You have worked hard to build your business and want to make sure you maximize the legacy you leave to your beneficiaries. One strategy that can be used to achieve this may be owning permanent life insurance inside your business. There are many considerations that need to be addressed. Ultimately, you need to sit down with your tax accountant and advisors to discuss your specific situation, but here are some of the basics that may help you get started.
If the following items apply to you and your business, then a corporately owned life insurance may be a solution;
- You are age 40+ and healthy and own or are a significant shareholder in a private corporation (CCPC).
- Your business has retained earnings or excess annual cash flow and/or investment assets not needed for daily operations, expenses or business purposes. And the business has been in operation for at least 5 years.
- You want tax- efficient manner to maximize your estate and transfer assets.
- You are looking for stable and predictable asset growth (asset diversification).
How it works;
If you own a private corporation/business that generates cash flow over and above what you need for daily business purposes, you can set up a holding company that can receive these assets/cash as tax-free dividends from your operating company. Since any investment earnings in the holding company are taxed yearly and any dividend distribution to you will be taxable as well, a more tax-effective way to hold and distribute these assets is permanent life insurance. The company purchases a permanent life insurance policy where the policy owner and beneficiary is the company and the life insured is you (the company owner or shareholder).
Growth in the life insurance policy is tax-free and all policy proceeds are paid tax-free to the corporation upon your death (there are no deferred gains).
Upon your death, your corporation receives the death benefit tax- free which will create a credit to your corporation’s capital dividend account. This credit can be used to pay tax-free capital dividends to the shareholders or your estate. This creates a tax-efficient channel from your holding company to your estate.
In essence, corporately owned life insurance can help protect your business and help you get more out of your company’s assets.
Photo by Austin Distel on Unsplash.