Client Profile: Michael & Emily
- Both aged 60
- Four adult children
- No debt
- Home and cottage valued at $2.75 million
- $4 million held in investments
- $2 million inside their holding company (formerly the professional corporation)
Income Assumptions
- 5.5% return earned on investments
- 2.5% CPI (inflation)
- $120,000 annual spending - indexed
- Receive full CPP and wish to protect OAS
- Between personally owned investment accounts (RRSP, TFSA, etc) and corporate dividends, they have little need for most of the retained earnings in the corporation.
No Insurance Solution:
With no insurance strategy, Michael & Emily are leaving a significant amount of estate value on the table and are paying more in taxes.
Projected Values (Age 90/Year 30)
- Total Estate Value: $13.3M
- Lifetime Taxation: $3M
- Non-Registered + TFSA Assets: $5.5M
- RRIF: $1.35M
Proposed Insurance Solution:
- Purchase $2 million joint last to die PAR whole life insurance policy
- Pay the annual premium of $74,850 for a guaranteed 20 years.
- The cash surrender value of the policy is estimated to be $3.55 million at age 90.
- The face value of the policy is projected to grow to $4.42 million.
- Policy loans against the cash value can be used to help fund retirement in a tax-efficient manner.
- The policy beneficiary is the corporation, with the premiums paid using cashflow or retained earnings from the corporation.
- Implement an estate freeze & establish children as shareholders
- All four children become common shareholders of the corporation
- Upon 2nd passing, the death benefit of the policy credits the Capital Dividend Account which can then be paid out to shareholders tax-free (net of the adjusted cost base).
Projected Values (Age 90/Year 30)
- Total Estate Value: $15.43M
- Lifetime Taxation: $2.84M
- Non-Registered + TFSA Assets: $4.4M
- RRIF: $1.35M
Results
- Additional Estate Value = $2.13M (+16%)
- Retained Earnings: ~$100k after paying out $1.37M in Dividends
- Eliminate virtually all final tax liability from the corporation, while tax-efficiently shifting assets outside of the corporation.
Summary:
By Michael & Emily adding the insurance solution, a significant financial advantage was created in every way, while also diversifying away from investment risk relating to their portfolio. They also maintain far more liquidity than they require.
The proposed plan resulted in an equivalent internal rate of return of 11.9%, providing an estimated 122% more wealth by age 90 in comparison to investing at a baseline 5.5% return.