Is Corporately Held Insurance Right for You?

“If the Federal Government removes the Pipeline Method, having corporately held insurance will allow capital gains to be taxed at a lower rate. Now more than ever, corporately held insurance is a sound financial move.”

Recently, I’ve been contacted by many lawyers, investment advisors and clients asking about the benefits of Corporately Held Insurance – insurance owned by an incorporated business rather than an individual. It is most commonly put in place when a corporation is profitable and they want to be able to protect their interest if an owner or key employee dies.

Proposed Federal Government Tax Changes

This increased interest in corporately held insurance is largely due to the proposed tax changes that were released by the Federal Government on July 18th, 2017 – changes that are causing many private companies to reassess how corporately held insurance may be a useful tool as part of their current operations and risk management, as well their estate plan.

How Could Tax Changes Affect Capital Gains?

In the corporate world, one of the specific concerns with the proposed Federal Government changes is that it could limit the ability of business owners to convert the regular income of a corporation into capital gains, which are taxed at a lower rate.

Corporately Held Insurance: A Viable Solution

While these changes may or may not occur, what is certain is that corporately held insurance is a solid and viable solution for many issues that may arise if these tax changes are implemented.

With corporately held life insurance, the company is listed as the owner and the beneficiary of the policy on the insured individual’s life. Policy owners must have an insurable interest in the life of the insured individual, which limits the coverage to shareholders and family members.

The major benefit of corporately held life insurance is through premium payments. Similar to personal policies, premiums are paid in after-tax earnings; however, unlike personal tax rates, corporate tax rates are significantly lower. The lower tax rates greatly reduce the gross earnings required to make those premium payments.

How Capital Gains Work Now

Currently, if someone owns shares of a company and they die, the shares are deemed disposed of at fair market value. This triggers a large capital gain, as most private company shareholders didn’t initially pay a very significant amount for their shares. For example, if shares were initially purchased at $100, and were worth $1,000,000 at the time of the shareholder’s death, the capital gains would be significant.

The Pipeline Method

The strategy that has been used by tax advisors and lawyers is called the Pipeline Method. This method keeps taxes on capital gains at 25% rather than what could go as high as 44%. Basically, when the shareholder dies, it triggers a capital gain, and financial advisors or lawyers would take steps to allow the company to pay no more than the 25% tax, allowing the capital gains to be taxed at the lowest rate.

What Could Change

If the proposed Federal Government tax changes take effect next year, the Pipeline Method could disappear, resulting in capital gains being taxed at a much higher rate. Therefore, having corporately held insurance may be the right alternative for you.

A Viable Solution

If the Federal Government removes the Pipeline Method, having corporately held insurance will allow capital gains to be taxed at a lower rate. Now more than ever, corporately held insurance is a sound financial move.

Things to Consider before 2018

• How to take salary and dividends out of your company
• How to invest your money in your corporate holdings and look for tax-efficient ways to do so
• Look into your succession or estate plan and inquire as to whether or not the rules prevent you from taking advantage of the Pipeline Method

Let MGF Advisory Help

Marco Faccone, CPA, CA, CFP has long specialized in the area of corporately held insurance and estate planning, advising and assisting shareholders with succession and wealth accumulation strategies. Marco has worked alongside estate lawyers and tax accountants to offer his clients a professionally tailored and value-added plan. Contact MGF Advisory for more information regarding corporately held insurance and succession planning.

Categorised in: corporate insurance, insurance

This post was written by Marco Faccone