The following is an excerpt from the 6th edition of Estate Planning with Life Insurance, by Glenn Stephens, released November 2016. This has been updated to consider changes to the passive income rules introduced in the 2018 budget.
The March 22, 2016 budget eliminated the income tax advantages of many policy transfers from individual shareholders to corporations. However, the changes primarily affect transactions that involve consideration significantly greater than a policy’s cash surrender value (CSV) or adjusted cost basis (ACB), and there is no requirement that a transfer from shareholder to corporation takes place at any particular price. In many cases, it will be to the client’s advantage to transfer a policy to his or her corporation for a lesser amount (generally not exceeding the greater of the policy’s ACB and CSV). Consider the following:
- Where a policy’s ACB is greater than its CSV at the time of the transfer, it may be sold to the individual’s corporation for an amount equal to the ACB without tax consequences.
- Where a policy’s CSV is greater than ACB, the difference will be taxable on any policy transfer from an individual to his or her corporation even if the consideration paid is less than CSV. In such cases, it may be advisable to set the purchase price at CSV as that will represent the minimum proceeds of disposition in any case. It may still make sense to transfer the policy if the resulting tax liability is not considered onerous.