- The Story
A successful private corporation with four equal partners faced a significant challenge in ensuring a smooth ownership transition in case of a partner’s death. Each partner owned shares through their respective holding companies (Holdcos), and while they had built a highly valuable business, they lacked a structured buy-sell agreement. Without a proper plan in place, the surviving partners would struggle to fund the buyout, potentially forcing asset sales or high-interest borrowing. They needed a tax-efficient, fully funded strategy that preserved business liquidity while minimizing tax liabilities.
Developing a tax-efficient buy-sell plan
Stone Owl designed a structured buy-sell agreement that leveraged corporate-owned life insurance and an Immediate Financing Arrangement (IFA). Each partner’s Holdco purchased and owned life insurance policies on the other three partners. Upon the death of a partner, the insurance payout would be received tax-free into the deceased partner’s Holdco, ensuring immediate liquidity for the buyout.
To preserve corporate cash flow, each Holdco implemented an IFA strategy. Instead of using business funds to pay insurance premiums, each Holdco took out a loan secured against the policy’s cash value. The loan proceeds were then used to cover premium payments, allowing the business to maintain liquidity for growth and operations.
Upon a partner’s passing, the deceased’s Holdco received the insurance proceeds tax-free. The Capital Dividend Account (CDA) was credited, enabling the Holdco to distribute tax-free dividends to the deceased’s estate. This facilitated a seamless buyout while minimizing tax burdens. The surviving Holdcos used these proceeds to redeem the deceased’s shares, ensuring that the remaining partners retained full ownership control.
Mark’s corporation funded a high cash value whole life insurance policy with $250,000 per year in premiums. The policy’s cash value grew tax-sheltered, creating a corporate reserve for retirement.
Instead of waiting for retirement, Mark’s corporation borrowed against the policy’s cash value, preserving liquidity for business growth and investments. The corporation paid loan interest, which was tax-deductible, further improving tax efficiency.
Upon retirement, Mark’s corporation used tax-advantaged withdrawals from corporate surplus and insurance cash value to fund dividends. The insurance policy continued to grow, ensuring a long-term tax-efficient capital pool remained within the corporation.
Upon Mark’s passing, the life insurance payout was received tax-free by the corporation. The CDA allowed his heirs to withdraw funds tax-free, ensuring efficient wealth transfer. Any outstanding corporate loans were settled, ensuring a clean and optimized estate transfer.
A closer look at liquidity and wealth preservation
By integrating corporate-owned insurance with strategic borrowing, Mark successfully maintained corporate liquidity while securing tax-efficient retirement income. His structured approach ensured that corporate funds remained invested and available for business opportunities. Additionally, his corporation paid lower taxes compared to traditional taxable investments, providing a significant financial advantage. The retirement dividends were carefully structured to minimize personal tax exposure, ensuring that Mark could enjoy a steady income stream without unnecessary tax burdens. Furthermore, his estate passed on significant wealth tax-free through the Capital Dividend Account (CDA), securing financial stability for his heirs.
The power of structured corporate retirement plan
With the guidance of Stone Owl, Mark optimized his retirement income while keeping his corporate cash flow flexible. By combining corporate borrowing and life insurance, he successfully saved for retirement tax-efficiently while utilizing corporate funds for investments and maintaining liquidity. This structured approach allowed him to extract tax-advantaged dividends for personal income, ensuring financial security throughout retirement. Additionally, the corporate Capital Dividend Account enabled him to pass on wealth tax-free to his heirs, preserving his legacy.
Today, Mark stands as an example of how business owners can structure their corporate finances to maximize retirement income while preserving financial flexibility. His case highlights the power of proactive planning in securing long-term wealth.
* We take our clients’ confidentiality seriously. While we’ve changed their names, the results are real.
