiaries in agreed upon proportions
Holdco receives tax free dividends from Opco to pay its portion of the premium
Opco has no ACB so larger CDA credit Less complex than shared ownership as
don’t have disposition if Opco is sold or beneficiary is changed in the future
#2 RCAs
Non-registered supplementary pension plan Designed for executives and shareholders of
private corps earning more than $100,000 pa Contributions subject to 50%
refundable tax and deductible to employer Earnings subject to 50% refundable tax Tax refunded when payments
made out of the plan and taxed to plan member
#2 RCAs
Benefits of RCAs: Creditor protection Ensures funding in place to pay
future benefits No current tax to plan beneficiaries
But not tax efficient vehicles unless…
#2 RCAs
You use an exempt life insurance policy as a investment in the plan.
Avoids payment of second level of tax on plan earnings.
BUT the death benefit becomes taxable when distributed.
#2 RCAs
Can avoid the death benefit being taxable by structuring as a “shared ownership” arrangement
Employer or employee owns the death benefit and funds this cost
RCA owns the cash surrender value and funds this through employer contributions
#3 Collateral Insurance
Deduction for premiums equal to NCPI
if following conditions are met:
Policy is assigned to a “restricted financial institution”
Assignment is required as collateral for a loan
Interest payable on the loan must be deductible for tax purposes
#3 Collateral Insurance
Deduction is available for any type of life insurance policy (not just term)
Size of policy must reasonably relate to the amount owing by the taxpayer
Taxpayer claiming the deduction must also own the policy
Premium must actually be paid in the year
#3 Collateral Insurance
Planning Opportunity: Bob is shareholder in a successful
private corporation (Bobco) In past 4 years Bob has received
additional bonuses totalling $600,000 (to reduce corporate income to $200,000)
Bob has lent after-tax amount of $300,000 back to Bobco
#3 Collateral Insurance
Bobco borrows $300,000 from bank and repays Bob
Bobco purchases a life insurance policy for $300,000 and collaterally assigns to the bank
Bob can invest in policy on “shared ownership” basis
Bobco can deduct NCPI in respect to policy If Bob dies prematurely the
bank loan is repaid and his estate can withdraw$300,000 tax-free from Bobco
#4 Charitable Gifting
Shareholders in a private corporation have choice of making charitable donation personally or by using corporate funds
There may be significant advantages to structuring the gift through the corporation
Donation by individual is a credit, donation by a corporation is a deduction
#4 Charitable Gifting - Example
Joe Dambro is the sole shareholder of Dambro Construction
Joe went through crystallization - $500,000 in preference shares with full ACB
Joe is owed $200,000 by company Joe in 50% tax bracket, company at 45%
tax rate for earnings over $200,000 Joe wants to make $100,000 charitable
gift
#4 Charitable Gifting
Gift of Insurance Dambro Construction could be the
owner/beneficiary of a $100,000 policy on Joe’s life
On Joe’s death the insurance proceeds would be gifted to charity by the company
Note - it is not possible for Dambro Construction todesignate charity as beneficiary and claim as adeduction
#4 Charitable Gifting
Gift of Insurance Premiums not deductible - slight
advantage to company paying premiums Dambro Construction can deduct gift of
$100,000 - $45,000 in tax benefits Death benefit creates $100,000 capital
dividend account - can be paid out tax free to Joe’s estate
#4 Charitable Gifting
Preference Shares Joe could gift $100,000 in preference
shares to charity other than a private foundation
Dambro Construction would purchase $100,000 of insurance on Joe’s life
On Joe’s death the insurance policy would redeem preference shares owned by charity
#4 Charitable Gifting
Preference Shares Joe realizes full benefit of charitable
credit ($50,000) as no gain resulting from gift of preference shares
Charity receives dividends on shares while Joe is alive, and $100,000 on his death
Insurance proceeds create capital dividend account - can pay tax-free dividends
#4 Charitable Gifting
Shareholder Loan Dambro Construction would borrow
$100,000 to repay part of shareholder loan
Joe would gift $100,000 to charity (can be a private foundation)
Dambro would purchase $100,000 insurance on Joe’s life - could be assigned to repay new loan
#4 Charitable Gifting
Shareholder Loan Portion of premiums could be deductible
as collateral insurance Joe can claim charitable credit of
$100,000 ($50,000 tax savings) Loan is repaid on death with insurance Insurance proceeds would create credit
to capital dividend account
#5 Corporate Back to Back
