Planning for the tax bill your estate may face

Source transcript, with paragraph breaks added for readability. Speaker identities have not been inferred. Verify quotations against the recording.

Your biggest tax bill ever is the one when you pass away. You could have millions of dollars in taxes without the postmortem planning, which again, they would have had a tax bill of in total close to like 12 $13 million. $11 million lost in taxes. The second that you have more than $50,000 of passive income, you start to lose your small business deduction. Once you make 150 grand in passive income, whether that's in your operating company or in your holding company, doesn't matter, they're associated, you lose your small business tax rate, just we'll keep it simple, results in about $70,000 extra in taxes. My dad bought insurance on me when I was a little kid. This life insurance policy he bought on me now is worth like $800 $900,000. The grandfather who's calling me is going, "Hey, I want to insure my grandchild." And now two generations after he's gone.

He's going to be long gone, but he's they're going to get a check from their greatgrandfather. We were able to increase his net worth at death by close to, you know, $6 million. More money even than he actually was worth when he died. There's no other asset class in Canada. There's a reason why the wealthiest of families in Canada use and buy more insurance than you would know. So, welcome to Beyond the Bottom Line. I'm Joey. This is where we pull back the curtain on how the ultra wealthy actually protect and grow their money without the complexity or the gatekeeping. So, today I'm joined with Jeremy Kelly from Kelson Financial, a planning centric advisor helping Canadian entrepreneurs turn tax problems into multigeneration assets. So, we're going to dive into what cascading insurance is and corporateowned strategies.

How to reduce tax gra how to reduce tax drag on holding companies and protecting your family, building a legacy that outlives you. With that said, welcome to the show, Jeremy. Thank you, Joey. Nice introduction. I'm uh pleased to be here and uh excited to dive into everything. We'll dive into how to help business owners, how to help uh you know incorporate professionals and uh how to take that the right plan accenting approach which I think is you know really the key to any financial plan. So yes sir, that's going to be a good one. If you're Canadian business owners right now, listen up. There's going to be some great value out of that. So Jeremy, let's start with this. You're big on planning first and product second, right? We've talked a little bit off record.

Can you take us back to the moment where you realized a for example a business owner's holding company uh tax drag was quietly destroying their family's long-term structure um and how that led you to use what you call cascading insurance. Yeah. Yeah. So there's you know uh many different angles I could take this uh this question Joy. So thank you for the nice open-ended question. I want to start with uh the planning centric approach. Like I do think that that is probably the most important thing for entrepreneurs and just people in general. The amount of people that I meet, entrepreneurs that have wonderful businesses and absolutely no idea what they're doing on their personal finances or their corporate finances or how that's getting married together. Um is astounding honestly. Um and I think that's because there's a lack of planning.

So people have great ideas. People hear about great products and strategies, but it may not be the one for them, right? So our approach at Kelson is really planning first. And I learned that lesson early on in my career. I think I did about a year um before I said, "Hey, I need to go get my financial planner degree and actually be able to implement and look at all of the different um components of a person's financial plan to make it work." Um cuz at the end of the day, I always tell people, your insurance product is just a commodity. It's really no different than uh you know, going to buy steak at the butcher, at the grocery store. There's a time and place for each. If you're on a budget or you're in a rush, go to the grocery store.

If you want the good stuff, you go to the butcher. Um it's the same thing with the strategies that you might hear about that some uh advisor may have spoken to you about. Some of the strategies are really great for certain individuals, some are better for others. So how do we get to know what's the best strategy for a person is really by doing the plan first. And so that's why for us it's really important to start with kind of the boring stuff honestly. Hey reviewing the shareholders agreement, reviewing the will. What does the will say? What happens if a shareholder dies? If your business partner dies, uh if you pass away, what happens to the shares of the business? What's it valued at? All of these things kind of um oftentimes go overlooked and we like to start there.

Um, what do you need to retire on? What are your long-term goals, short-term goals? Do you need some of the cash in the in the short term to fund potentially a business opportunity or an expansion? Um, and so we start there because without knowing all of those details, I might prescribe you the wrong, you know, I'll use medication, but I'm really talking about insurance here, you know, um, or financial planning strategy. So, um, that's where we always start. Um, the products are products. Then we could find what's the best one for your situation and the best strategy that goes handinhand with that product with your age. You know, like talking about um insurance, you might have some I won't name the carriers, but some carriers are going to be better for older people. Some are going to be better for 35 to 45.

Um so the plan comes first. the strategies are just really what kind of augments the plan and allows for to the second part of your question um mitigating tax drag and and implementing the right strategy. If that's your goal, you know, then there's certain things that we can do. If your goal is I want to mitigate the taxes that I have to pay to the government when I pass away, we might look at a different type of product, different type of strategy. Um and I and I'll touch on that just for a second. Yeah. You know, uh, I sit down with a lot of business owners all the time and we're pinching. We're trying to find any way that we can to save 5K, 10K, a couple percentages in taxes every year. But what often gets forgotten is your biggest tax bill ever is the one when you pass away.

It's not the one like you could have millions of dollars in taxes. And what I find kind of ironic is that a lot of people will just forget about that tax that that tax bill. They say, you know what, I'd rather save 10 grand today than maybe 2 3 $4 million when I pass away in the future. Um, and so that's kind of two things that we have to evaluate as well. And when we talk about the strategies, um, you know, one that I I think has been on your show already, uh, or definitely if it has not yet been, definitely will be, is how do we get money out of the company? uh tax-free or in a taxefficient way for um for retirement for example. Yeah, that's a phenomenal strategy. Again, right place, right time.

