Do your clients need an IFA to reduce estate taxes?

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A business owner’s secret to efficient wealth transfer

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 is top of mind.

They’ve worked hard, built a thriving business and hope to pass on the wealth to their children. But how do they do it tax-efficiently?

Step 1: Secure a whole life policy

Whole life insurance policies have emerged as a powerful solution to this problem. After the client passes away, their assets typically transfer to the heir – along with the estate taxes.

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

There’s only one catch: costly premiums.

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

Step 2: Apply for an Immediate Financing Arrangement (IFA)

An IFA is the missing puzzle piece. It enables the policy holder to borrow up to 100% of the premium as soon as the policy is put in place.³ They can effectively add insurance to cover them– and optimize the estate plan – without negatively impacting their liquidity.

Let’s consider a real-world example: Richard is a 75-year-old business owner with a wife and two adult children. He wants to leave the company to his sons when he passes, but is nervous about the significant capital gains that would be triggered upon his death. Moreover, he’s hesitant to pull any capital out of the corporation at this time.

To mitigate the eventual tax bill, Richard buys a corporately-held whole life insurance policy with a premium of $500,000. He’s then eligible to borrow back the funds through an IFA – thus structuring his estate and ensuring the business has enough capital to continue on.

Step 3: Borrow back 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 other than paying the ongoing interest on the loan, the borrower must keep the policy in good standing at all times. He can also apply to borrow back additional premiums on an annual basis, if the need for capital continues.

The Equitable Advantage

While IFAs are offered by multiple lenders, Equitable has gone further. We allow policy holders to access up to 100% of the premium, with no excess collateral! even if the cash surrender value (CSV) of the policy lags behind. For example, the CSV could be worth only $350,000, but Steve would still be eligible for $500,000 (the full premium amount).³

Other benefits include:

• Low minimum – only $50,000 in annual premium required
• A hassle-free process for additional credit limit increases
• Easy to navigate underwriting and adjudication process – limited back and forth
• Competitive rates & fees keep your costs low⁴
• No principal due until the insured party passes away⁵

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

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¹ Equitable Bank is in no way providing tax or financial advice. Advisors should consult with their clients to discuss their unique tax situation and the tax-free benefits of an IFA. 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 & projected year end CSV must be equal to at least 70% of the premium amount. ⁴ Rates are subject to change at any time. ⁵ Equitable Bank CSV Line of Credit Suite offerings are demand credit facilities, meaning Equitable Bank can demand payment of all or part of the outstanding balance at any time.