# Buy, Borrow, Die



## MrBlackhill (Jun 10, 2020)

I never took time to figure out how the ultra wealthy manage to pay almost no taxes.

Pretty simple, they take no income, they borrow against their assets and they die with those loans. When the loans are paid at death and transfered to their heirs, it doesn't trigger any capital gain.









How Ordinary Americans Can Also Buy, Borrow, And Die Without Paying Taxes


Even if you're not a millionaire yet, you can take advantage of the same strategies that help them avoid paying taxes each year.




www.forbes.com


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## james4beach (Nov 15, 2012)

MrBlackhill said:


> Pretty simple, they take no income, they borrow against their assets and they die with those loans. When the loans are paid at death and transfered to their heirs, it doesn't trigger any capital gain.


Yeah, it's interesting. But I think the problem is that you need a huge amount of assets to pull this off. Imagine if you have 30 years of retirement and withdraw (add to your margin loan) 50K each year. You'll rack up $1.5 million in loans. For a margin broker to be comfortable with that, the loan would have to be against something like $10 million in securities.

And rich people tend to have expensive lifestyles, so we're probably talking more like 100K x 30 years = $3 million borrowed. Now we're talking about more than $20 million required for the strategy to be viable, unless you want to risk having a margin call.

Also I think rich people would typically do this by arranging specialized non-callable loans.


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## MrBlackhill (Jun 10, 2020)

I have no clue what I'm talking about but let's say at retirement I own a fully paid house which is now worth $5M. If I'm not wrong, I can take a HELOC of 80% of its value, $4M. Now for the next 40 years I use my HELOC to borrow $50k/year, tax free and I pay the interests with the HELOC itself. And then I die, the house is used to pay the HELOC. Sure, after 40 years, I'll have borrowed over $2M so I'd be paying interests higher than the money I want to withdraw so it may not make sense, by meanwhile the $5M house continues to increase in value. There's certainly some optimisation to do. And there's certainly something similar to do by using a loan against an investment portfolio of stocks & bonds.


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## milhouse (Nov 16, 2016)

Borrowing against asset doesn't seem to be a very widely used strategy for creating non-taxable income and/or capital for additional investments which on the surface makes sense to me but I haven't taken the time to fully understand all the ins, outs, risks, and benefits of it. Borrowing against home equity/real estate is probably the most familar to most people. In the past, I've mentioned reading about borrowing against the cash value of whole life policies. In the crypto thread, m3s describes borrowing against the value of one's crypto currency so as not to trigger capital gains. 

In Canada, I'm under the impression that your assets are deemed sold upon death (other than RRSP's, etc) so your estate has to pay the captal gains before it can be passed onto heirs. 1-I'm under the impression this is not the case in the US which I find odd, though there are estate taxes. Please correct me if I'm wrong. 2-I'm curious if one can shield your gains through a family trust in Canada.


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## m3s (Apr 3, 2010)

Robert Kobayashi covers this all the time. It's a very common strategy to borrow against crypto and real estate.

Borrow a depreciating asset (fiat cash) against an appreciating investment and it's tax advantageous. In a business expenses (spending) is deducted before taxes whereas personal income is taxed before spending. In the US apparently they can even depreciate investment real estate to counter any capital gains on a given year.

So they just keep borrowing as assets appreciate. You never want to be maxed out where you risk liquidation


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## Covariance (Oct 20, 2020)

james4beach said:


> Yeah, it's interesting. But I think the problem is that you need a huge amount of assets to pull this off. Imagine if you have 30 years of retirement and withdraw (add to your margin loan) 50K each year. You'll rack up $1.5 million in loans. For a margin broker to be comfortable with that, the loan would have to be against something like $10 million in securities.
> 
> And rich people tend to have expensive lifestyles, so we're probably talking more like 100K x 30 years = $3 million borrowed. Now we're talking about more than $20 million required for the strategy to be viable, unless you want to risk having a margin call.
> 
> Also I think rich people would typically do this by arranging specialized non-callable loans.


It's all based on a quirk in their tax code that is fundamentally different than Canadian tax. When a US tax payer dies and passes on an asset the ACB to the person receiving is fair market value and the estate pays no tax on the capital gain from ACB up to FMV. Read that again. The estate pays no tax. Thus 100% of the assets move to the next generation. Whereas in Canada the next generation would get a lesser inheritance because the estate would first settle the tax payment. It's fundamentally different from Canada. 