But in my experience at Kelson, like we've, you know, I'm doing this close to close to a decade. My dad's been doing this for 40 years. So, I see some of the plans that were, hey, we're going to do this, but now we're like getting to that point where they're retiring and we're we're looking at the plan. And this is again where the planning comes in is while holy client you're going to have taxes to pay of about 5 million bucks your life insurance plan could pay for those taxes and you know clean your estate and allow you to settle your estate in a really tax efficient way by just letting the t the taxfree death benefit be paid out of the company pay the government and everything else your family can keep. But if you do the retirement strategy, for example, well, now you're creating a bit of a of a loan situation where you're not getting 100% of the death benefit taxfree and you got to find another way to pay for the tax.

Yeah. So things change. Business owners know that, right? Like anyone who has a plan knows that their plan has changed 10 times since they started their business. You know that. I know that. Anyone that we work with knows that. So building flexibility into our plans and products is also um extremely important, right? So I don't want to that's good. I I want to touch on something because I found that really interesting. I think again as a business owner myself, I'm not a financial adviser, but I see and I meet a lot of financial advisors every day. I think there's a big dichotomy or big spread between what the adi the the advisor knows about strategies out there for Canadian business owners and what Canadian business owner knows is out there, right? A big problem is the lack of education.

And I think it was funny because you said everybody knows that um for example the biggest tax bill is when you die or at the end of at the end of basically your life, right? Yeah. I didn't know that and I'm sure a lot of business owners don't know that. Right. So, if that's the case, like why do you think most business owners disregard that? And what's what's actually the the big damage that this could do if they don't plan for that basically death bill? Yeah. Yeah, that's a that's a good question. And it's and it's right. If I said if I said everyone knows that, I apologize. I take that back. I didn't mean that cuz a lot of people have no idea. And logically speaking, like for sure it makes sense that they don't because you would think, all right, I'm making money.

I'm making money. I'm paying tax on the money that I'm that I'm making. So why would I pay tax again when I when I die? Like it doesn't really make sense intuitively. So I take that back. But what happens is in reality is your company, especially when you're when you're a company, you own a company, right? Your portfolio is is not taxed the same way that it would be personally. So you have a company, right, Joey? Let's say your company you cost you nothing to open it. There was no invested capital in it or anything. But if you invest your money into this into your company and you let it grow by the time you're, you know, 85, 90 and you have call it $10 million in there, what happens for tax purposes is that your it's the cost base of your company's shares that are taxed, not the investment.

So even if you put, you know, $5 million that grew to $10 million in your company, you're still taxed on the $10 million as a capital gain. So that's kind of why I think a lot of people don't realize um that there is a big tax problem. I see. M and why so is that the is that the biggest reason why it's most significant to plan for that tax bill at the end of your life and is does the trigger really has to be end of life or is there any other trigger that could trigger that big tax bill other than death? Yeah, for Okay, that's a that's a that's a loaded question and I and I like it. Right. So I there's a lot of planning that you could do, right? If we're talking more specifically about in insurance and your business, right?

So, you're going to have your operating company, which if you sell your operating company, you know, there's a tax bill that happens. That's a trigger. Yeah. That that's that's a trigger that happened before death. There's things that we could do to plan around that in terms of, you know, in Canada, we have a lifetime capital gains exemption of $1.25 million. If you implement a trust, potentially you could multiply that capital gain. So, there's things that we could do beforehand, making sure that your company, one qualifies for that exemption, uh, and then finding ways that we can maybe share that exemption with either business owners or family members. Um, but outside of outside of that, you know, yes, obviously you're going to trigger taxes when you sell stock or withdraw money. Like taxes are inevitable to a certain degree, right?

So, it's how do we pay the taxes and how do we um how can we find efficient ways to get money out of the company. To your point though, and I want to touch on one last thing before we move into the, you know, cascading insurance and other strategies is um at the end of your your life, the how do you fund that tax bill is the question, right? So, I work with a lot of people who are in real estate, for example, say they have a $5 million tax bill. Where's the money coming from? A lot of people don't have a very liquid estate, which by that I mean is well, they're going to need to sell maybe one building or two buildings or a home to pay that tax bill, which a lot of people don't want to do because they've they want their kids to own the same properties as them and there's maybe a little emotional attachment to that and the real estate market may just not be uh it might not be an opportune time to be selling those those buildings and it might not happen like that, right?

So, in my time working, like we've seen so many issues with dealing with estates. Accounts get frozen. There's no access to capital. Uh wives are left with no money for months on end, like living off loans and stuff. So, what's the most efficient way to pay the tax is with a life insurance policy. Hands down. There's no other asset class in Canada that permits for a tax-free death benefit to be flowed through the company uh into the estate of the deceased persons. So, you know, you you have options. Sell bu sell buildings, sell stock, sell assets, take a loan, which you're going to end up paying more in interest over the time of the loan than you would on the insurance premiums, or buy an insurance policy that's going to be paid out within less than a month of the death, provide liquidity directly to the estate, be funneled out tax-free, and um and you know, I'm sure it's been talked on on the show, but um there's there's premium tax arbitrage to be done in the company as well, right?

So, if you own a company, you have an advantage that your life insurance policy is going to cost you less than somebody who's not incorporated. Um, that's just purely tax rates, right? So, if you're taxed at 53% on on the personal side and you're taxed at 26% or 12% on the corporate side, well, you're getting a 25% discount on your on the revenue that it takes to pay for that premium and it's still all taxree. Absolutely. And and yeah, that's really good. And and I think one thing that I've got from what you said and a lot of people, a lot of business owners, myself included, like every time we hear insurance like ah what is that, you know, like freaking life insurance again. But I think like you said, I think you said it really well that it's insurance of itself by itself is just a commodity, right?

