A few weeks ago, I brought the idea of withdrawing money from a corporation or a holding company without having to pay taxes through The Split Dollar Strategy. I actually lied about the whole thing… you will have to pay taxes…. About 3% in the example that I will show you 😀 hehehe! 3% of taxes compared to appreciatively 33 to 36% if it would have been a dividend income or 45% to 48% if it would have been an interest or business income. Not bad, huh?
So here’s the deal: You have a corporation paying a $5,000 yearly premium for critical illness insurance. For a young man of 37 years, it could roughly represent an insurance of 200K if he would get a critical illness during the process.
So the premiums include the following:
– A critical illness insurance of 200K payable upon diagnosis (23 listed illnesses such as heart attack, cancer, etc.)
– Premium reimbursement in the end of the policy owner upon death of the insured
– Premium reimbursement option in the end of a named beneficiary (the individual owning the company in this situation)
Every year, the individual will have to declare a taxable benefit of $297 for being the beneficiary of the insurance premium reimbursement (here’s come the split dollar strategy ;-0 ).
So 15 years from now, you are still not ill (let’s hope for it!) and you cancel your critical illness insurance.
You will receive a nice cheque from the insurance company of $75K (so 5K times 15 years) free of taxes! Really? Not really 😉 You actually paid a big $142 every year in taxable benefit provided by your company through the critical illness insurance. So total paid in taxed over 15 years is $2,138 ($142 X 15 years). 2K on 75K… 2.85% in taxes 😀
I actually run the numbers to see what would happen if you invest the 5K every year within the company on the stock market and pay yourself a dividend (taxed at 33% for this example) after 15 years.
Well, in order to receive $72,862 (75K – $2,138 in taxes) from your company at a 33% tax rate, you need to have $108,750 within your company. If you invest $5,000 over 15 years within your company at a after tax yield of 5%, you will get your 108K. However, in order to make 5% after tax, you need to make about 7.15% (let say that you are taxed at 30% within the company). So if you are 100% that you will make more than 7% in the next 15 years, you don’t need this strategy 😉
Personally, I would certainly consider putting a part of my company liquidity into it ;-). Then again, I do neither recommend nor selling the Split Dollar Strategy. I am not an insurance licensed representative and I am simply telling you that you might want to look at the Split Dollar Strategy closer with an expert and professional that knows your personal financial situation.
I hope you enjoyed the demonstration of the split dollar and please comment if you have any questions 😀
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