Now to make it even richer what you do is take out life insurance equal to or greater than the debt. Voila 100% gets passed on...


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## OneSeat (Apr 15, 2020)

Covariance said:


> . . . . . . . what you do is take out life insurance equal to or greater than the debt. Voila 100% gets passed on...


In US, Canada, or both?


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## Covariance (Oct 20, 2020)

OneSeat said:


> In US, Canada, or both?


My comment was more focused on the US scenario. Not to say you can't utilize insurance in Canada for planning as well...


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## AltaRed (Jun 8, 2009)

Covariance said:


> It's all based on a quirk in their tax code that is fundamentally different than Canadian tax. When a US tax payer dies and passes on an asset the ACB to the person receiving is fair market value and the estate pays no tax on the capital gain from ACB up to FMV. Read that again. The estate pays no tax. Thus 100% of the assets move to the next generation. Whereas in Canada the next generation would get a lesser inheritance because the estate would first settle the tax payment. It's fundamentally different from Canada.
> 
> Now to make it even richer what you do is take out life insurance equal to or greater than the debt. Voila 100% gets passed on...


True, but there is an inheritance tax, albeit that really only applies to the truly wealthy, and the estate's debts (loans against collateral) must be settled in some form.


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## MrMatt (Dec 21, 2011)

Covariance said:


> Now to make it even richer what you do is take out life insurance equal to or greater than the debt. Voila 100% gets passed on...


But you paid more for the life insurance than you get paid out.
The "life insurance for taxes" always seemed like a silly strategy.


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## MrMatt (Dec 21, 2011)

Covariance said:


> It's all based on a quirk in their tax code that is fundamentally different than Canadian tax. When a US tax payer dies and passes on an asset the ACB to the person receiving is fair market value and the estate pays no tax on the capital gain from ACB up to FMV. Read that again. The estate pays no tax. Thus 100% of the assets move to the next generation. Whereas in Canada the next generation would get a lesser inheritance because the estate would first settle the tax payment. It's fundamentally different from Canada.


Wow, that's incredible, but again, that's the impact of tax free compounding.


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## kcowan (Jul 1, 2010)

If voters really understood how capital gains taxes works upon death in Canada versus the $11 million exemption per person in the US, they would be appallled. That is the real death tax that our government extracts from the middle class.

Even in Mexico where the tax rate is 28%, we made 2 million pesos on the sale of our condo, but there is an allowance every five years that exempts that for Permanent Residents.


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## MrMatt (Dec 21, 2011)

kcowan said:


> If voters really understood how capital gains taxes works upon death in Canada versus the $11 million exemption per person in the US, they would be appallled. That is the real death tax that our government extracts from the middle class.
> 
> Even in Mexico where the tax rate is 28%, we made 2 million pesos on the sale of our condo, but there is an allowance every five years that exempts that for Permanent Residents.


They would be glad, those old rich dead guys should pay more tax.
There are some who want to ban inheritance entirely, like the entire concept of caring for or providing for your children is "unfair".


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## MrsPartridge (May 15, 2016)

Isn't it true that when a person dies their debts are not passed on to heirs? 

If that's the case, maybe borrow to maintain a lifestyle against your assets and your wealth will stay intact and grow.


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## peterk (May 16, 2010)

^ If you are financially mis-fortunate and have _net_ debts when you die, then they outstanding debt doesn't get passed to your heirs (i.e. the lender has no legal recourse against your heirs - but they still have the loan on their books that will end up defaulting).

If you just have some debt, then the estate has to pay the debt off, which would come from the asset funds that your heirs would otherwise get.


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## afulldeck (Mar 28, 2012)

MrMatt said:


> They would be glad, those old rich dead guys should pay more tax.
> There are some who want to ban inheritance entirely, like the entire concept of caring for or providing for your children is "unfair".


Canadian should stop comparing ourselves with the US from a personal tax perspective. Canada is far more progressive especially at death. To ban inheritance would be a travesty for some family who support loved ones that are incapable of looking after themselves. I know a few families in that position, I know their sacrifices and I know their worries.


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## MrMatt (Dec 21, 2011)

afulldeck said:


> Canadian should stop comparing ourselves with the US from a personal tax perspective.


Why?

We're in a global fight for capital, and I want to win.
Personally if Canada offers second rate opportunities, my investing funds go elsewhere.

Canada is well positioned, but we need to stop hamstringing ourselves with bad policy.
The US is our closest competitor, and we should be comparing ourselves with them.