It's just a product that anyone can do. Where the real power comes from is actually working with planners, right? and real financial planners that can put it's it's not just a thing. It's a sequence of systems that we put in place, right? And that's where it comes. It's like like you said, you did a good analogy with like a steak, right? If you buy a ribeye, right, at five $5 ribeye, a $10 ribeye at the the shack next to your next to your house, right? It's going to taste different than a $200 ribeye in a downtown Toronto, right? So, it's the way you prepare it and the way you plan for it that makes the the whole difference. Can you touch on that a bit more? Yeah, for sure. So, and just to clarify your question, you want to know a little bit more about how we prepare like an insurance strategy, like the difference between like just getting the insurance product and like actually what for example you and your firm um that has a lot of decades of experience doing this with business owners, how would they prepare that differently?

Yeah, for sure. and trying to think the best way to answer your question, but I think it's important to dive into the components of an insurance product, right? And I and I want to just premise like we're talking mostly on this show and right now about life insurance, right? There's other strategies that that could be really beneficial to business owners in terms of protecting risk. I want to stay on topic on the life insurance because I think that is what most people are curious about and it is the biggest strategy. In life insurance, you're going to have three main products, right? And I'm just going to break that down quick. You have term insurance, cheap insurance for things like shareholders agreement, homes debt, things that are a temporary need. And I always talk to people and I say, "Look, you're going to buy insurance for one of two reasons.

Need or greed." And maybe I shouldn't. Maybe the greed part I should find a better word for, but it rhymes and I like it and I think it's legit. You have a need for term insurance and the greed is permanent. Now, for all the reasons we just spoke about, that's why you want something that's permanent. Yeah. So, whole life insurance is my preferred product. There's universal life, whole life. I'll be talking for the rest of the show pretty much only about whole life insurance. Um, now understand there's a few important components. You got a fixed premium, right? So, if you buy a policy at Yuri Joey, you're young, you're healthy, that premium is going to stay the same your entire life, but the death benefit is going to grow every single year. There's also a cash value component to the life insurance policy and that's what we will refer as to the investment component of the life insurance.

Okay? Right? And there's a premium and then there's an additional deposit option that you could do. And this is where I think a lot of people don't know enough about this option because for whatever reason it's it's overlooked. Um but it is a really powerful thing that you can do, right? So I call it the corporate TFSA almost. Once you have surplus in your company, you could add extra money into your insurance policy to supercharge the values of the cash value or the the investment value of the of the policy and of the death benefit. So this is where the flexibility comes in and is really key. When we do a plan, I'm going to say, Joey, you know, you're good for based off of your cash flow, your history, and your projections. there's a base premium of let's call it 10k that you're comfortable to pay, right?

But I know you. I'm getting to know your business and I know there's a lot of future potential that 10K is going to feel like peanuts in a couple of years, right? So, I want to make sure that within that same first insurance plan, I've built in options to allow you to put more money into the plan without needing to buy a plan later on, another one, for example, because you're going to have a better rate of return on the first one that you bought when you were younger because the premiums were were were smaller. Yep. So, um that's part of the of the flexibility and it's building a plan for business owners like this cash value. You've got different types of whole life products out there. Some that are going to be preferable for a long-term death benefit, some that are going to be preferable for uh short-term cash value.

What I mean by that is when do I break even on my investment? So, in the example I'm giving you, you put in 10K a year. When do I have $10,000 in my cash value, my investment value that I can borrow against, uh withdraw from in case I need it for the business? So, um, you know, with business owners, usually we'll lean towards something that where I have a break even point that's really soon in the policy. Usually like year 5, 6, 7 type of thing. That'll depend on your additional deposit options and and some different variables. But what I find great and I've seen it being used is 5 years in, maybe it's a slow year. Okay. Well, maybe we don't need to pay the premium that year because you're reinvesting more money into a side project or an expansion.

I could put the premium on pause because we've overfunded it in those first couple of years. M maybe there's a huge opportunity where um you need you know 40k or whatever it is like or there's an emergency there's an opportunity you could dip into your life insurance policy use those funds to fund your business opportunity and then pay it back later on once you're back in the greens or you know or that that opportunity is worked out. So got it building in that flexibility is you know there's a lot of different ways that we can do that. Um, but for business owners, it's just such a the cash value. We need to remember that that's an asset. And you know, we talk about be your own bank. A misconception is that you're be your your own bank in the first year.

And I tell people insurance is a it's a compounding effect. The the longer you wait, the more money you put in, the bigger benefit you're going to have. So my timeline is like 5 to 10 years ideally as you're funding that premium. And then you have a lot of options of what you could do with your your policy. Got it. That's interesting. And why why do you believe then that life insurance is the the asset of the wealthy? So let me dive into it. It it is I've seen mostly because I've seen it and I know the power that it has. Right. And I think cascading insurance is a we didn't I didn't jump into that. So I think it's a kind of the perfect segue. But I think cascading insurance is the strategy of of the wealthy.

And what is cascade cascading insurance? It's essentially buying insurance on a younger member of your family, right? So let's say and I'll give you like a personal example where I'll give you two personal examples and I'll give you an example from a client if if we have time if we want to dive into it. But essentially I'll start with my grandfather passed away a few years ago. He hadn't asked, he had life insurance and something that he was able to do with that life insurance is he was able to gift me and all of my cousins some money when we when when he felt like it essentially when we graduated university or there was an event he gave us some money which I just think is a really cool kind of thing that you can do for family members as a grandfather as a as a parent as whatever um when he passed away again we received a little bit more money and this was not a life-changing amount of money, but it's it it was a gift.

