Corporate investment strategy
An investment strategy using tax-exempt life insurance
If you have a successful company, you probably have a corporate investment portfolio or excess cash flow that’s not needed to fund business operations. You may be planning to leave as much of this value as possible to your heirs. The amount your children receive after corporate and personal taxes may not be nearly as much as you had planned. Fortunately, you can help maximize the after-tax value of these assets using the corporate investment strategy.
Meet Mark and Susan. Both 55, they own a successful company and have accumulated a significant corporate investment portfolio in their holding company, HoldCo. What they don’t use for retirement they want to leave to their children. After working with their advisors, they determined their business will continue to generate $75,000 of excess corporate cash flow. Mark and Susan want to invest these funds and continue building a legacy for their children. They’re also concerned about the large tax liability at death. Their advisor estimates their total insurance need is approximately $2.6 million.
The challenge: Mark and Susan’s current strategy does not maximize the benefit of their hard work for their children.
- With corporate investments in HoldCo, the rate of return will be eroded by corporate taxes, both on investment earnings and on deferred capital gains.
- When the HoldCo investments are liquidated on the death of the second parent, the estate will wind up the corporation and the proceeds will be distributed as a taxable dividend.
- This will diminish the after-tax value of the corporate investments for the children — exactly the opposite of what Mark and Susan are trying to do.
The solution: Pay less tax and leave more with the corporate investment strategy.
- With the corporate investment strategy, Mark and Susan will use the corporation’s excess cash flow of $75,000 to fund a universal life policy for 10 years. The death benefit will cover their insurance need. The policy fund is invested to match their asset allocation objectives using the Sun Life Diversified Account.
- The policy fund grows tax-preferred during their lifetime (there is no tax on growth), as long as the funds remain within the policy.
- Upon death of the second parent, the policy pays HoldCo a tax-free death benefit, and this can enable the company to pay some or all of the proceeds from the life insurance death benefit as a tax-free capital dividend.
- Their children will receive the maximum after-tax value of the corporate investments — exactly what Mark and Susan wanted.
The result: The corporate investment strategy made a difference in excess of $1.8 million.
By age 85 (the average life expectancy of the last survivor), Mark and Susan’s estate will be worth $1.8 million more than if they had continued to rely on taxable investments.
The corporate investment strategy (CIS) is a cost-effective way to ensure that the fruits of your hard-earned business success go to your children, not to taxes.
Corporate investment strategy
* Illustrated values based on SunUniversalLife II joint last-to-die, COI payable to second death with Insurance amount plus policy fund death benefit. Assumed rate of 4% for the Sun Life Diversified Account, compared to a fixed income portfolio generating a 4% return.
Education and training
Seminar: Reviews the use of corporate-owned life insurance to increase the estate value of corporate-owned investments, with graphic presentation of the strategy's mechanics and benefits, and mention of some of the planning issues. This seminar is available from your Regional Sales Director. Contact your Individual sales support team for details.
Material for your client
Sales strategy sheets
This information is being presented with the understanding that it is intended for information purposes only. Unless specifically stated, the values and rates presented are not guaranteed. No one should act upon the examples/information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific case are considered.
Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies.
© Sun Life Assurance Company of Canada, 2019.