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## afulldeck (Mar 28, 2012)

MrMatt said:


> Why?
> 
> We're in a global fight for capital, and I want to win.
> Personally if Canada offers second rate opportunities, my investing funds go elsewhere.
> ...



So I agree with you. My point was that Canada already pays an exorbitant amount in tax. Yet MSM Canada conflates taxes about the Rich (US) vs Canada and canadians get the wrong idea...


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## MrMatt (Dec 21, 2011)

afulldeck said:


> So I agree with you. My point was that Canada already pays an exorbitant amount in tax. Yet MSM Canada conflates taxes about the Rich (US) vs Canada and canadians get the wrong idea...


Because many Canadians are ignorant and uninformed, so it plays well here too.


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## sags (May 15, 2010)

Somebody is going to pay the taxes. Everyone wants it to be the other guy.


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## MrMatt (Dec 21, 2011)

sags said:


> Somebody is going to pay the taxes. Everyone wants it to be the other guy.


I want everyone to pay less taxes.
I don't think a 30+% tax rate is reasonable.
I don't think people making < $20k should pay a penny of income tax either. I make substantially more than that FWIW.

Too much of what we pay in taxes is wasted, and too many politicians have totally sold out to special interest groups, which they funnel massive amounts of money to.

In BC they totally sold out to unions.








Provincial projects must be built with union labour, B.C. government says


Billions of dollars of provincial government projects, starting with Metro Vancouver’s Pattullo Bridge, will be built using union-only labour, under new rules announced by Premier John Horgan.




www.timescolonist.com




You can't even bid for government work, unless you're in a union. Wonder how many union votes that got them.


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## james4beach (Nov 15, 2012)

MrMatt said:


> I want everyone to pay less taxes.


Why on earth would you want that?

I want our country to have good social services, proper roads and bridges, top quality universities, well-funded police and military, and other strong infrastructure. That's what makes us into a great country.

By slashing down to minimal taxes, you end up with a country like the US which is rapidly deteriorating into a third world country. They can barely afford to provide social services, and generally leave poor people out to starve and go mad on the streets. Forgotten and neglected by society.


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## MrMatt (Dec 21, 2011)

james4beach said:


> MrMatt said:
> 
> 
> > I want everyone to pay less taxes.
> ...


Because I want our country to have a strong healthy economy where ALL Canadians can enjoy a reasonable standard of living. Don't you?



> I want our country to have good social services, proper roads and bridges, top quality universities, well-funded police and military, and other strong infrastructure. That's what makes us into a great country.


So do I, which is why I still support the necessary taxation. Those items are only a fraction of the budget.
I simply don't think a 30+% tax rate is reasonable, fair or required, and a 50% rate is just ridiculous.

My city spends a tiny sliver of budget on police fire and infrastructure. There is significant waste in their spending.



> By slashing down to minimal taxes, you end up with a country like the US which is rapidly deteriorating into a third world country. They can barely afford to provide social services, and generally leave poor people out to starve and go mad on the streets. Forgotten and neglected by society.


"I don't think people making < $20k should pay a penny of income tax either. "
We're taking money from people who aren't even making a living wage, yet you talk about "leaving out poor people".

The reason poor people are left out in the streets is complicated but I'd suggest
1. Taking what little money they have isn't helping.
2. Systematically restricting the availability of housing to ensure a chronic housing shortage is a MAJOR contributor.
3. Failure to address drug and mental health issues in the extreme poverty and homeless populations is also making this worse.

Work on those three items and we'll have far fewer people "starving and going mad on the streets".

If the government fixed the housing problem (by that I mean stop making it worse) the average Canadian family would have thousands a year more money to improve their lives.


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## Spudd (Oct 11, 2011)

MrMatt said:


> "I don't think people making < $20k should pay a penny of income tax either. "
> We're taking money from people who aren't even making a living wage, yet you talk about "leaving out poor people".


In 2020, I had $21.5k of total income, 21.25k taxable income. My net federal tax was zero. I had to pay $76 in provincial income tax. So basically I think people making <20k aren't paying income tax.

In fact, my total payable included CPP because I had self-employment income, and came to $353. But the climate action incentive was $495, and the Canada worker's benefit was $871. So in the end I walked away with $1013 given from the government to me. If you don't include CPP as a tax (because it will come back to you once retired), it's even more. And then there are the GST and Trillium (for Ontarians) payments for low-income folks on top of that. 

