Tax Shelters/Corporate Investments

[dpmorel]

Ok - so a guy I play soccer with is a financial planner. Normally I avoid these guys like the plague, but I like this guy so I decided to let him come over and give his pitch.
So I am technically incorporated and my work contracts me through my company (I work remote in Toronto, HQ is in NYC). Being a founder of a company has its perks!
In the past I have explained how this structure has enormous tax benefits. You can basically leave your retirement money in the corporation and pay far less tax.
The problem I have, it is more of a Canadian problem, is that investments generating passive income in a corporation are taxed at 47%.
So bear with me as I get technical here...
One way to tax shelter your money (according to the Financial Planner) is to use life insurance. Basically you:

-invest $x each month from your corp into a life insurance policy (via a premium)

-money within LI can be invested without taxation (though the LI product has to meet certain "growth profiles".... i.e. you can't then go and put it in a hedgefund, basically hockey stick or S-curve)

-the problem is then basically this - how do you withdraw from a "death benefit" without dying

-well, the insurance company works with a bank. The bank gives you a line of credit for basically the death benefit you have built up via premiums and returns/yields. You can withdraw from a line of credit tax free! So you have created an investment/withdrawal loop with zero taxation within the corp

-then when you die, the bank gets paid first and whatever is left is transfered to whomever is next of kin

-interest is simply tacked onto the loan
Sooooo, given there is some good brains in this forum, I thought I'd try and get some opinions on this setup (note I'm not sure if this concept works in the US... or if it even has to since capital gains is much friendlier in the US invested from within a corp).
At first I thought it was very clever, then I realize the huge risk is interest rates. Because your retirement income is in the shape of a loan, interest rates could crush you. In fact they'd be doubly penalizing to you, inflation + your loan effectively shrinks.
But you are saving massive amounts of income early on because you are now paying minimal income. Which means you could retire even earlier.

[jacob]

Nothing technical to add, but when I was looking at smallcaps some time ago, some of the more "questionable" setups had rather large cash flows associated with life insurance for some of their officers. Good for management. Not so good for shareholders.

[ktn]

This sounds similar to how the American viatical industry works. Here in Finland, banks are hoping to offer something similar with real-estate (i.e. real-estate takes the place of life-insurance as a way for the elderly to cash out on their real-estate equity).
I tend to be suspicious when I hear banks + financial planners push something that sounds like a good deal. Questions I would be asking:

- what % of your life-insurance funds would the loan cover?

- what happens when the underlying invested funds increase/decrease in value?

- what would the interest rate and terms be, if I were to take the bank loan today? Are there any other fees associated?

- if this loophole were to be closed by the government, what would my options be then?
I'd also look very carefully at what and how many investments today meet that "growth profile" and what their associated fees are. You also have to consider the scenario where you've drawn down the line of credit completely but need to continue paying interest until death.

[George the original one]

I, too, am skeptical whenever someone wants to handle my money for me.
From what you describe, it's only the passive income stream that is taxed at 47%? So if your withdrawls are only return-of-capital, then you could get the money tax-free?

[Kevin M]

I've heard of a similar scheme using whole/permanent life insurance. Basically front-load the insurance premiums to get a high cash value and generate bigger dividends to pay the premium and then you can withdraw tax-free later (return of principal). I've never seen it coupled with a bank loan, I guess that's a Canadian thing.
The company that presented it to me has a solid track record, but the minimum guaranteed return was REALLY low and scared the crap out of me. I wasn't comfortable handing my money over to them any more than I would be to a mutual fund.