Transferring an entrepreneur’s life insurance policy to his/her corporation can have its advantages, and, in some cases, without any tax implications for the shareholder.
Taking out a new life insurance policy on a shareholder can prove to be very costly for a corporation. However, a viable alternative can be for the shareholder to transfer a personally-owned policy on his or her own life to the corporation, both for the purposes of meeting insurance needs and for the resultant fiscal and tax benefits.
Tax consequences of the transfer:
Shareholders transferring their interest in a life insurance policy to a non-arm’s-length corporation may receive from that corporation the equivalent of the fair market value (FMV) of the policy. In this case, shareholders would be required to include in income only the amount by which the cash surrender value (CSV) exceeds the adjusted cost base (ACB).
Example:
Mr. X transfers an insurance policy valued at $100,000 to a corporation. The policy’s ACB is $75,000 and the CSV is $50,000.
The disposition will not result in any tax consequences for Mr. X and he can be paid a tax-free amount equivalent to the fair market value of $100,000.
Main advantages:
- Paying the premiums with money taxed at the corporate rate, which is less than the income tax rate for individuals;
- At the shareholder’s death, the death benefit may be paid tax-free (minus the ACB) to the other shareholders or to the individual’s estate.
Primary considerations:
- The cost of an appraisal to establish the policy’s fair market value;
- The need to amend the policy to designate the corporation as the beneficiary of the policy, rather than the shareholder’s family members;
- Loss of creditor protection for the death benefit and the cash surrender value;
- The fact that a corporation is holding an asset that is ineligible for the capital gains exemption ($800,000) if the corporation is an active business rather than a holding company.
Should you be interested in such a transfer, please contact us before taking any action so that we can determine whether this transaction is recommended in your situation and what the potential tax consequences might be.