Who likes to pay taxes? I don’t! Actually, most people don’t like to pay taxes 😉 This is probably why we see so many people trying to legally decrease the amount written on the government’s cheque at the end of the year! One way to reduce your taxation rate is to earn income via a corporation or a holding. In most countries, INC structures pay fewer taxes than an individual with the same level of income.
However, it technically comes down to the same thing once it is time to withdraw money from the company… until you know about the split dollar strategy.
The thing is when you withdraw money from a corporation or a holding; it is taxable as income (additional to your current revenue) at your marginal tax rate. Therefore, unless you are retired and live off your company’s dividend, you will pay your share of taxes.
But, there is good news for those who want to benefit from the fruit of their labour while they are still working and earning money. The good news is called the split dollar strategy.This method requires cash flow within the company (you need water to drink, don’t you?) and that the company’s owner is healthy (huh?!?).
So here how the split dollar strategy works:
#1 you take a critical illness insurance contract on the company owners with premiums paid by the company.
#2 you take an option in the critical illness to get full reimbursement of the premiums if the individual doest not have a critical illness after 15 years.
#3 you name the individual (not the company) as the beneficiary or the premiums reimbursement.
#4 in 15 years, you will receive a nice cheque from the insurance company in your name that is not taxable.
Isn’t this too cool to be true? Not really. However, there are some things to know about the split dollar strategy:
#1 the insurance premiums require stead cash flow to be taken out of the company
#2 if you stop the strategy half way, the benefit won’t be that great (full reimbursement option seems to be only available after 15 years).
#3 if you ask for a premium reimbursement prior to the end of the contract, penalties occur.
#4 you will personally get taxed on the “benefit” received from your company in regards to the premium reimbursement option. However, the taxation is minor compared to a regular tax rate.
#5 this insurance is not to be considered as insurance by itself but as a tax saving tool. If you require critical illness insurance, you should do it separately as this contract is meant to be terminated in 15 years.
I’ll run some calculation and come back with a complete example of the split dollar strategy later on.
Disclaimer: I am not telling you to do the split dollar strategy and I am not selling insurance. Please contact a professional in order to determine if this strategy is applicable in your situation.
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