It's true that my spouse only made 9k so our household income was about 15k per person - that did help. But still. The situation is good if you're making less than 20k. Nobody was taking money from us - they were giving it to us.


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## MarcoE (May 3, 2018)

MrBlackhill said:


> I never took time to figure out how the ultra wealthy manage to pay almost no taxes.
> 
> Pretty simple, they take no income, they borrow against their assets and they die with those loans. When the loans are paid at death and transfered to their heirs, it doesn't trigger any capital gain.


Wouldn't they still have to pay taxes on all the yield their assets spit out? This could be significant. How do they get around this?


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## sags (May 15, 2010)

I don't know about BC, but in Ontario a company that wants to work on government projects has to obtain a high level of certification in many areas.

It is the unions who provide the necessary training with their own qualified instructors in their own training centers.

It makes sense the Ontario government would hire unionized companies that have obtained the necessary certification level and perform audits.

It would be a safety disaster to hire a bunch of small independent construction companies to work in dangerous locations, such as the 400 series highways, or the subway tunnel projects, as their employees lack the training and certifications.

Our son works for a fully certified company and has a big binder full of training certificates. He is involved in continuous training that may be individualized to the project and recently trained for working on the Toronto Subway expansion that will be starting next year. He also works at places like Bruce Power and building Amazon facilities, and the Gardiner Expressway in Toronto.

They are big, and sometimes dangerous projects. Our city recently had a collapse of the concrete floor in a new building project and workers were killed.

The accident involved a small construction company and it appears that mistakes were made regarding the depth and weight of the concrete floor.

It costs a lot more to hire unionized companies because of all the training, certifications, and experience involved.

I wouldn't say it is a waste of tax dollars.


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## MarcoE (May 3, 2018)

milhouse said:


> In Canada, I'm under the impression that your assets are deemed sold upon death (other than RRSP's, etc) so your estate has to pay the captal gains before it can be passed onto heirs. 1-I'm under the impression this is not the case in the US which I find odd, though there are estate taxes. Please correct me if I'm wrong. 2-I'm curious if one can shield your gains through a family trust in Canada.


You are generally correct.

In Canada, we have no "inheritance taxes" per say. HOWEVER, when you die, your estate is deemed to have sold all your assets. And the estate then owes capital gains. This can be significant. Especially for Canadian small businesses.

Let's say you're a small business owner. You started a business with nothing (worth $0). When you die 50 years later, your business is worth $10,000,000. Your estate now owes capital gains on $10 million. Let's round it up to about $3,000,000 in capital gain tax owed. Now... few businesses or estates actually have 3 million in cash sitting around, ready to hand over. So that puts the business in a tough spot. The government, wanting its 3 million, can end up seizing the business, taking it apart, and selling it bit by bit, and the entire thing ends up going kaput. The business dies with the owner.

So... Canadians who want to pass a business on to an heir use a whole life insurance. The company buys whole life insurance, insuring the life of the main shareholder (or multiple shareholders). The company itself is the beneficiary. Then when the shareholder(s) dies, the life insurance money flows back to the company tax free, and the company uses the cash to pay the capital gain tax.

I've seen this used to protect businesses from the death of the shareholder(s). But I imagine that this method could be used to shield other assets too, such as a significant real estate portfolio.

In the USA, there are estate taxes too, but only for very large estates. Last time I checked, estate taxes in America only started applying over 11 million dollars (in Canada they start from the first dollar). So nearly no Americans pay estate tax, since nearly nobody dies with 11 million worth of assets. The very rich have loopholes.


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## MarcoE (May 3, 2018)

milhouse said:


> In the past, I've mentioned reading about borrowing against the cash value of whole life policies.


This is correct. You have borrow against the cash value of your whole life policy. It's a very safe loan (you're guaranteed to die at SOME point), you can get good rates, and if you want, you can die with the debt (and the death benefit will pay it off).


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## MarcoE (May 3, 2018)

MrMatt said:


> But you paid more for the life insurance than you get paid out.
> The "life insurance for taxes" always seemed like a silly strategy.


Not necessarily. Say you own a business in Canada that's appreciated about $10,000,000 by the time you die.

The capital gain tax will be about 2.5 - 3 million (assuming today's rates).

You want to take that 2.5 - 3 million cash out of the company? How? How many small businesses have that kind of cash lying around? You'd have to sell parts of the company (say assets its owns) triggering massive taxes. Maybe lay off employees, close departments. Then funnel that cash out to the heir(s) in the form of a dividend, triggering massive taxes again. You could end up losing $7,500,000 dollars in taxes that way. 75% of the asset's worth. The company goes under.

