There are many excellent reasons to consider corporate-owned insurance, and most Ottawa Certified Financial Planners recommend it. However, that does not make it perfect – you may experience a few hiccups with a policy owned by your operating company. For example, transferring the policy out of the operating company when you want to sell can be very difficult. Such transfers also often come with challenging tax consequences. Rollovers do not apply to life insurance, either from or to a corporation. Therefore, the corporation is forced to dispose of the policy, potentially leading to taxable income instead of capital gain.
Suppose the transfer is from or to a family or group of companies, i.e., non-arm’s length transactions. In that case, the estimated deposition proceeds will be the greatest of the fair market value of the consideration received, cash surrender value, and adjusted cost basis. An alternative is to limit the amount of the gain on disposition in the corporation. This is achievable by turning down the fair market value consideration. However, this option could be worse, possibly resulting in a shareholder benefit.
But what is the best way out of this?
Plan Your Corporate-Owned Insurance Properly
The need for proper planning around your corporate-owned insurance cannot be overemphasized. For starters, the operating company should not own the policy, considering how difficult it is to transfer a life insurance policy when selling the company. Another reason to avoid this is to protect the creditors of the operating company.
So, if a company avoids owning the policy, what is the more suitable alternative? First, incorporate the holding company. That way, the incorporated company can act as the owner, while the operating company serves as the beneficiary. Then, on the sale of the operating company, the holding company becomes the new beneficiary by designation. This move ensures the ownership of the life insurance policy is retained.
As simple as this move appears, it can be the most significant difference whenever you are ready to sell your business with corporate-owned insurance.
Navigating this process should be easy. But companies that are entirely new to corporate-owned insurance policies may struggle to achieve a proper setup. But, again, the guidance of an Ottawa CFP can make the entire planning better and easier.