And I think that carried a lot of like I'm big on legacy and I think that carried a lot of what he wanted to be passed on in terms of his values and and it's it was a beautiful thing. Now, fast forward, my dad has bought life insurance on me. And now this is a real cascading insurance. That was kind of the segue. This is like actually how it works, right? My dad bought insurance on me when I was like a little kid. this life insurance policy he bought on me now is worth like $800 $900,000 and there's a cash value component that has a couple hundredk in it as well. So he's the owner or his company's the owner of this policy. Now he has access he's the owner. So he has access to all of this cash value if something happens and he needs the cash for whatever reason or wants to use it as an investment opportunity or there's an emergency.

He has access to all of that cash value. So there's me, there's my two sisters as well. He's got access to capital built into these life insurance policies. Now, at a certain point, he'll probably gift that policy back to me and then that'll be my money that I could use if I want. And then at a certain point, if I never use it, well, my grandkids are going to get or his grand my dad's grandkids, my kids will get a a pretty sizable u death benefit when I pass away. But that all came from my dad, which is kind of a cool And that's what cascading insurance is. So insurance is cheap when you're young and it grows like crazy the longer you hold it. So if you're able to buy it on younger family members, and then pass along the ownership of the policy, whether that's personally or through a corporation, you just, if it's a corporation, it's the shares that get inherited, and then they own the company and the asset that's within it, which is the life insurance.

Um, and so it's it's a really um I just think it's a beautiful strategy that encompasses why wealthy families do this. And I have a lot of clients that it's their it's the grandparents. So I have clients, they just got a newborn kid and now it's the grandfather who's calling me going, "Hey, I want to insure u my grandchild." And now three, like two generations after he's gone. He's going to be long gone, but he's they're going to they're going to get a check from their greatgrandfather who, you know, who was thinking so far ahead as to make sure that intergenerational wealth was being passed down. Um, and the nice thing like Joey about life insurance is it's there's guarantees. Your investment portfolio, uh, your business, there's a lot of variables. There's a lot of risks involved in in anything.

into life insurance. Not that there is no risk, but death benefits have been growing. Like 150 years of history will show that they grow almost pretty much every year if you're with a with a good company. Cash values do the same. Uh and they're vested. So even if the market crashes, if you have a million dollar life insurance policy, still going to be a million bucks. If you have half a million dollars in cash value, it's still going to be a million bucks. So or half a million bucks. So that's um you know that's kind of how cascading insurance works and I think that is why you know the wealthy use it. Yeah. No, you explained it perfectly and I was just thinking like I'll speak for myself but I'm sure a lot of other business owners can relate to that.

Like as a business owner you work 60 70 80 plus hours a week for I don't know how many years, right? It's not just for yourself. Like at the end of the day it's it has to be for something bigger than yourself. If not, you just don't have the motivation or discipline to keep going. I mean, for me, at least for me, and I'm sure others can relate, but like at the end of the day, you want to do this for for your generation, right? For your legacy. I think that's a big big part of every business owner's kind of motivation deck or vision board is to make sure they work hard so that then future generations can thank them for for all of that, right? And they can look up to them for the legacy.

I think businesses are made to build legacies. And the way you explained it cascading insurance concept, it it fits like a glove with this motivation, right? So, I think that's that's amazing. Yeah. Yeah. I couldn't agree more. I think uh some people have the motivation, but I think most have this vision of, hey, for generations and generations, I can build a business that's going to be so big that, you know, they don't have to work or they don't have to worry about money. They can actually do what they're passionate about. And like I'm seeing that now. Like it's so fun to see some of our clients like tell their kids like or their grandkids like, "Hey, don't go into like what you think is going to make money. Go into what you love." And like now you've created like wealth, but you've also created like kind of a happier, more fulfilled next generation as well.

And insurance is one of the the big big tools. Like without the planning, you could have the best business in the world, but you could lose like I have an example I could talk to you about. You could lose so much of your estate to taxes. It's incredible, right? And then falls into the wrong hands and you never know what happens. And you correct me if I'm wrong, but I don't think you need to build the $100 million company to get access to that, right? Like you can do that with a couple million bucks, $10 million, and you can keep majority of that at your death, which is what you pass on. But the risk of losing all of that, it's basically devaluating all your company if you're losing all that money to estate taxes.

Yeah, correct. Like absolutely. And anyone can do it. Like honestly, Joe, you don't even need millions of dollars. You could do it as your, you know, as I always tell people, I don't want the insurance to be something that is a stressful thing in your finances, right? The second that you can afford the premium, like just buy the insurance on your kids, buy the insurance on your grandkids. If it's affordable, you don't need millions of dollars. Someone's going to see that money. And like people don't understand the rate of I would look at like internal rates of return. Yeah. Does it make sense mathematically? If it makes sense for 20 million bucks or 50 million bucks, it also makes sense for like $100,000. It sounds crazy to say, but it's just the mindset that a little bit different, but the ratio is pretty much the same.

Like you get a little bit of a discount when you buy over a million dollars of insurance, but not enough to make, you know, buying less insurance unattractive. Yeah. What are nightmare stories that you saw happen of people not having that in place and getting screwed over with that? I mean, you know, nightmare situations. I haven't we've saved some nightmare situations, I could say. Uh that that uh you know, if you're working with a with an adviser with a financial planner like us, like we're pretty diligent. Um it's it's quite like we don't we make sure that we have the right things in place. if you want to work with us, like we're going to do a full plan and see, hey, if you should do some insurance, or maybe you don't need the insurance depending on your goal, if it's not, if legacy is not a goal and you don't mind losing most of your money to tax.

