How To Double Your Asset Holdings (Without Doubling Your Investment Capital)
Posted In: Entrepreneurial Wealth Management

Successful entrepreneurs eventually face the common dilemma of how best to maximize investment potential with company profits, while reducing tax. 

Cash that sits unused in the corporation isn’t working for you. Taking it personally out means outrageous taxes. 

In many cases, there is an elegant solution: Immediate Financing Arrangements. Immediate Financing Arrangements, or IFAs, work by leveraging whole life insurance premium deposits as collateral for a line of credit—allowing the company to do more with what they already have. 

IFAs can help free up assets trapped within corporate structures, improving cash flow and alleviating tax burdens in the process.

It’s a great alternative to an entrepreneur who reinvests everything back into the company but realizes they need to do something for themselves to plan for retirement.

A Quick Example Of How an Immediate Financing Arrangements Works

Bill and Jane’s company has $1M in cash they want to invest. They decide to put that money into commercial real estate.

Now they have an $1M commercial real estate investment and no cash. They have traded one asset for another.

An Alternative Solution With An Immediate Financing Arrangement

Instead Bill and Jane put a portion of their money into a Whole Life Insurance contract (depositing $100K a year for 10 years). Next, they borrow 100% of their $100K deposit back, and continue to purchase the same real estate investment they were always going to make.  

The benefit to them is now they have two assets growing in value: the tax sheltered whole life insurance, and the commercial real estate.  Best of all, the life insurance will be used to solve the future tax problem (taxes owed) created from the growth in value of the real estate.

By the end of the deposit schedule, they now have:

  1. $1M investment value inside the Whole Life Insurance investment.
  2. Their $1M commercial real estate.
  3. The growth of both assets.
  4. The solution to the tax problem their real estate creates by going up in value. This becomes an issue when they want to transfer this asset to their kids.
  5. Estate planning. They have a solution to pay the tax to keep the real estate in the family.
  6. The death benefit amount above the loan outstanding from the life insurance contract is a tax free payout.
  7. The option to repay the loan at anytime without penalty.

They have more than doubled their asset holdings in the same time period. The only negative is they have the outstanding loan, which is covered by the death benefit.

3 Reasons To Consider An Immediate Financing Arrangement

  • You get more assets working for you

Immediate Financing Arrangements allow you to use the same initial cash investment to acquire the asset you were always going to buy.

The difference is the money then comes from financing 100% of the premium deposit back, instead of the direct cash exchange. The company (or individual) can loan back 100% of their premiums deposited.

In the case of Bill and Jane, they were going to buy their property either way. Over time, we expect the property would increase in value and potentially added some extra cash flow.

They now have a 2nd asset working for them (the Whole Life Insurance), improving their holistic rate of return. The life insurance also solves a future tax problem that will occur when transferring the property to their estate.

  • It’s a low risk asset

Many entrepreneurs enjoy investing in medium to high risk ventures. The IFA gives you the best of both worlds. An IFA financing allows you to continue to invest how you were originally going to. The life insurance investment in the background (working as a 2nd asset) is a low risk investment that by law can’t go down in value.

  • It reduces tax now and in retirement.

Investment growth inside the Whole Life Insurance is tax exempt (much like a TFSA), reducing your overall tax burden. There are two tax deductions now:

  • When you borrow money to invest into an income producing asset, the interest that you pay is 100% tax deductible. Since most of these insurance contracts are owned in a holding company, the tax deduction is at the passive tax rate of 50.7%.
  • A portion of the net cost of pure insurance (NCPI) is tax deductible to cover the outstanding loan amount.

When you retire and your loan balance is paid off, you can access the money in the insurance, meaning you can enjoy a tax-free retirement income. The loans from the retirement income will be paid off from the death benefit from the insurance when you pass.

Any death benefit above what you owe in loans is paid tax-free to your beneficiaries.

IFAs are not for everyone in every situation

Since the corporation owns the life insurance contract, any financing would may affect company’s future ability to borrow. The same holds true for personal lending arrangements using the insurance.

There is usually a small collateral requirement in the early years of the arrangement. Often, this reduces to zero within a few years.

There are certain situations to successfully qualify for implementing this strategy including health as well as the financial underwriting for the loan.

The IFA strategy minimum is a $30K deposit each year for 10 years. However, there are many designs that can have reduced deposit schedules.

That said, if you are looking to free up assets, generate higher rates of return, increase your legacy, and reduce tax burden, it’s worth investigating.

Immediate Financing Arrangements Are A Sophisticated Strategy

Not every Financial Planner knows about Immediate Financing Arrangements on how to organize properly. At Elementus Wealth we only advise entrepreneurs and specialize in solutions that give you access to more wealth now and into the future.

Let’s continue the conversation to find out if an Immediate Financing Arrangement can complement your existing planning or goals.

Written by:

Jeff Devlin | Certified Financial Planner, Director


E & OE

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