In February 1973 my little gang of eleven year-old boys undertook a risky innovation in tree-climbing in a small forest near our school in North Vancouver. Most of the trees were young flexible ones, about thirty feet tall, which we could rock and sway when near the top. We then grabbed the nearest tree, shifted our hand and footholds to it, and gingerly let go of the first tree. We called this "crossing over" and nicknamed the entire forest: "The Crossovers."
After a few days of this, my best friend slipped and fell to the soft forest floor, the lower branches and trees breaking his fall, and his arm. His Registered Nurse mother sent him back to school in a plaster arm cast the next day, but she made no attempt to stop our adventures.
Sensing that our escapade might soon be curtailed by concerned adults, we in the remaining crossover crew decided to traverse the entire forest canopy all the way to the Upper Levels Highway and back - a journey of about 500 yards. We were oblivious to time and risk, thinking we could slip safely back in to class un-noticed an hour or two late. After dancing among our silent coniferous friends over the next two hours, we were immediately busted on return to the school.
The next day we survived a close call with the Principal and his beloved strap, a very painful form of corporal punishment which was that very day outlawed by the new BC Education Ministry! But the Crossovers were forever crossed off our activity list.
Frankly we were lucky on a number of levels. Sadly, such good fortune did not always follow the youth in my neighbourhood. Around this time, a boy my age, (who took no ridiculous risks that I am aware of), died from a small cut on his foot. The wound became infected with gangrene quickly snuffed out his young life, much to the torment and grief of his loving parents.
Plan for the Unexpected: Part 2 - Buy-sell Agreements
It isn't fair that freak accidents can take the life of or cripple a loved one or business partner, but it does happen, usually unexpectedly. Planning and paying for the curtailment of this risk involves (among other things) consideration of the following:
Administration -- When numerous shareholders exist, it can become complicated for each shareholder to own insurance policies on the lives of all the other shareholders. It can also be quite costly when you account for the aggregate premium costs. With corporately owned insurance, only one policy for each shareholder is required, which provides for ease of administration and lower aggregate premium costs.
Potential Protection from creditors -- When a buy-sell agreement is funded with corporately owned insurance, the proceeds payable to the corporation on the death of a shareholder is subject to the claims of the corporation's creditors. With personally owned insurance, the proceeds may be protected from corporate creditors (although they may not be if it was deemed put together with creditors in mind rather than insuring life and limb). It is essential that a qualified legal advisor is consulted regarding any asset protection options.
Tax leverage -- Annual life insurance expenses are generally not deductible, which means that it may be more advantageous for a corporation in a lower tax bracket to pay the premiums to fund a buy-sell agreement than the individual shareholders, who may be in a higher tax bracket. For example, an individual shareholder with a marginal tax rate of 45% would require $1,818 of pre-tax income to pay a $1,000 insurance premium. A corporation paying tax at a rate of 15% would require only $1,176 of pre-tax income to pay the premiums.
Ensuring payment of premiums -- When a buy-sell agreement is funded with personally owned insurance, it may be challenging for one shareholder to be certain that the other shareholders are meeting their obligations by making the necessary premium payments. The policing of premium payments is not required with corporately owned insurance.
Insurance costs -- If one shareholder is in poor health or is significantly older than the other shareholders, personal ownership of the policies places a heavy premium burden on the other shareholders. Whereas with corporately owned insurance, the cost may be shared among the shareholders according to their pro rata interest in the corporation.
You should discuss these matters with a qualified tax advisor before acting on any of the information in this article to ensure that your own circumstances have been considered properly.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
