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Retirement and Succession

Using Corporate Life Insurance for Retirement and Succession Planning

Client Overview

  • Business Value: $8 million
  • Capital Gains: $6 million
  • Ownership Structure: One child actively involved (to inherit the business), and one child uninterested in ownership (seeking cash payout).

Challenge

How to retire comfortably, transfer the business equitably to heirs, manage taxes efficiently, and provide liquidity without impacting business continuity.

Step 1: Identifying the Tax & Succession Risks

Retirement and succession, when improperly structured, create several problems:

Significant Capital Gains Taxes:

The business appreciated by $6M (original cost: $2M, current value: $8M), creating an estimated tax liability of ~$750K+ at succession.

Estate Liquidity Challenges:

Equalizing inheritances between an involved and non-involved child posed a serious liquidity challenge.

Double Taxation:

Risk of double taxation when extracting corporate assets directly.

Without strategic planning, these factors threatened the owner’s retirement security and family harmony.

Step 2: The Strategic Retirement & Succession Solution

The client implemented a strategic solution built around Corporate-Owned Life Insurance (COLI), combined with an estate freeze and corporate pipeline strategy:

1. Estate Freeze (to limit tax exposure)

  • The business value was frozen at the current market value ($8M), clearly defining the owner’s tax liability and succession structure.
  • Future appreciation is assigned to the active child via new shares, minimizing further capital gains exposure.

2. Corporate-Owned Life Insurance (COLI)

  • At age 55 (20 years before retirement), the owner purchased a corporately-owned participating life insurance policy with significant cash-value growth potential and a substantial death benefit ($5M).
  • Over the decades, this policy grew tax-exempt within the corporation, creating a significant cash-value accumulation.

3. Leveraging Insurance as Retirement Income

  • As retirement approached, the owner used the policy's cash value as collateral, obtaining tax-free loans to fund personal lifestyle, investments, and retirement needs.
  • These collateral loans provided cash flow without triggering personal tax, effectively becoming part of their retirement income strategy.
  • Premiums became cost-neutral over time as growth in the policy offset loan costs, requiring only after-tax interest payments.

4. Corporate Pipeline Strategy & CDA (Capital Dividend Account)

  • At the owner’s eventual death, the $5M death benefit paid into the corporation:
  • Repaid any outstanding collateral loans (~$3M).
  • Created an immediate CDA credit of $5M.
  • Tax-Free Dividend: The CDA credit allowed $5M of corporate cash to be distributed to heirs as a tax-free dividend.
  • After paying off the loan, there was $2M immediate liquidity plus an additional $3M CDA room, allowing further tax-free distribution to family shareholders.

📊 Step 3: Financial Outcome & Comparison

Approach Tax Impact Liquidity for Heirs Impact on Retirement
No Strategic Plan $750K+ in capital gains taxes; double taxation risk Limited; forced asset sale Limited access; reduced retirement comfort
COLI + Pipeline + CDA Strategy Taxes offset by CDA credit $5M+ tax-free liquidity Robust tax-free retirement income; minimal disruption

Final result:

  • Owner enjoyed comfortable retirement funded tax-efficiently from life insurance cash values.
  • Business smoothly transitioned to active child without forced sales.
  • Non-involved child received fair cash payout via CDA, tax-free.
  • Wealth preserved and significantly enhanced for the next generation.

Step 4: Leveraging COLI as a Retirement Tool

By integrating corporate-owned life insurance into their retirement and succession plan, the business owner achieved three strategic objectives:

Tax-Exempt Retirement Growth:

Policy cash value provided secure, stable, tax-free growth.

Tax-Free Retirement Access:

Leveraged tax-free loans for personal retirement income, without eroding capital or paying dividend taxes.

Legacy & Succession Efficiency:

Created a powerful tool (CDA credits) for tax-free wealth extraction and equalization among heirs.

🗣 Final Thoughts & Lessons Learned

This business owner’s retirement wasn’t just about leaving the business—it was about leaving a legacy.

Through proactive planning, leveraging corporate-owned life insurance and a tax-efficient pipeline strategy, they:

  • Provided ample retirement income, tax-efficiently.
  • Avoided major tax liabilities at death.
  • Achieved seamless, fair wealth transfer among heirs.

Properly structured, Corporate-Owned Life Insurance isn’t an expense—it’s a strategic tool for retirement, succession, and lasting family impact.

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