Yeah. Then is it a nightmare situation? It's kind of just your choice, honestly. Um but um I'll tell you so here's like a situation that uh I prepped some numbers to give you a bit of an idea cuz keep asking also about kind of the tax drag and I think that's another important aspect of of insuranceances and being incorporated in Canada. um you're in how you're taxed on your investments isn't different personally or in a company, right? So, you're still taxed your capital gains. You're still taxed at 50% on your interest. You're still tax on your on your dividends. Um the advantage to being incorporated is that you don't have to pay all of your income out and you get to defer gains, defer taxes in the company. So, I'll tell you a situation. We had uh and I'm changing numbers and things a little bit, but just to give you a bit of an idea.

Yeah. How do we reduce tax drag? So, let's say we had a client who sold his business for about $5 million. He had about $5 million. We did a full plan, uncovered what he would need to live and and everything. And then we projected what his portfolio would look like at a conservative rate of return at his age 90 around like your kind of life expectancy. he was around 55 57 years old. So we project that his his uh portfolio assuming it's all liquid would have a value of close to $23 million by the time he passes away. I have the numbers here, but I just quickly there's two you could do post post-mortem planning, which is I'm not going to talk about that's something a fiscal should should be kind of on this call for and I think would be a great episode actually.

But there's some planning that you could do that would reduce your taxes to probably about $6 million on in this situation. So with the right planning, without insurance, um the estate that would be about $23 million could drop down to about 16.57 million. Without the postmortem planning, which again like work with the right people, build a team of financial adviserss that you trust, not just planners, but fiscalists, lawyers, everything. It's really important. Without the postmortem planning, they would have had a tax bill of in total close to like uh 123 million. So $6 million more and a net estate of about 12 million bucks. So $11 million lost in taxes. That was that's crazy if you do nothing, right? That was just let the money grow and do nothing. Now, so how does the insurance come in, right?

Like what's the what's the advantage? So we looked at it. We said, "Okay, well, you have a big tax bill. You don't need all of the funds that you have either. So, let's build a strategy where you're putting $100,000 a year into a whole life insurance plan." So, that does a couple things. One, you're because you're reducing the value of your investment portfolio that's taxed every single year, right? Your dividends, everything is taxed every year. So, we're reducing the value of that. Instead of it growing to 23 million, it grows to say 20 million. So you save some taxes there and you saved taxes throughout your life u every year that you know you have about 3 million bucks that wasn't invested. So you're saving some taxes there as well. Now the other thing that's really cool is that death benefit has now grown to about $10 million that's going to be funneled into the company taxfree.

Right. So to recap, we've just moved about $3 million, a little over $3 million to a whole life strategy. And another sidebar, I apologize that my AD is kicking in, but it's important when you're 60, your investment portfolio should start to be a little bit less aggressive. So we'll often look at the cash value of a life insurance policy, which is vested, as an alternative asset class, as potentially a replacement to fixed income. So, not only are we moving assets from a taxable portfolio to a non-t taxable portfolio, we also do that while reducing your overall risk, which is key as you kind of age. So, let's look at the final situation in this in in this example, right? With post-mortem planning, which again, I won't get into, but the situation looked like he'd have a net worth at death of 20 million.

So he was worth less in this situation, but he'd actually get net to his family close to $24 million. So more money than in the previous example, more money even than he actually was worth when he died. And that's because the life insurance came in, $10 million death benefit came through tax-free uh through the CDA, mostly taxree in this example. Um and and yeah, so we were able to increase his net worth at death by close to, you know, $6 million depending on the planning that happens, but a significant boost in uh net estate. So that's that's kind of the power of the insurance is you're moving investments that are taxable to a non-t taxable investment that's going to be paid out taxfree and isn't taxed again when you die because your investment portfolio it's taxed every year and it's taxed again when you die.

So when you do the right type of planning and the right strategy and you work with a proper insurance advisor who's going to tell you, okay, this is a premium or an investment that makes sense uh for you. And then you talk with the right accountants and everyone and we try to work like at Kelson, we kind of try to quarterback things a lot. So we'll sit down with the notaries, the you know the accountants and and be we want to be involved. And I think working with people who want to be involved and who um I you know I say as a financial planner we're not experts in everything. We're dangerous enough to play kind of in everybody's sandbox, right? So I know I know enough about what the accountant's talking about to see how that fits into the plan.

I know enough about what the notary is talking about uh or the lawyer u not to make the decisions and write up the contracts and and execute the parts of the strategies that aren't mine to execute but enough to educate the client and walk them through uh the advantages disadvantages etc. That's good. And the example you shared that was basically corporate owned whole life insurance and cascading well cascading insurance at play. Right. So, in this situation, it wasn't a not a cascading, if you will. It was the the owner of the company. The insured was the owner of the company. Um, but think, you know, that $25 million or $24 million is going to be paid to the kids, cascaded down to the kids, and that now they have, you know, there's two kids, there's a wife.

So, do the math. Everyone's got a lot of money now. And it is something, you know, we should look to to implement now is well, maybe we should insure the kids because they're going to be worth even more, right? Cuz 8 million bucks say 35 40 that's going to grow for they're going to have the same problem, right? So if it works for the the first client, it's going to work for the next. And um yeah, so that's more of an example of a corporate life uh corporate owned cash value life insurance maybe being used as an alternative to fixed income or just as its as a as an estate planning tool which you know that's the real purpose of life insurance. That is like why you buy insurance. all the other things we'll talk about like the ca the cascading using the cash value, using the investment value, all of these things, they're they're bonuses, they're advantages, but you buy life insurance because you're eventually going to die.

