CIA Annual MeetingAssemblée annuelle de l’ICA

June 29 & 30, 2006 Ÿ Les 29 et 30 juin 2006Ottawa, Ontario

IND-3: Hot Concepts, How the Business is Sold

Personal & Corporate Estate Bond

Audience: Canadian Institute of Actuaries

Topic: Overview of Personal & Corporate Estate Bond with Explanation of Leveraged Life Insurance Aspects

Presenter: Cam MacIntyre, Regional Marketing Manager, Manulife Financial

Hot Concepts in the Life Insurance Marketplace

• Personal Estate Bond

• Personal Leveraged Life Insurance

• Corporate Estate Bond

• Corporate Leveraged Life Insurance

The Estate Bond

‘Using Mattress Money More Efficiently”

Or...How to maximize the amount your family will get from your passive investments.

What are Main Concerns for People in the Last Quarter of their lives?

1) Fear for money while both are alive (financial independence, conservative investing)

2) Once gone, concern for the spouse’s continued security (simplify investments, life-long solutions)

3) Once both gone, an orderly transfer of assets to the children and grandchildren (estate planning, insurance, will planning)

Who?Do you know anyone, say 65 to 75:

– healthy, – doing well financially, – certainly with enough income to live on, – a fairly conservative investor – with a long investment horizon – is concerned about next generations?

So…..• Then you may know the person who is acting

as the ‘guardian’ for money for the next generation….

• And you may know a person who would love this idea, because it is….– tax efficient– an estate multiplier– a guaranteed inheritance even if your client needs

to access more money from the pot they’ve put away!

Client ID• Personal money • Profitable Investment Holdcos and/or

Professional Corporations or• Significant cash/near cash investments

generating interest income• Interested in tax-deferral/tax shelter ideas • Longer term focus• Family orientation• Typically 50+

Invested Assets

Your useand benefit

Your family’s future security

There are two kinds of assets

• Assets earmarked for your family’s future security are often in low-risk, fairly to highly liquid investments

• Today they might earn 3% - 5% pre-tax, 2% - 2.5% after tax

• If we can move these investments to a tax-deferred environment, we might be able to double the yield, compliments of Revenue Canada!

Kinds of Assets to Consider?

How much to consider?

• These investments might normally be 10-20% of an “older” client’s investable assets

Case Study

• Clients are m65ns & f62ns.• They have $35,000 in GICs/Bonds for family security• Their accountant has reminded them (again) that

they are paying the highest tax rate on the money• Their goal is to maximize the amount that will

eventually pass to their family once they are gone.• The $35,000 is presently invested in term certificates

at 5.5%, and is subject to annual accrual taxation.• Personal Tax Rate is 35%

The Government Family

5.5%$1,925 interest

$1,251$674

$ 35,000GICs

Present Situation

Assuming death of the second spouse when the youngest reaches age 88 (27 yrs), what

will the family get?

1. Original capital $ 35,000

2. Growth on capital $ 65,335

3. Net to family $ 90,335

Is there a better solution?

Investments

TaxExposed !

TaxDeferred

$35,000

Tax Exempt Joint Life Insurance Contract

$ 7,910

Tax from Side Account $ 688

The Government

$ 27,090

Side Account4 years

Estate Bond

Assuming death of the second spouse when the youngest reaches age 88 (year 27), what will the

family get?

1. Original capital $ 35,000

2. Total death benefit $147,350

3. Net to family $147,350

Assuming 4.0% interest

Term CertificateTerm Certificate

5055

8891

$ 90,355

$ 147,350

5055

8891

Estate BondEstate Bond

Let’s Compare...

Comparison

GIC *Personal Estate Bond **

Total taxes payable $29,808 $688

Net to Family $90,355 $147,350

i.e. +$56,995

* assuming 5.5%, 35% tax

** assuming 4.0% interest

Client ID

• Profitable Investment Holdcos and Professional Corporations or personal money

• Significant cash/near cash investments generating interest income

• Interested in tax-deferral/tax shelter ideas • Longer term focus• Family orientation• Typically 50+

What happens if you want to access funds?

Then, what do you do……..?