If you invest about $500,000 in whole life insurance early on, it'll be "paid up" (dividends cover premiums) soon enough, and you just forget about it. And the death benefit (assuming you're young enough when you start) can be worth 2 - 3 million.

So you invest $500,000 in whole life insurance early on, and when you die decades later, it covers the capital gain tax. Your heirs get the full $10,000,000 asset.

Or you can save the $500,000 now, and when you die, your estate will end up paying about $7,500,000. Ouch. That's fine if you don't care about the company, and nobody else will ever work there or want to inherit it. But kiss your legacy goodbye. I'd much rather pay half a million.

Whole life insurance is really the best way to avoid business disaster due to estate taxes in Canada.

Caveat: I'm mostly familiar with how it works for businesses. I know less about how it works for other assets. So there might be other methods for other assets.


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## MarcoE (May 3, 2018)

kcowan said:


> If voters really understood how capital gains taxes works upon death in Canada versus the $11 million exemption per person in the US, they would be appallled. That is the real death tax that our government extracts from the middle class.


I don't have data on this. But my gut feeling is... most Canadians don't die with significant amounts of money outside of RSPs and TFSAs, which can be rolled over to a spouse tax free. So I think it's a "niche" problem here.


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## MrMatt (Dec 21, 2011)

MrMatt said:


> But you paid more for the life insurance than you get paid out.
> The "life insurance for taxes" always seemed like a silly strategy.





MarcoE said:


> Not necessarily.


No, but statistically you pay more for insurance than you get back.

When the insurance company offers a $1M policy, they expect to get more than $1M from payments and growth of the float.

It's the basic concept of insurance, it's just pooled risk. Assuming it's completely fair and perfect, everyone will get back what they paid + growth - (administration costs & profit)

Whole life, term life, it doesn't matter, the basic math of insurance policies is pretty simple.


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## MrMatt (Dec 21, 2011)

sags said:


> I don't know about BC, but in Ontario a company that wants to work on government projects has to obtain a high level of certification in many areas.
> 
> It is the unions who provide the necessary training with their own qualified instructors in their own training centers.


No, they don't.
The company provides the training.
Can you give an example of this legally required training that is only available at the union?

FYI, I'm talking about unions, not licensed trades/professions.



> It makes sense the Ontario government would hire unionized companies that have obtained the necessary certification level and perform audits.


No, it makes sense for the government to hire companies that have the necessary certification and perform audits.
You don't need a union to comply with regulations.

We even have government inspectors to ensure compliance.


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## sags (May 15, 2010)

The government mandates the certification requirements to bid on projects.









Demand for COR certification continues to grow in Canada - OHS Canada Magazine


EDITOR'S NOTE: This story was originally published in Glass Canada, a sister publication to OHS Canada. By Treena Hein Again this year in Canada, adoption




www.ohscanada.com





The union provides the training needed to be certified.






Homepage - LiUNA Local 183 Training Centre







www.183training.com





COR certified companies.



https://www.ihsa.ca/pdfs/cor/ihsa-cor-certified-members.pdf


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## MrMatt (Dec 21, 2011)

sags said:


> The training of every employee is expensive and time consuming, and small companies wouldn't be able to afford the cost.


Do you have any evidence that small companies aren't providing the required safety training now?



> As unions provide the training to their members, it is understandable why unionized companies can bid on government contracts.


This is the second time I've asked. Can you show what legally required training is ONLY provided by unions?


Just to be clear, I am for requiring appropriate safety measures by trained individuals.
If only unions can manage the economics of providing those individuals, that's fine.

I just don't like the restriction of only allowing unions, that adds cost with no benefit.

If only unions had the required safety training, they could hide behind that without having a unionization requirement.
Personally I think it's disgusting that a government would only hire workers who have surrendered their rights under workplace legislation, but that's just me. I already know you don't care about human rights.

FYI, under Ontario law union members are prohibited from a number of legal protections and recourses against employers.


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## MarcoE (May 3, 2018)

MrMatt said:


> No, but statistically you pay more for insurance than you get back.
> ...
> Whole life, term life, it doesn't matter, the basic math of insurance policies is pretty simple.


