As a Certified Financial Planner (CFP) who works exclusively with entrepreneurs, I often meet with business owners who are looking for creative strategies to grow and protect their wealth. These people are all successful, and they all face a similar dilemma: a large chunk of their profits are trapped within their corporate structure, and they don’t want to pay a truckload of tax to move it to their personal pocket.
This unused cash is basically dead money: it’s fun to look at, but, it’s not growing and not keeping up with inflation. Our solutions are to find out-of-the box ways to help invest that cash and still keep it accessible.
When these business owners come to me asking how they can maximize returns and investment potential while keeping their tax burden low, there are stages we have to review…
Stage 1: Their natural interest
Many people we help have a natural interest in a specific asset class. For example, owning real estate and other businesses. For real estate, let’s face it, they’ve seen and participated in the Vancouver, Whistler and other markets. It is a common way to get cash working.
Often we see entrepreneurs set up a holding company to buy real estate while keeping their operating company eligible for the small business capital gains exemption. The holding company can take out a mortgage to help purchase investment properties.
Investing in real estate is a solid option to get assets generating more wealth. But it isn’t the only strategy that works.
Stage 2: One of the sophisticated alternatives
Rather than investing directly in real estate, buying other businesses or reinvesting back into their own company, business owners who have cash stockpiled in the company can 1) first get a tax-sheltered, Investment Life Insurance contract and then 2) buy the asset they were going to buy using the deposit you just made into the Investment Life Insurance.
By using a corporate Investment Insurance contract, they can:
- Increase the rate of return, instead of having “dead money”
- Move the cash from a tax exposed environment and deposit into a tax sheltered environment i.e Investment Life Insurance
- Borrow 100% of the deposit (into the Investment Life Insurance) back to purchase the same real estate (or other asset) that you were always going to buy
- Create tax deductions they would otherwise not be getting
- Double the number of assets working for them (Investment Life Insurance + real estate, for example)
How does that work?
Here’s an example…
Imagine that an entrepreneur with $1M cash or cashflow in their corporation, and wants to do something with it (other than look at it). Let’s say they want to buy real estate. Before buying the property, they can take out a Whole Life Insurance contract that allows them to deposit $100K a year into the contract for 10 years (sometimes less). Then, we organize a lender to provide a line of credit (LOC) for the $100K (to match the deposit into the life insurance), and use that LOC money to purchase the same real estate investment they wanted to buy. Best of all, the LOC does not get reported to the credit bureau.
They continue this deposit strategy for the next 10 years. By doing this they have doubled the number of assets that are growing in value. They have the investment real estate they purchased, as well as the tax-sheltered investment whole life insurance.
Ten years later, when we’ve completed the investment life insurance deposit schedule they have:
- More than a $1M tax sheltered investment value, inside the insurance contract
- The real estate they purchased
- The growth from both assets
- The solution to the tax problem the real estate creates (by going up in value)
- Estate planning (or a solution to keep the real estate in the family)
- A potential structure to help spend their retirement income, tax free.
Is it too good to be true?
Using Investment Life Insurance is a smart way to move dead money into an investment, and still stay liquid. It can also be used as a stand alone investment for part of the low risk portion of the overall portfolio.
But it isn’t for everyone…
Because this strategy depends on taking out both life insurance and loans/line of credits, entrepreneurs must successfully qualify for these things, which are dependent on medical and financial underwriting.
In addition to this, it’s important to note that since the corporation owns the life insurance contract and the Line Of Credit, any future financing may affect the company’s future ability to borrow.
But all that said, if you’re looking to exponentially increase your wealth, generate higher rates of return, increase your legacy, and reduce tax burden, Investment Life Insurance: it’s worth investigating.
Is this the only smart strategy?
Quick answer: No. We will write about the other strategies in our upcoming case studies. Check them out then. Can’t wait? Let’s chat.
How do I know if this strategy is for me?
Give us a call. At Elementus Wealth we are experts in advising entrepreneurs how to do better and impact bigger.
We look forward to chatting.