Yeah, we know that for sure. We know for sure that you're going to have taxes to pay and it's the best way to pay for those taxes. Yeah, that's really good. And when specifically does it make sense for a business owner to have corporate own whole life insurance as an asset class in their portfolio? Yeah. So there's that's another great question and my opinion as soon as you can. Um as soon as like I said earlier like to me I want your cash flow situation I don't want it to be a burden. Second it's not a burden and we're buying an an amount of insurance that is relevant. Like I'm not saying buy like a $50,000 or $100,000 policy just to own one. That's not necessarily like worth your while. Wait a couple of years.

This is where like sequential financial planning is what I call it. I'm sure it's not I'm sure I didn't invent that term, but doing things in the in the right order. Yep. Um, so that's for example, if I work with a younger people who are younger in business, the first thing I look at is shareholders agreement. And we might just put in term insurance at that time. Like it might be something simple like couple hundred bucks a year, have a million, $2 million of term insurance if something happens to the one of the business owners while the business could buy back the shares and become a full-time owner of that business instead of, you know, the wife coming in and being a 50/50 partner with you, right? So that's not most people that's not really what they want to have happen.

So, uh, the beautiful thing about that, Joey, is like I could put a term insurance in place because that's what makes sense today and we could convert that down the line without having to do any medical. So, your biggest risk your biggest risk as a to wait is health like really that's it. If your health changes, insurance companies aren't just insuring everybody that they that that applies. Yeah. like you have to think like it's it's a lot of on our end it could be a lot of work sometimes if they if you have any um health issues right they're not going to want to insure you or they're going to insure you and they're going to say Joey instead of 10 grand you're paying 20 grand you still want it cuz we'll we'll take on the risk if you give us more money so we try to safeguard people's insurability as much as we can if it's not the right time and make sure that they always have the option down the line to not miss out on these opportunities when the business is cash flowing going the way that it needs to uh to pay for that.

Mhm. Yeah. That's the urgency that business owners have is that you never know when you're going to be less healthy than today, right? So, it's that's the gamble that people play. You know, I always it's the one thing you could have, you know, you could buy your stock portfolio, you could buy other businesses, you could buy real estate, you could do everything. You could buy anything if you're about to die or or in bad health, but you can't buy insurance when you're not in good health. Yeah. So that's why I think it makes sense as soon as you can, but if you can't buy term insurance and safeguard the ability to to own a whole life insurance policy down the line. And so that that's great. I think you touched on a lot of stuff like like a no-brainer strategy to for when you die.

And that's the biggest tax bill, right? Whenever that that arrives and we got to be prepared for that. Now, what about the business owners that makes a lot of money, makes a lot of profit, and like they're paying a lot of taxes right now, and they want to find the solutions to diminish or reduce that as much as possible as fast as possible. Yeah. What would you recommend in that area? So, a similar strategy, right? Like we're just going to use it maybe for a different reason. Now, if we had so much more cash flow, maybe we could put fund a similar life insurance policy. Now the benefit to that is so what happens in Canada right you have no matter if you have associated companies to your operating company which most people do most people have a holding company that owns shares of their operating company and they invest in their holding company thinking I'm good right the second that you have more than $50,000 of passive income you start to lose your small business deduction right so you're I know you're familiar with it but maybe for the audience it's a twoc second bid on it.

Once you make 150 grand in passive income, whether that's in your operating company or in your holding company, doesn't matter, they're associated, you lose your small business tax rate, which results, just we'll keep it simple, results in about $70,000 extra in taxes if you have the small tax rate. So, you're paying 70 grand more in taxes. That's that's a lot. Um, that's a lot. So, how can we mitigate that? How can we potentially stop that from happening? Okay. Well, have tax efficient investments or tax sheltered investments. And life insurance is a tax sheltered investment. So, how much we have to kind of figure out the calculation. How much of your investment portfolio needs to go into a life insurance policy to uh to stop that that tax drag on the small small business tax loan and on your portfolio that's being taxed also.

cuz you're remember your passive income, it's screwing up your operating your your active business income, but you're also being taxed on that passive income at probably 50% as well. So, you're losing a lot of that. Um, so again, that it's a similar strategy, and this is where we kind of get into the uh using the cash value potentially as an asset class when you have that much that much those that much funds and that much cash flow coming through. If we're able to maximize the additional deposit options, we can hit a break even point on your cash value very early, as early as like five years in, and then use those funds to fund your operations, fund your lifestyle or other things. So, give you an example, right? Let's I'm just going to make up a cash value number 10 years from now.

So, you have a million dollars in cash value 10 years into owning the policy. What can you do with with those funds? And why is it why is it more efficient than an investment portfolio where to withdraw those funds you'd be taxed on? So if you keep money in the business, let's say it's for a business expense, you could just use your corporate your life insurance as collateral to a bank or even directly with the insurance company and they'll lend you up to 90% of that cash value. So because it's a loan, there's no tax implications, right? So some people say, well, why don't I withdraw the money? Because if you withdraw the money, there could be tax implications. But if you use it as a loan and you put it up as collateral and maybe you know you have if you have that much money, most likely you have a good relationship with a banker who might be able to offer you a good rate and you could take money out into your company that way.

Now what if I want to get money into my hands personally? Right? So that's the biggest problem that we see. Um and this where the planning is really really important but it is one of the biggest problems we see is we have accumulated assets in our company for so long and we've had success in deferring the taxes as much as we could but at a certain point you know I got I didn't just save all that money maybe to to not spend it. I want to spend it. I want to use the funds. So using the life insurance, you can take the loan either into the company and pay yourself out a taxable dividend, which you're not really stopping the issue, but there's advantages to doing that. So I'll give you the two options and I'll give you the advantages and disadvantages of each.