Leveraged Life Insurance

• Client purchases a cash value life insurance policy

• Client deposits additional amounts to maximize growth

• Deposits accumulate and grow over time

I. Accumulation Phase

ExemptLifeInsurance

Deposits $

Leveraged Life Insurance

• Client uses the policy as collateral security for a bank loan • Borrowing should avoid income taxation on these cash flows• Client uses the loan for personal or business purposes

II. Access Phase

ExemptLifeInsurance1. Collateral

assignment

2. Loan $

• Bank loan is repaid through death benefit

• Remaining death benefit goes to beneficiary of the policy

III. Settlement Phase

1. Death benefit pays bank loan

2. Remainder of death benefit gets paid to policy beneficiary

ESTATE

Leveraged Life Insurance

Corporate Estate Bond

Or ...

How to maximize the amount your family will get from your company

Client Profile

• Profitable operating companies (Opco) – substantial retained earnings, or

• Investment (Holdco) & professional corps– cash/near cash investments– generating interest income

• Interested in tax-deferral/tax shelter ideas• Maximize amount family will get from

company • Longer term, estate planning focus

Case Study

• Family business owners M55 & F50, non-smokers

• 2 categories of assets in their company: – ONE... their use and benefit during their

lifetime.– TWO...“earmarked” for benefit of family.

• They “earmarked” about $100,000 for family.

Case Study

• Goal to maximize amount that will pass to family once they are gone.

• $100,000 presently invested in term certificates at 6%, and is subject to annual accrual taxation.

• Corporate tax rate is 49.3% (includes RDTOH)

• Personal dividend tax rate is 31.60%

The Government Family

$3,074$2,926 (including RDTOH)

$100,000Opco. (retained profits)

Holdco. (investment income)

$6,000 interest @ 6%

Present Situation

Assuming death of second spouse when youngest reaches age 86 (37 yrs), what will family get?

1. Original capital $ 100,000

2. Growth on capital $ 206,5403. Refundable div. tax $ 107,523

4. Total taxable dividend $ 414,063

5. Tax on dividend paid ( 129,602)

6. Net to family $ 284,461

Is there a better solution?

There are two kinds of assets

Opco. (retained profits) Holdco. (investment income)

Your useand benefit

Your family’s future security

Investments

Climates

Tax Exposed

Tax Deferred

Corporate Estate Bond

TheGovernment

$ 100,000

$500,000Tax-exempt life

insurance contract

$ 19,055$ 80,945

Side Account 5 years

$ 2,369 tax on Side Account

How family gets the money...

Insurance Proceeds

Tax Free

Opco / Holdco

Regular RetainedEarnings

CapitalDividend Account

Tax-free Capital Dividend

Family

Taxable Dividend

Assuming death of second spouse when youngest reaches age 86 (37 yrs), what will family get?

1. Original capital $ 100,0002. Insurance Proceeds $ 1,097,4063. Refundable div. tax $ 0

4. Capital dividend $ 1,097,4065. Tax on dividend paid $ 0

6. Net to family $ 1,097,406

Term CertificateTerm Certificate

5055

8691

$ 284,461

$ 1,097,406

5055

8691

Estate BondEstate Bond

Let’s Compare...

Comparison...

GICGIC$ 202,489Total tax Total tax

payablepayable

Net to FamilyNet to Family $ 284,461

Increase

CorporateEstate Bond

$ 7,134

$ 1,090,272

$ 805,811

Why Would You Do this?• Tax-deferred investment fund• Tax-free estate proceeds (including investment

fund)• Cost-effective way to pay estate taxes &

conserve assets• Creditor protection• Improve estate planning clarity, liquidity &

certainty• Flexibility and control (ownership & beneficiary

provisions)

What happens if you want to access funds?

Then, what do you do……..?

Access to funds…(Leveraged Life Insurance)

Term CertificateTerm Certificate5055

8691

$ 20,000

6772

$ 271,940taxable dividends

($ 186,820 after tax)

5055

$ 1,097,406

8691

Estate BondEstate Bond

6772

$ 271,940 taxable dividends

($ 186,820 after tax)

- 271,940 Dividend

$ 649,387

- 448,019 Interest

Thank You!