Yes, but the reason it works for estate planning is due to how big assets (such as corporations) are taxed when the owner dies. In the example I gave, a $10 million company would end destroyed by estate taxes, potentially losing 75% of its value (and likely not surviving). Life insurance would involve paying about half a million and allowing the company to survive, this saving millions of dollars. Whole life insurance ON ITS OWN is a bad investment. But it's the only mechanism in Canada (that I know of) to pass on assets such as small businesses to heirs. If there's another method, I'd like to know it. For this SPECIFIC purpose, the mechanism is very valuable and ends up saving people millions.


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## MrMatt (Dec 21, 2011)

MarcoE said:


> Yes, but the reason it works for estate planning is due to how big assets (such as corporations) are taxed when the owner dies. In the example I gave, a $10 million company would end destroyed by estate taxes, potentially losing 75% of its value (and likely not surviving). Life insurance would involve paying about half a million and allowing the company to survive, this saving millions of dollars. Whole life insurance ON ITS OWN is a bad investment. But it's the only mechanism in Canada (that I know of) to pass on assets such as small businesses to heirs. If there's another method, I'd like to know it. For this SPECIFIC purpose, the mechanism is very valuable and ends up saving people millions.


Well you could take the money, and instead of buying insurance just invest it.


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## MarcoE (May 3, 2018)

MrMatt said:


> Well you could take the money, and instead of buying insurance just invest it.


Not if it's corporate money. Taking money out of corporations can be difficult and trigger very high taxes for shareholders. The method I describe is something corporations use. The corporation is the owner of the life insurance policy AND the beneficiary as well. If the corporation saved and invested the money instead, the value of the company would grow, and we'd be in the same problem of potentially losing 75% of that wealth. This is a corporate mechanism, not something individuals do. As far as I know, it's the only method available in Canada to protect corporations from the deaths of their owners. (If there's another way, I want to learn about it.)

As for individuals... I'm not sure that whole life insurance is worthwhile.

A POSSIBLE use of whole life insurance (for individuals this time) might be as a tax shelter. Investments inside a whole life insurance aren't taxed. Ever. Like a TFSA. While TFSAs and RSPs are capped, whole life insurance can be set up to have huge contribution room. You could potentially pump hundreds of thousands, even millions of dollars into it, where it will grow tax free. Forever. The downside? There are very expensive premiums for whole life (much more expensive than term life). And you cannot withdraw the money while you are alive without getting hit with taxes (though you can borrow against it, similar to a HELOC). I believe there are also high management fees, and the investments tend to be a black box. If you're out of TFSA/RSP room, and have millions of invested dollars being taxed, cash value life insurance could POTENTIALLY be a place to put aside some of that wealth, allowing it to grow tax free, then tapping into it via loans. It depends if your taxes are higher than the premiums, so it only really works for wealthy individuals paying a ton of taxes on their portfolios. If you're paying $3000 a month in taxes on your portfolio's dividends, but a whole life insurance costs are $1,500 a month, you save money.

Personally, I probably wouldn't recommend using whole life insurance this way. I think its single great advantage is for estate planning when used by corporations, not individuals. But... I think it's one way some people use it.


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## MrMatt (Dec 21, 2011)

MarcoE said:


> Not if it's corporate money.


Uhh no, the math is the same

Assuming equivalent investment methodology an insurance policy will pay out less than the corresponding investment portfolio.
There is no secret magic that makes insurance a better investment.


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## MarcoE (May 3, 2018)

MrMatt said:


> Uhh no, the math is the same


Not if you consider how companies are treated when an owner dies and the estate owes estate taxes. That's where you run into problems. The estate ends up owing a massive tax bill. Most companies don't have enough liquid cash sitting around. They'd have to sell a lot of assets to raise enough cash, paying taxes on those sales. Then they'd have to pass the liquid cash to the heir of the company as a dividend, triggering more taxes. Then finally pay the estate tax. Each of these three steps could eat up 25-50% of the company's worth. Combined, it would devastate a company. Whole life insurance considered ON ITS OWN, while IGNORING the scenario I described, could be seen as a bad investment. However, in the scenario I described here, it could save a company and save the estate millions of dollars. As I said, as far as I know, this is the only mechanism in Canada for businesses to survive the death of a shareholder.

The reason it works is because the company owns the whole insurance policy. The death benefit goes to the company tax free. There is a mechanism for the company to release the money to the heir without paying taxes either. The heir is then able to inherit the company, using the death benefit to pay the estate tax. The company can then survive and keep operating as usual under new ownership.