Yeah. So you either take money, you take the loan in your company, you pay yourself a dividend, or you pay taxes personally, right? So, you've deferred tax in the company. It's great, but you still have to pay personal. Or you take the corporate asset, you take a loan against it personally, and you just take the withdrawal personal and you don't pay tax. But there's a caveat to that as well because you're not really supposed to take the you're not really supposed to have access to your corporate funds to take that personal uh loan. So, you have to pay what we call a guaranteed fee back to the company every year, which could be anywhere between 1 to 2% depending on um on kind of what like the the prime rate and a few different things are.

So, that's not a big deal in the first 10 years, right? You take out a 100 or 200k out of the company and you pay back a,000 or 2,000 to the company, but it's on the balance outstanding. So, if you've got, you know, millions of dollars in loans, well, you're always paying back your company that and that number becomes bigger at a certain point, but you're not paying any taxes personally, which then allows you to maybe draw down on your RRSPs, draw down on your other investments to to pay tax on that and kind of balance things out a little bit, right? Have more net income in your pocket. Now, so obviously the advantage to option two is, well, I don't pay tax personally. That's the that's the advantage. But if I go the other way and I say, you know what, I'll pay the taxes personally because you have to pay the taxes eventually.

Honestly, that's just you're either going to pay a lot in interest and lose part of the death benefit or you just pay the taxes prematurely. If your goal is legacy, often times it's you or it's your family. So, do you prepay some of the taxes? But here's the really cool thing. If you take the loans in the company and then you pay out a taxable dividend personally, what happens is that the loan is in the company. So, let's use the example. Let's say it's a $5 million death benefit when I pass away and it's all credited to the CDA account, which means that I could pay a taxfree dividend out to my to my estate, no problem. But I have a loan of, let's call it 2 million bucks because I've taken out a lot of funds throughout my retirement.

So, the company still receives 5 million and it creates an a CDA credit of 5 million. Now, I pay the loan back and I have $3 million of life insurance like proceeds that are left over after I've paid down the loan. So, I can pay the 3 million out to my estate. But if I have other assets in my company, I can now take out another $2 million of say my stock portfolio or an investment or whatever other assets I have in my company, I could pay out another $2 million from that out of my company that I would have otherwise had to pay tax on. So, personally, like that's kind of I think for for cleanliness and for um yeah, for overall like planning purposes, I really love that strategy. if you have assets in your company.

If you don't have assets in your company and it's really just the life insurance and you plan on spending everything else, okay, then maybe go option two where you're not paying as much income on the personal side and paying back a guarantee fee. But CDA is a really really powerful thing. Um, and yeah, so that that that's my uh that's my take on you know, how do you how does someone really wealthy use the life insurance? Yeah, I'll come back to like how I start is you need flexibility. Like we'll talk about this. They probably I would make a bet like with most of my clients like this is what we're showing you. This is what we could do. These are all of the options. Most likely you're just going to keep it because it's you want the death benefit to go and do the more of the cascading or passing intergenerational wealth down to your kids.

That's most of the time what ends up happening. But we build a plan with the flexibility options to do all of these things and you could wake up tomorrow and want to maybe take income from that for like four or five years. Yeah. Or for your whole life or for one year. Like I want my clients to have I want they can have the the world is their oyster. When we build a plan, we build it with flexibility and their goals in mind and also the fact that we know their goals might change, you know. So um so I hope that answers the question. Yeah. Yeah. No, that's that's really thorough. I really appreciate that. That's that's going to add a lot of value to business owners watching this. So, that's amazing. I wish I had that when I got started for sure.

Um, but what I want to ask now is more on the like we start we asked about when's the right time to use an corporate own participating old life. Um, and you said that what I had in mind was that well when you start hitting that 50k in passive income, right? like it should be the earlier the better from what I understand. But is it fair to say that once you hit that passive income uh when you lose that low low tax rate on your passive income and you start losing 70 grand uh because of that that is that is like a no-brainer like you do need to have that if not you are losing that money. Yeah. Is that fair to say or ideally before to your point like yeah ideally ideally before for sure and the the reality is kind of the you know my point about cash flow and passive income they kind of go hand in hand because if you don't have the cash flow to pay the insurance you also don't have the cash flow to be building a portfolio that is going to screw with your passive income with the passive income loss.

You understand what I mean? So yeah. Yeah. Yeah. You know like they kind of go hand in hand. And so the second you start making good money, that's when you're probably starting to put some money aside as well and investing in your holding company or even in your operating company. So those things happen kind of around the same time. And I tell people, you know, and there's a different ratio for everybody, but there's a place for both. It's not just everything goes into life insurance, right? It's once you're starting to put funds away, I usually recommend, you know, you look at, you know, we didn't get into like the critical illness strategy, for example, but Yeah. 10 to 15% of your net profit goes there. 10 to 20% of your net profit goes to a life insurance policy.

The rest you keep some float for your business for opportunities that you might need in the next 5 years before the cash value and the life insurance hits that like point where the break even makes sense to lend against and then I'm not like you know still invest in the market or invest in real estate and other things. It's good to be diversified. So, so yeah. So to answer your question more clearly is yes when you're making money start allocating things to different things. Start allocating to your real estate portfolio, your investment portfolio, your life insurance, your critical illness all at the same time. Like that the we don't run into the passive income tax trap of paying an extra 70 grand for you know maybe you get there eventually but we'll delay it for a lot of years if we start allocating funds in different places.

