An Interesting Tax Advantage


I have been a fan of the cartoon strip “Wizard of Id” since the ’60’s. I think there is an edge to it and while not every one is amusing, some are brilliant. One came up recently in a meeting with one of our network partners.

Dennis Serre, of Serre Financial in Toronto is always the source of knowledge on income tax related, structural and plan oriented details. He is our go-to-guy when the technical morass appears and the complexity starts to make the old head hurt.

Today’s topic was about transferring personally owned life insurance to a controlled corporation.

The advantage, available to everyone, is that the pre-tax income required to pay premiums inside an active corporation is about 35% less than the income required to do it personally. Generally a no-brainer. Take a look if you have not already been advised to do so.

Where it gets more interesting and considerably more technical is when the fair market value of the policy is greater than its cash surrender value. The most common circumstance is where there is an older policy with a change in the health status of the insured.

There are many other situations where this will become something to explore.

  1. Consider it seriously if you have older guaranteed, non-participating policies like term100 or level cost universal life.
  2. It might work with participating insurance, depending on the age of the policy.
  3. Every once in a while it works with term insurance.
  4. Run to the phone if you have term to 100 and since you purchased the policy, your health status has changed adversely.

The immediate advantage can be worth as much as 30% of the valuation amount that exceeds the cash value, less any immediate taxes due. Sometimes none due now.

You need Dennis’ people to help you with the technical stuff. Their forte!

There is a cost to do so of course. Approximately $2,000 per policy to do the required valuation, the paperwork like preparing resolutions, letters of instruction, pre-filled forms for the insurance company, even accounting entries and an explanation for accountants. Trust me on this, you will need the explanation. The majority of accountants will not believe this works.

But, and exceptionally but, you can get a free estimate of the likely value that will result before you need to proceed with the final valuation, and the documentation and the fee. Seeing the potential benefit before you pay the fee is almost unheard of.

Pay attention. This is not a do-it-yourself project. Here’s why.

Sometimes the Wizard of Id has important insights. In an old cartoon, the king has a peasant on the gallows ready to be hung. The peasant cries, “My lawyer said there is a loophole.” The king replies, “You are wearing it.”

As with every other technically based tax structure, the documentation and a professional valuation is crucial. Do not go cheap here.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. | Twitter @DonShaughnessy | Follow by email at moneyFYI

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