Do your clients need an IFA to reduce inheritance tax?

As Benjamin Franklin once said, “Nothing in this world is certain except death and taxes.”2 And for many Canadian business owners, that’s exactly what comes to mind.

They have worked hard, built a thriving business, and hope to pass on the wealth to their children. But how do they do it in a tax efficient way?

Step 1: Secure a whole life insurance policy

Whole life insurance policies have emerged as a powerful solution to this problem. After the death of the client, his assets are generally transferred to the heir, along with inheritance rights.

However, if a client owns a whole life policy, the impact of potential capital gains may be minimized by the death benefit and cash value. This gives beneficiaries a way to inherit while keeping most of the funds intact.

There’s only one catch: expensive bonuses.

Policies used for estate planning for high net worth individuals are often expensive. And even if clients can afford the policy, the cash flow drain may prevent an advisor from suggesting the strategy. Enter, the Immediate Financing Arrangement (IFA).

Step 2: Apply for an Immediate Funding Agreement (IFA)

An IFA is the missing piece of the puzzle. It allows the insured to borrow up to 100% of the premium as soon as the contract is set up.3 They can effectively add insurance to cover them – and optimize the estate plan – without negatively impacting their liquidity.

Let’s take a real-world example: Richard is a 75-year-old business owner with a wife and two adult children. He wants to pass the business on to his sons when he dies, but worries about the large capital gains that would be triggered when he dies. Moreover, he is reluctant to withdraw any capital from the company at this time.

To mitigate the potential tax bill, Richard purchases a company-owned whole life insurance policy with a premium of $500,000. He is then eligible to re-borrow the funds through an IFA – thereby structuring his estate and ensuring the business has enough capital to continue.

Step 3: Borrow 100% of the premium

After a quick underwriting process, Richard qualifies for an IFA of $500,000. There are no restrictions on the use of the funds, and apart from paying outstanding interest on the loan, the borrower must maintain the policy in good standing at all times. He can also ask to borrow additional premiums on an annual basis, if the need for capital persists.

The Fair Advantage

While IFAs are offered by several lenders, Equitable has gone further. We allow policyholders to access up to 100% of the premium, with no excess coverage! even if the cash value (CSV) of the policy is lagging. For example, the CSV might only be worth $350,000, but Steve would still qualify for $500,000 (the full bounty amount).3

Other benefits include:

  • Low minimum – only $50,000 annual premium required
  • A hassle-free process for additional credit limit increases
  • Easy to navigate underwriting and auction process – limited back and forth
  • Competitive rates and fees keep your costs low4
  • No capital due until the death of the insured5

Most importantly, we respect the advisor-client relationship. Our involvement is solely as a lender and our goal is to help advisors and clients achieve their financial goals.

Ready to refer? Provide your details and an expert will contact you shortly. Contact our team at [email protected].

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1 Equitable Bank does not provide tax or financial advice. Advisors should consult with their clients to discuss their unique tax situation and the tax-free benefits of a CDI.
2 NCC Staff, “Benjamin Franklin’s Last Great Quote and the Constitution,” National Constitution Center, November 13, 2021.
3 Subject to internal underwriting and discretion, the expected year-end cash value must equal at least 70% of the premium amount.
4 Rates are subject to change at any time.
5 Equitable Bank RV Line of Credit offers are demand credit facilities, which means that Equitable Bank may demand payment of all or part of the outstanding balance at any time.

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