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CIA Annual Meeting Assembl

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Title: CIA Pension Seminar Last modified by: Sheila Richard Created Date: 2/6/2006 3:16:07 PM Document presentation format: On-screen Show Company – PowerPoint PPT presentation

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Title: CIA Annual Meeting Assembl


1
CIA Annual MeetingAssemblée annuelle de lICA
  • June 29 30, 2006 Ÿ Les 29 et 30 juin 2006
  • Ottawa, Ontario

IND-3 Hot Concepts, How the Business is Sold
2
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

3
Hot Concepts in the Life Insurance Marketplace
  • Personal Estate Bond
  • Personal Leveraged Life Insurance
  • Corporate Estate Bond
  • Corporate Leveraged Life Insurance

4
The Estate BondUsing Mattress Money More
Efficiently
5
  • Or...How to maximize the amount your family will
    get from your passive investments.

6
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 spouses 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)

7
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?

8
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 theyve
    put away!

9
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

10
There are two kinds of assets
Invested Assets
Your use and benefit
Your familys future security
11

Kinds of Assets to Consider?
  • Assets earmarked for your familys 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!

12
How much to consider?
  • These investments might normally be 10-20 of an
    older clients investable assets

13
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

14
Present Situation
35,000 GICs
5.5 1,925 interest
The Government
Family
674
1,251
15
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
16
Is there a better solution?
17
Investments
Tax Deferred
Tax Exposed !
18
Estate Bond
35,000
The Government
Tax from Side Account 688
19
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
20
Lets Compare...
90,355
50 55
88 91
Term Certificate
21
Comparison
Personal Estate Bond
GIC
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
22
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

23
What happens if you want to access
funds? Then, what do you do..?
24
Leveraged Life Insurance
I. Accumulation Phase
Exempt Life Insurance
Deposits
  • Client purchases a cash value life insurance
    policy
  • Client deposits additional amounts to maximize
    growth
  • Deposits accumulate and grow over time

25
Leveraged Life Insurance
II. Access Phase
2. Loan

Exempt Life Insurance
1. Collateral assignment
  • 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

26
Leveraged Life Insurance
III. Settlement Phase
1. Death benefit pays bank loan
2. Remainder of death benefit gets paid to
policy beneficiary

ESTATE
  • Bank loan is repaid through death benefit
  • Remaining death benefit goes to beneficiary of
    the policy

27
Corporate Estate Bond
28
  • Or ...
  • How to maximize the amount your family will get
    from your company

29
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

30
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.

31
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

32
Present Situation
100,000 Opco. (retained profits) Holdco.
(investment income)
6,000 interest _at_ 6
The Government
Family
2,926
(including RDTOH)
3,074
33
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 206,540
3. Refundable div. tax 107,523
4. Total taxable dividend 414,063
5. Tax on dividend paid ( 129,602)
6. Net to family 284,461
34
Is there a better solution?
35
There are two kinds of assets
Opco. (retained profits) Holdco. (investment
income)
Your use and benefit
Your familys future security
36
Investments Climates
Tax Deferred
Tax Exposed
37
Corporate Estate Bond
100,000
TheGovernment
2,369 tax on Side Account
38
How family gets the money...
Insurance Proceeds
39
Assuming death of second spouse when youngest
reaches age 86 (37 yrs), what will family get?
1. Original capital 100,000
2. Insurance Proceeds 1,097,406
3. Refundable div. tax 0
4. Capital dividend 1,097,406
5. Tax on dividend paid 0
6. Net to family 1,097,406
40
1,097,406
Lets Compare...
284,461
50 55
86 91
50 55
86 91
Term Certificate
Estate Bond
41
Comparison...
42
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)

43
What happens if you want to access
funds? Then, what do you do..?
44
Access to funds (Leveraged Life Insurance)
1,097,406
- 271,940 Dividend
20,000
- 448,019 Interest
649,387
Term Certificate
Estate Bond
50 55
86 91
67 72
50 55
67 72
271,940 taxable dividends ( 186,820 after tax)
86 91
271,940 taxable dividends ( 186,820 after tax)
45
Thank You!
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