Most of us become entrepreneurs to bring a vision and a passion to life. This allows for many things such as freedom, flexibility, enjoyment and success. Unfortunately, one of the costs of success is that little three-letter word that we are all too familiar with, TAX.
I was recently having a conversation with John Anderson, a business owner whom I have known for several years. He and his wife Barb have owned a successful family enterprise that they started several decades ago and after a relatively smooth transition, now have one of their three children owning and running the business.
Over the past few decades, the Anderson’s have been able to run a very profitable business and, like most business owners, have saved their profits in a holding company.
They have invested their savings into a mix of rental properties (residential), private investment pools (containing stocks and bonds) and they own the building in which their family business currently operates. John and Barb generate more than enough income from these investment holdings to support a great lifestyle for the rest of their lives and will ultimately leave these assets behind for the benefit of their children and grandchildren.
They are excited about the fact that they will be able to leave a legacy to their heirs, but were curious about how they might also create a legacy that extends beyond the family, that would benefit the causes that are meaningful to them. John and Barb are also unsure about how to plan for their estate because they are aware that there will be tax to pay at some point, they’re just not sure when or how much it will be.
After some in-depth conversations about their vision for the family, the legacy they wish to leave and the financial figures that support it all, we were able to come up with a plan of action that encompasses all of their wishes with the tax planning they will need for their estate.
The plan is to utilize a combination of life insurance with charitable giving. John and Barb will purchase a joint-last-to-die permanent life insurance policy that will pay out when the last of the two of them dies and the policy’s death benefit is derived from our calculations of what their final taxes owing will be, come estate time.
The policy will be owned and funded by their holding company and when the last of the two of them has passed away, the proceeds of the life insurance policy will be paid, tax-free, to the holding company. The proceeds can then be paid out of the company tax-free using what is called a Capital Dividend, which is a special type of tax-free dividend.
A donation of the proceeds is then made to the charities and/or foundation(s) of John and Barb’s choice, as directed in their wills, and the estate receives the tax credit for the donation.
The result is that the donation credit takes care of the taxes owing, the heirs receive the investment assets fully intact (via the holding company shares) and there is a meaningful legacy created by way of the significant charitable donation.
This is the ultimate win-win for the Anderson family and the causes they care about.