That's really good. And again, for Canadian business owners like watching this right now that does have that surplus in their holding company, what's the single smartest move they can make like today or this week in order to improve their tax strategy? book a meeting with a tax planning professional like like you know like I'm not going to plug myself here but you know feel free to reach out obviously but um talk to a professional because there's there's things that um you're unaware of or there's things that you might think you're aware of but maybe you don't understand else like you're going to make the most as a Canadian business owner you're going to make the most money doing what you know best which is running your business. Yeah. Now, let people whose job is to take care of you keeping as much money as you possibly can in your business do that for you.

So, so yeah, there's there's not a onesizefits-all, but I think it's, you know, keep an open mind to insurance for sure cuz like you said, like most people hear insurance and it's right away turned off and they're like, I don't need that. I think, you know, it's only good when I'm dead or it's just an expense or uh insurance salesmen are sleazy people cuz they've written books about that for, you know, hundred years now. And like that those things are I I think it's funny honestly. Uh there's, you know, maybe some truth to to it back then like but hey, these strategies, they're here for a reason. There in Canada, there's no other asset class like like insurance and there's a reason for that. So, you know, you have a TFSA, you have your first house, that's taxfree.

Yeah. There's nothing else. Your 1.5 million on your if you sell your business if it qualifies, which is a whole other story. And then there's nothing else. There's insurance. There's a reason that that's main that's that that's stayed that way. There's a reason why the wealthiest of families in Canada use and buy more insurance than you would know. Um, so you know, keep an open mind to that. Get the right and build a team of financial professionals you trust. Like, yeah, get an accountant, get a financial planner, um, a lawyer and and meet with them regularly to review your plans. Yep. That's often what what we hear and I think it's going to be the recurring message after meeting with all those people like you, financial experts. It's it's a big lack of team, right?

finding the right team, making your own research obviously, right? This is like make make your own uh decisions, make your own research, talk to the professionals before implementing every situations is different. There's no guarantee and anything we talked about today. This is just common knowledge that you can go ahead and bring to your team and and and seek those responses yourself, but it's out there, right? People like you um is there helping business owners for 40 years now in Canada putting in place the those strategies. So, the help is there. um and maybe not just rely on your account and your CPA or the person that's been with you from the beginning that does one part. There's other parts that goes into that. So that's that's extremely insightful. Um yeah, and if I can touch on Yeah, please please please.

I was just going to say like I love accountants. I studied accounting. I worked in accounting a little bit. I y I'm not saying anything bad about CPAs, but um you know it happens that they're they're looking at your business from a often times backwards, right? They're looking at what were you doing in the last you know year, two years fixing your things, they'll look forward a little bit. Um, and every time I work with a CPA, like I I often recommend that off a second or third call, I want the CPA to come in if they have a good relationship with them and I'll share the insurance strategies with them. Joey, every single time I'm I'm teaching them something new. This is not their area of expertise. Like they're and they understand it quickly, you know, like they they go, "Oh, okay.

Yeah. Oh, that makes sense. That makes sense. Yeah, okay. It's a good idea. We should do it." Right? like most of the times they they're like this close to to knowing about it. Then you kind of like iron it out for them and and and they often times love it. So um everyone brings a different skill set. I think that's important to keep in mind as well. Your CPA is not the end all be all of your of your finances. Yeah, 100%. Jeremy, if this episode's out outlive you, right, what's the one lesson about building and enduring Canadian legacy that you would like for business owners to remember? Well, hopefully that episode outlives me, right? The internet uh should still be around by then. We got bigger problems otherwise. Um, you know what? I think legacy is a is a super important thing to think about when you're in business.

Uh even when you're not in business, I think your legacy is something that um should drive your everyday action, should drive your your what you do on a day-to-day basis. And legacy is different for everybody, right? Like we talked about it for you and I, Joey, maybe it's more I don't want my grandkids to have to work and I want them to to live a free life. For other people, it might be a charitable um endeavor that they want to be remembered for. Um money helps with all of your legacy needs. You know, obviously having the right personality, being a person of integrity and all and and that is number one, but um just be efficient with your funds. Look at looking into how you can keep and preserve as much of your estate will help build that legacy.

the example I gave you before, you know, that business owner may have their their family and the generations to come may have a very very different outcome if they receive the million uh $11 million versus 25. Um so be efficient. Um but also your legacy should reflect your values, right? So so keep that in mind. like life insurance. We didn't get into it and maybe we do another episode on uh life insurance for charities. There's amazing strategies that you could implement there as well. Um really really great tax advantages that you could leverage um when buying insurance for a charitable purpose. So yeah, I think think like my advice would be like think about your legacy as you're building your business, as you're building your wealth. just think about it and what you want to have um be remembered and and what you want to pass on.

I think a lot of people go through the motions more than thinking about what could they be worth in 10, 15, 20, 30 years. So the more you think about it, the more clarity you get on that and and the more drive you probably get for your business, too. For sure. That's that's really good advice and hopefully this whole conversation sparked that uh that reasoning in a lot of Canadian business owners. Um so I want to thank you Jeremy for being an open book and sharing that value. I don't think there's a lot of places that business owners in Canada can get those type of responses or or guidance. So that was extremely insightful. So, if you're a business owner that watched that uh in Canada and you found just a little bit of of good golden nuggets, all we're asking is free.

Just subscribe to the channel. We're going to drop an episode every week to help Canadian and American business owners keep more of what they earn. That's the whole point of this channel. So, if you enjoyed it, just subscribe. Comment your thoughts below. Comment your takeaway. and we'll see you guys on the next