New Trends in Insurance Planning

Transcription

1 PlanningWise Inc. Tax, Succession and Estate Planning New Trends in Insurance Planning James W. Kraft CA, MTax, CFP, TEP, CLU PlanningWise Inc.

2 Engage Monitor Gather Implement Analyze Present

3 Agenda s Split Dollar Critical Illness Policies s 10 / 8 s Insured Annuities s Portfolio Diversification s Transferring Personally Owned Policies 3

4 Split $ CI The Strategy s Jointly owned CI policy s Health & Welfare Plan owns the base coverage and pays the base premium s Executive owns the refund of premium rider and pays the extra charge 4

5 Split $ CI Premium for base policy Et Extra charge for premium refund 5

6 Split $ CI Why s Company provides a very good benefit s CI premium is not a taxable benefit s CI benefit payment is not taxable s ROP provides a good rate of return (9.7% to 7.1% after-tax) tax) 6

7 Split $ CI The Strategy s M 45 ns, $500,000 CI policy s CI product costs $6,237/yr s ROP rider costs $4,188/yr Level cost coverage to age 75 7

8 Split $ CI If there is a critical illness s The executive receives the benefit as per the health & welfare plan s But he would lose the refund benefit 8

9 Split $ CI If there is NOT a critical illness s The executive receives the refund of premiums as the owner of the rider 9

10 Split $ CI Pieces s Health and welfare plan s Split dollar agreement s Shareholders resolution s Directors resolution 10

11 10 / 8 The Strategy s Client deposits cash into policy s Cash value secures a loan s Loan used to earn income s Cash value earns 8% s Loan interest is 10% 11

12 10 / 8 Strategy Insurance Company or Bank Base Premium Extra Deposit 12

13 10 / 8 Why s Loan interest expense deductible s Interest t on cash value tax deferred d s Tax savings pay mortality charges s Method of buying insurance 13

14 10 / 8 Flavours s Collateral loan s Policy loan 14

15 10 / 8 CRA s Has named 10/8 as one of its 2009 audit initiatives s They might be looking at the use of the funds s They might be looking at linkage between 10 and 8 15

16 10 / 8 Pieces s Document flow of funds s Income to absorb b deductions d s Need an exit strategy 16

17 Insured Annuities The Strategy s Capital is invested in an annuity s Insurance used to replace capital s GIC look alike 17

18 Insured Annuities

19 Insured Annuities Why s Generate income s Preserve capital 19

20 Insured Annuities Fit to retirement planning Portfolio of strategies Longevity risk Investment risk o Inflation risk 20

21 Insured Annuities $500, Couple aged 65 5% IA Income 25,000 34,967 Taxable 25,000 13,037 Taxes 10,000 5,215 Insurance 6, Cash Flow 15,000 23,087 21

22 Insured Annuities Design Options Joint Last Joint J i t First Him Her Joint last reducing on 1 st death 22

23 Insured Annuities Product Options Term to 100 Universal U i l Life Minimum pay Prefunded 23

24 Insured Annuities Timing Options Buy the insurance early Buy B the annuity later 55/55 $3,387 60/60 $4,995 24

25 Objective Options Regular IA Customized IA Income more +/ - +/ - Family same Charity none + / - 25

26 Insured Annuities Pieces Review all design options Ensure E policies i match Keep track of insurance policy Cover inflation separately 26

27 Portfolio Diversification The Strategy Conservative capital is analyzed Insurance I replaces a portion Long term positioning 27

28 Portfolio Diversification Options Futures Collectibles Real Estate Equity Funds Lg/Sm Cap Bonds & Debt Bonds & Debt Money Market Bank Accounts 28

29 Portfolio Diversification Why Improve family s financial position 29

30 Portfolio Diversification Example Couple aged 60, non-smokers Large L investment t portfolio $1,000,000 life policy Costs $9,770 30

31 Portfolio Diversification Example $1,000,000 life policy 9.0% 9 at life expectancy 11.1% 3 years earlier 7.5% 3 years later 31

32 Portfolio Diversification Example Portfolio in a Holding Company $1,000,000 life policy Costs $9,770 32

33 Portfolio Diversification Example Portfolios in a Holding Company Same S value as an investment t But extra value created CDA credit Value of shares depressed 17% BT equivalent 33

34 Portfolio Diversification Pieces Manage the policy Beneficiary B i designation Creditor protection discussion Corporate beneficiary Review estate plan 34

35 Transferring a Policy The Strategy S/H owns a policy Wants W t transfer to company 35

36 Transferring a Policy Cash Private Company 36

37 Transferring a Policy Why Extract corporate values Low L tax cost 37

38 Transferring a Policy Example Male aged 60 Owns O $1m policy Cash value is $150,000 38

39 Transferring a Policy Example Sell policy for $400,000 FMV ACB is $80, How should it be taxed?? 39

40 Transferring a Policy Example SS 15(1) says S/H deal at FMV Deeming D i provision i at SS 148(7) Non arm s length Transaction occurs at CSV 40

41 Transferring a Policy Example -- S/H position Proceeds of disposition 150,000 Adjusted t d cost basis 80, Policy gain 70,000 Extra 250,000 not taxed 41

42 Transferring a Policy Example -- Company position Purchase price 150,000 Adjusted t d cost basis 150, Extra 250,000 gets lost 42

43 Transferring a Policy Pieces Need a valuation Policy P transfer forms Change of beneficiary forms Agreement of Sale S/H resolutions 43

44 PlanningWise Inc. Specializing in tax, trust, estate and transition planning for individuals and privately held corporations Using a holistic approach, we facilitate the identification of key objectives that form the foundation when planning for major personal, business, and financial transitions. We know the importance of independent, professional advise upon which you can rely. Business Transitions Re-Structuring; New Business Venture; Adding A Partner; Buying Out A Partner; Business Loans; Selling the Business; Family Succession Personal Transitions Career Change; Marriage; Divorce/Separation; Re-Marriage; Birth of Children/Grandchildren; Empty Nesting; Retirement Financial i Transitions New Mortgage; Mortgage Elimination; Financing Education; Accessing Investments; Alternative Investments jkraft@planningwise.ca 44