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spring 2007 |
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F
I N A N C E
Get
corporately-owned insurance working for you
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Jonathan Carpenter Photo |
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Can you invest your
corporate surplus in a tax-preferred universal life policy? Do you have
to buy another policy or can you use the one you already own personally?
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By MD Financial Staff |
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You already recognize that universal
life insurance can help you reduce your personal tax burden. You’ve
also incorporated your professional practice and built up surplus
capital in your business.
Now you are considering how you can take
advantage of universal life insurance within your corporation. Can you
invest your corporate surplus in a tax-preferred universal life policy?
Do you have to buy another policy or can you use the one you already own
personally?
Due to the small business deduction,
professional practice income earned and retained within your corporation
is likely taxed at a much lower rate than the rate you would have paid
had you earned that income personally. One way to put these lower cost
corporate dollars to work is to invest in a universal life policy where
the corporation is both the owner and beneficiary of the policy. Within
a corporately-owned policy, your money can be invested in guaranteed
interest accounts and market or index-linked accounts and your surplus
can grow without triggering any tax for you or your corporation while
the money is within the policy. On your death, the excess of the
policy’s death benefit over its adjusted cost basis will be added to
your company’s capital dividend account and can be paid out to your
heirs as a tax-free capital dividend.
You do not necessarily have to buy another
policy if you already own one personally. You may be able to transfer
the ownership of your policy to your professional corporation. However,
you need to analyze the tax and other implications of making that
transfer before you determine whether it is the best solution for you.
Items such as the purpose of the
personally-owned policy and the age of the policy can factor into your
decision to change your policy’s ownership. For example, if your
insurance needs can be met by a corporately-owned policy, transferring
ownership can mean you keep the required insurance coverage and benefit
by paying premiums with lower cost corporate dollars. If the
personally-owned policy is only a few years old, there may be relatively
minor tax implications to an ownership change, potentially making it an
attractive alternative.
MD Financial
includes CMA Holdings Incorporated companies offering financial planning
and a banking referral service through MD Management Limited, mutual
funds by MD Funds Management Inc. and MD Private Trust Company,
investment counseling services by MD Private Investment Management Inc.,
executor and trustee services by MD Private Trust Company and insurance
products by MD Life Insurance Company and MD Insurance Agency Limited.
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