Combining several strategies in a highly individualized IG Living Plan
Frank and Isabel have done a great job building a strong and growing business while raising their family. Their children are still too young to know whether they have any interest in the business. The plan right now is for Frank & Isabel to sell their millwork company in 6 years’ time.
Their company has a diverse customer base, strong revenue growth and is known for the quality of its product. As a result, they have received unsolicited offers for around the $3 million mark. The Thomas’s and their accountants believe it is not unreasonable to assume the value of the business will continue to grow at 6% per year over the next 6 years.
But like many business owners, they have a number of questions:
- How much value will they lose to tax when they sell their business and what can be done to achieve a better outcome
- The profit of their business affords them a comfortable lifestyle, that includes travel and private school for their children. They also have dreams of owning a 2nd home in a warmer clime. Assuming their business is worth $4 million when they sell, is their current lifestyle sustainable and is their dream attainable.
How we helped
✓ Reorganizing today to access Capital Gains Exemption (CGE) on sale: Working with their accounting and legal advisors, the Thomas’s will reorganize their business structure, amalgamating their current holding company with the operating business and freezing the amalgamated corporations in favour of a family trust. By carrying out these steps, all shares in the business will be held either directly or through a family trust, making use of the capital gains exemption a possibility.
✓ CGE + IPP: Frank and Isabel have been employed in their business for 28 years. As a result, establishing an IPP will: 1) For their remaining working years, allow for higher tax deductible contributions to the IPP than could be made to an RRSP; and 2) Allow their company to make a large ($304K for each in this case), tax deductible contribution for past service. Although there are other options discussed earlier, when the Frank and Isabel retire, the value accumulated with the IPP will be used to acquire life annuities that will provide them with a combined guaranteed retirement income stream of $155,000 for life.
✓ Shift the Portfolio: Due to their increased income security, Frank and Isabel’s comfort level with investment volatility has increased. Frank and Isabel are now more moderate-aggressive investors, as opposed to moderate, and their non-registered investments can be shifted away from less tax efficient fixed income and towards equities, which have a higher expected investment return and are more tax efficient. Through this shift in portfolio construction, we would predict a slight lift in return of about 0.64% per year, a small reduction in interest income (which is fully taxable), and an increase in both dividends and capital gains, which have a tax advantage over interest income. A shift toward investments with more of a deferred growth/capital gains expectation, and less annual income, can also help reduce any grind on the small business deduction by reducing passive income.
✓ Corporate life insurance: Using corporate owned investments to fund a permanent life policy over 20 years, adds another $310K to the net estate value. But the cash value within the policy could also be accessed to enhance retirement if desired (20 Pay Estate Achiever, joint-last-to-die, annual premium of $18,174 and guaranteed death benefit of $350,000). The insurance would produce a more dramatic increase in comparative estate values if Frank and Isabel were to die earlier than assumed in the plan. Clients who are more moderate or conservative in their investments may see a bigger gain to their net estate using an insurance strategy because the premiums are even more effectively used.
Results
It is clear that combining several strategies in the context of a highly individualized IG Living Plan can have a profound effect on client confidence that their spending goals will be met, and how much is left over when the spending is done and the government has been paid. In the IG Living Plan software, the Thomas’s estate has grown by 53% (compared to if none of these strategies are implemented) with added income security for life. Best of all, with some changes to her financial strategies, we increased the probability of a fully funded retirement from 78% to 92%.