2004 buy/sell arrangements. 2004 xyz inc. fair market value (fmv) = $2,000,000 owners: john owns...
TRANSCRIPT
2004
• XYZ Inc.• Fair Market Value (FMV) = $2,000,000• Owners:
John owns 50% of sharesJohn owns 50% of shares• ACB of John’s shares $10,000• PUC of John’s shares $10,000
Mary owns 50% of sharesMary owns 50% of shares• ACB of Mary’s shares $10,000• PUC of Mary’s shares $10,000
Company ProfileCompany Profile
2004
Company ProfileCompany Profile
• Growth rate of company2%
• Personal marginal tax rate on income 50%• Personal marginal tax rate on dividends
33%• Capital gains inclusion rate
50%
• Assume John died last night• Assume Mary sells the business in 10 years
2004
Alternative 1.Alternative 1.Criss-cross with personally owned insurance
• John buys $1,000,000 of insurance on Mary’s life• Mary buys $1,000,000 of insurance on John’s life
Ag
reem
ent
Premiums
Premiums
50%
50%
XYZ Inc.
2004
Alternative 1.Alternative 1.Criss-cross with personally owned insurance
$1,000,000To purchase shares
2
John’s estate
As per Buy-Sellreturns shares to Mary
3
$1,000,000Death Benefit
1
Mary
2004
Alternative 1.Alternative 1.Criss-cross with personally owned insurance
TaxationTaxation1. Premiums paid with after-tax dollars by owners
2. Any capital gains on “sold” shares belong to deceased’s estate
AdvantagesAdvantages1. The simplest of all alternatives
2. Surviving owner(s) have an increased ACB
3. Insurance proceeds protected from corporate creditors’ claims
DisadvantagesDisadvantages1. Large number of policies to maintain if there are multiple owners
2. Dealing with policies could be a problem in the event of disagreement
3. Premiums are paid with individual after-tax dollars.
2004
Alternative 2.Alternative 2.Criss cross with corporate owned insurance
• XYZ Inc. buys $1,000,000 of life insurance on John’s life and
$1,000,000 of life insurance on Mary’s life
Ag
reem
ent
Premiums
50%
50%
XYZ Inc.
2004
Alternative 2.Alternative 2.Criss cross with corporate owned insurance
As per Buy-SellReturns shares to Mary
Mary Now owns 100% of XYZ Inc.
3
5$1,000,000
$1,000,000Death Benefit
1
XYZ Inc.
$1,000,000Promissory note
To purchase shares
2
John’s estateMary
XYZ Inc. declares a capital dividend of $1,000,000
4
2004
Alternative 2.Alternative 2.Criss cross with corporate owned insurance
TaxationTaxation1. Premiums paid by corporation are a non-deductible expense
2. Proceeds received by the company are tax-free
3. Proceeds in excess of ACB are credited to the CDA
4. Any capital gains on “sold” shares belong to Estate of the deceased
AdvantagesAdvantages1. After-tax premium cheaper if the company is in a lower tax bracket
2. Fewer policies are required (one per shareholder)
3. Premium disparities are not an issue
4. Surviving owner(s) have an increased ACB equal to the purchase price of the newly acquired shares
DisadvantagesDisadvantages1. Insurance proceeds subject to claims from company’s creditors
2004
Alternative 3.Alternative 3.Share redemption with corporate owned insurance
• XYZ Inc. buys $1,000,000 of life insurance on John’s life and
$1,000,000 of life insurance on Mary’s life
Ag
reem
ent
Premiums
50%
50%
XYZ Inc.
2004
Alternative 3.Alternative 3.Share redemption with corporate owned insurance
As per Buy-Sellreturns shares XYZ Inc.
For cancellation
3
$1,000,000Death Benefit
1
XYZ Inc.$1,000,000
To purchase shares
2
John’s estate
2004
Alternative 3.Alternative 3.Share redemption with corporate owned insurance
TaxationTaxation1. Premiums paid by corporation are a non-deductible expense
2. Proceeds received by the company are tax-free
3. Proceeds in excess of ACB are credited to the CDA
4. Proceeds received by the shareholder’s estate in excess of the PUC deemed a dividend. The dividend could be elected as a capital dividend
AdvantagesAdvantages1. After-tax premium cheaper if the company is in a lower tax bracket
2. Fewer policies are required (one per shareholder)
3. Premium disparities are not an issue
DisadvantagesDisadvantages1. No increase in the ACB for the surviving shareholder
2. Insurance proceeds subject to claims from the company’s creditors
2004
Alternative 4. Hybrid method with corporate owned insurance
• The insurance would be corporately owned but the agreement would allow flexibility in determining at death how many shares would be purchased by the surviving shareholders and how many shares will be redeemed by the corporation.
2004
Alternative 4.Hybrid method with corporate owned insurance
• XYZ Inc. buys $1,000,000 of life insurance on John’s life and
$1,000,000 of life insurance on Mary’s life
Agr
eem
ent
Premiums
50%
50%
XYZ Inc.
2004
$500,000Promissory note
To purchase shares
Mary
4
As per Buy/Sell returns 50% of shares XYZ Inc.
For cancellation
3
Mary Now owns 100% of
XYZ Inc.
As per Buy/Sellreturns 50% of shares to Mary
5
7
Hybrid Method with corporate owned insurance
$500,000To purchase shares
2
John’s estate$1,000,000Death Benefit
1
XYZ Inc.
XYZ Inc. declares a capital dividend of $500,000
6
2004
Alternative 4.Hybrid method with corporate owned insurance
TaxationTaxation1. Premiums paid by corporation are a non-deductible expense
2. Proceeds received by the company are tax-free
3. Proceeds in excess of ACB are credited to the CDA
4. Proceeds received by shareholder’s estate in excess of PUC deemed to be a dividend. The dividend could be elected as a capital dividend
AdvantagesAdvantages1. After-tax premium expense cheaper if company is in a lower tax bracket
2. Fewer policies are required (one per shareholder)
3. Premium disparities are not an issue
4. Surviving shareholder gets an ACB step up
DisadvantagesDisadvantages1. Insurance proceeds could be subject to claims from the company’s
creditors
2. Somewhat complicated arrangement