Objectives Increase investment yield and cash
flow Increase estate by reducing taxes Facilitate distribution of corporate
assets on tax-effective basis
#5 Corporate Back to Back
Typical client is 65+ and shareholder in private company with large accrued capital gain and taxable investments
Company purchases T100 or min pay UL100 (no CSV) on shareholder’s life - company is owner and beneficiary
Company liquidates investments and borrows funds to replace investments
#5 Corporate Back to Back
Corporation purchases a non-prescribed annuity on shareholder’s life with a zero guarantee period
Annuity payments sufficient to fund insurance premiums and after-tax cost of interest payments
Death benefit repays loan to bank
#5 Corporate Back to Back
Tax consequences during lifetime Annuity is non-prescribed and
taxed more highly in early years Interest expense deductible
(subject to October 2003 REOP proposals)
NCPI deductible
#5 Corporate Back to Back
Tax Consequences on Death Company shares deemed to be disposed
of at fair market value - insurance and annuity have no value for these purposes
Company value also reduced by bank liability
CDA credit generally equal to death benefit that can be flowed out tax-free to estate
#5 Corporate Back to Back
Risks liquidation of corporate assets may have
tax consequences and/or penalties for early termination of contracts
interest rate fluctuations Lack of flexibility - no commuted value different insurers recommended
#5 Corporate Back to Back
Risks - “GAAR” could the CCRA treat this as one
non-exempt life insurance policy? has fair market value of corporation
really been reduced? is interest deductibility really
appropriate? (Singleton case supports deductibility but must now consider October 2003 REOP proposals)
#5 Corporate Back to Back
Risks May 2002 - CCRA provided verbal
interpretation regarding taxation of annuity contract under Regulation 301
adversely affects calculation of income earned by annuity contract
issue appears to arise through drafting error - correction being sought by insurance industry
#6 Leveraging
Corporation owns policy on key shareholder and max funds the policy
On retirement shareholder borrows for personal purposes
Corporation guarantees loan and uses insurance policy as security
#6 Leveraging
1% guarantee fee recommended Loan interest is capitalized Insurance proceeds paid through
capital dividend account and used to retire loan including capitalized interest
Excess insurance proceeds for estate purposes
#6 Leveraging
Tax Consequences Policy accumulations tax-free in
corporation Assignment of policy as collateral not a
taxable disposition Loan payments to shareholder tax-free Taxable benefit minimized by guarantee
fee
#6 Leveraging
Tax Consequences Interest deductible if loan is for
business or investment purposes (subject to October 2003 REOP proposals)
Insurance proceeds through CDA tax-free
#6 Leveraging
Risks Arrangement being treated as an
RCA Taxable benefit from corporation
guaranteeing shareholder loan Creditors of corporation Sale of business Impact on capital gains exemption
#7 “10/8” Programs
Target market – business owners and high net worth individuals aged 40-60
Designed to reduce costs of permanent insurance protection
Provides access to cash values for investment purposes
#7 “10/8” Programs
Overview of Program UL policy with special policy loan
provision at 10% Collateral loan account earning 8% Guaranteed “spread” and/or
rates in the policy
#7 “10/8” Programs
Interest on policy loan deductible (subject to October 2003 REOP proposals)
Investment return in UL policy is tax deferred and on death converted to tax-free death benefit
Net return is positive due to interest spreads and deductibility
#7 “10/8” Programs
Example Client in 46% tax bracket borrows
$10,000 from UL policy at 10% After-tax cost of interest is $540
(5.4%) Compares with after-tax interest
earned of 8% (positive spread of 2.6%)
#7 “10/8” Programs
The Problem Policy loan is a disposition for tax
purposes Amount of loan – ACB = taxable
income ACB is reduced by NCPI Cannot withdraw full amount of
premiums on tax-free basis
#7 “10/8” Programs
The Solution: Shared ownership with private
corporation owning the death benefit NCPI allocated to corporation as death
benefit owner (larger CDA credit) Allows shareholder to loan out full
premiums without taxable income
#7 “10/8 Programs
Interest deductibility essential to program
Money borrowed to earn income from a business or property
Must complete Form 2210 and have approved by insurance company to claim deduction
REOP test – requires sufficient “profit” to utilize interest deduction over a long period of time
“profit” does not include capital gains
There are Great Opportunities for Selling Life Insurance in the
Corporate Market!