Basically you're considering the investment in isolation, while in this scenario that I described, you need to consider estate tax law too. Different scenarios would need different considerations.


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## balexis (Apr 4, 2009)

MarcoE, you seem super knowledgeable in this area, thanks for your insightful comments!

There is something I don't quite understand yet:



MarcoE said:


> Most companies don't have enough liquid cash sitting around.


If the corporation keeps the 500k of your example and invests it in-house, reaching 10M at the time of death, then the company would hold the same liquidity to pay taxes as in the scenario of a life insurance payout of 10M, no?



MarcoE said:


> There is a mechanism for the company to release the money to the heir without paying taxes either.


Ah, so that would be the difference between both scenarios! How does that mechanism work in practice? I would expect the life insurance premiums couldn't be deductible business expenses if the payout gets to "escape" the company tax-free, so I'm wondering how that can be achieved.


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## MrMatt (Dec 21, 2011)

MarcoE said:


> The reason it works is because the company owns the whole insurance policy. The death benefit goes to the company tax free. There is a mechanism for the company to release the money to the heir without paying taxes either. The heir is then able to inherit the company, using the death benefit to pay the estate tax. The company can then survive and keep operating as usual under new ownership.


Since he didn't link to the details.








Corporate life insurance - Opportunities to die for


Corporate life insurance on your life. It pays to be prepared.




www2.deloitte.com





Basically it's the whole life insurance trick, but again there is a reason almost everyone recommends against this type of policy. Except those selling them of course.









Is Whole Life Insurance a Good Investment? When it's Worth it to Invest in Life Insurance


Whole life insurance might be worth it as an investment if you’ve already maxed out your retirement accounts and have a diversified portfolio, but only if you need for permanent life insurance coverage. Learn about the costs and other key details associated with investing in whole life insurance.




www.valuepenguin.com


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## MarcoE (May 3, 2018)

balexis said:


> If the corporation keeps the 500k of your example and invests it in-house, reaching 10M at the time of death, then the company would hold the same liquidity to pay taxes as in the scenario of a life insurance payout of 10M, no?


If the company kept the $500,000 (instead of purchasing whole life insurance for the shareholder) they could invest it in-house. That presents a problem, however. Suppose by the time the shareholder dies, estate taxes owes are $2,500,000 (using the same scenario I gave in previous posts). On the surface, that seems perfect.

HOWEVER -- to raise liquid cash, the company will have to sell the investment. It has appreciated about $2,000,000 at this time. Capital gains will have to be paid on this $2,000,000, reducing the liquid cash raised to about $1,400,000 - $1,500,000 (these are rough estimates since I don't know what the tax rates will be in the future). So right away, half a million or more are "lost" to taxes.

My understanding (not entirely sure, so please fact check) is that the estate does not directly pay estate taxes. The bill goes to the heir -- the next president who inherits the company. So to raise this cash, the heir (unless he/she is independently wealthy) will have to withdraw the $1,500,000 that remains (after the company sells the investment) as a dividend. He/she will have to pay income tax on it. After this second layer of taxation, the cash has now been reduced to about $750,000.

The heir now has a problem. He/she owes $2,500,000 on inheriting the company. But the original $500,000 the company invested, which grew to $2,500,000, is now worth only $750,000 (after multiple layers of taxation). The heir falls short and cannot afford to pay the estate taxes.

The alternative is: The company does NOT invest the $500,000 inhouse. Instead, it uses the $500,000 to purchase whole life insurance on the owner's life. The company is both the owner of the policy and the beneficiary.

The money invested grows tax-free inside the whole life insurance policy. When the company owner dies, the policy will be worth $2,500,000. (The death benefit can be negotiated and planned ahead of time.) When the owner dies, the full $2,500,000 flows to the company tax free. My understanding (please check with an estate lawyer) is that a death benefit on an owner's life can be used to settle the estate taxes (a mechanism only available for death benefits, not other investments). No need in this case for the heir to withdraw the cash and pay income tax. The estate taxes are paid in full from the death benefit, the heir inherits the company, and the company continues operating as usual under new ownership.

In the first scenario (company invests the $500,000 inhouse) the heir is left with only $750,000 at the end, not enough to pay the estate taxes, causing the company a serious problem (the government will want the money somehow, and if they can't get it, God help the company and its heir). In the second scenario, the investment turns into $2,500,000 - much more! And the company survives.

My understanding (again, I'm not an estate lawyer or accountant, so ask the experts to be sure, and please fact-check this because I might be wrong) is that this is the standard mechanism small companies in Canada use to pass companies to heirs.

If there's another way, I would (not being sarcastic) really want to learn about it.

The above is my understanding as a layman. I'm not an accountant nor lawyer, so I might be wrong. This is how I understand it. Please double-check in case I'm wrong.



balexis said:


> Ah, so that would be the difference between both scenarios! How does that mechanism work in practice? I would expect the life insurance premiums couldn't be deductible business expenses if the payout gets to "escape" the company tax-free, so I'm wondering how that can be achieved.


They're not deductible. However, company earnings are taxed at a lower rate than the personal rate, so it's still appealing.


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## Tostig (Nov 18, 2020)

Resurrecting a zombie thread instead of starting a new one. Then again, it's not that old.

It got de-railed with talk of insurance. So I'll just bring it back on course.
1) Buy assets, never sell and allow them to appreciate over time;
2) Borrow against those assets. Live off borrowed money and never pay them back.
3) On death assets and debts go to heirs who continue the borrowing cycle to pay previous debts and taxes

It works in the US because there is no capital gains tax on death.

However, in Canada upon death, assets of the deceased deemed sold so they are subject to capital gains taxes. So my suggestion around that is for owner of liquidable assets like stocks, is to sell those stocks annually, buy them back and pay the capital gains every year.

Those of us with sizable RRSPs/RRIFs should not be too concerned about maintaining our lifestyle so taking out a HELOC would not be considered. So there would be no debt to be passed down to the next generation.

I have also heard about setting up a family trust to shelter creditors from going after debts of the deceased. However, I don't think a HELOC would allow borrowing against assets that are all sheltered in a Trust.

Two final thoughts:
1) Now when I think about it, the big bank bailouts during the 2008 financial crisis isn't about saving the big banks. They are to ensure the banks won't be calling-in the loans of the the superrich who have accumulated multi-billions of dollars in loans. Calling-in those loans would mean that those superrich plutocrats would have to sell off some of their assets.
2) Since it is now clear to me that the superrich keep on borrowing and passing debts down to the next generation to continue this cycle, it's highly hypocritical of their political lobbyist to criticize any government (that have their own sovereign currency) about accumulating debts and the next generation. Criticisms about government debt and deficits are only for political debates and have no base in reality for the superrich.


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## james4beach (Nov 15, 2012)

Tostig said:


> One final thought:
> 1) Now when I think about it, the big bank bailouts during the 2008 financial crisis isn't about saving the big banks. They are to ensure the banks won't be calling-in the loans of the the superrich who have accumulated multi-billions of dollars in loans. Calling-in those loans would mean that those superrich plutocrats would have to sell off some of their assets.
> 2) Since it is now clear to me that the superrich keep on borrowing and passing debts down to the next generation to continue this cycle, it's highly hypocritical of their political lobbyist to criticize any government (that have their own sovereign currency) about accumulating debts and the next generation. Criticisms about government debt and deficits are only for political debates and have no base in reality for the superrich.


Fascinating ideas. Things I never considered. Though I think they were many reasons for bank bailouts and government help.


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## MrMatt (Dec 21, 2011)

Tostig said:


> However, in Canada upon death, assets of the deceased deemed sold so they are subject to capital gains taxes. So my suggestion around that is for owner of liquidable assets like stocks, is to sell those stocks annually, buy them back and pay the capital gains every year.


Dumb idea to pay cap gains every year.
Tax free compounding until sale is a benefit.

Go ahead model it, if you pay capital gains tax every year, you'll make less than if you wait.

assume 10% return, 25% tax rate 
Lets say I make $10k in equity growth.

I can keep the entire $10k invested.
Or i can pay the capital gains ($2.5k) and reinvest only $7.5k.

In year 2, the $10k reinvested makes another $1k, I owe tax on $11k, or $2750, so If I paid out, I'd end up with $8250

Or Scenario 2, I reinvested the 7.5k, I make $750 on that, pay tax (187.50)= 562.50+7500 = 8062.50.

By paying cap gains I just cost myself $190 in one year.


Now you could play tax rate games, but it's unlikely that paying cap gains as you go, you'll come out way behind.

As a personal example, I bought TD stock 20 years ago, it's ballooned HUGE in value. 
As it is now, I get nice dividend payments, though I have a significant tax liability, it is easily covered by the growth in my investment.

If I was selling off my position I'd have a lower tax liability, but I'd also be making far less in dividends


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