Many farmers have a high net worth, which, if their farming property doesn’t qualify for the rollover rules, can result in one of the largest tax bills their family will ever pay.
You work all your life to build up your assets only to have the government tax it all after your death. Not only can this greatly reduce your estate, it can also leave unwanted hardship for your loved ones.
We have all been offered some form of life insurance as a tool to alleviate these concerns.
Read Also
Agriculture ministers agree to AgriStability changes
federal government proposed several months ago to increase the compensation rate from 80 to 90 per cent and double the maximum payment from $3 million to $6 million
However, what many of us don’t realize is that there can be tax advantages to these products and additional planning that can be done to get the most out of them.
There are two types of life insurance. Whole life insurance is when premiums are paid over a specified time and the death benefit is paid no matter when it occurs. Term life insurance is when premiums are paid, but a death benefit is only paid if it occurs during the term of insurance.
If you own a whole life insurance plan that has a fair value higher than the amount of money that has been contributed, consider transferring this policy into your farming corporation and receive a tax free amount from your corporation.
Upon death, the life insurance benefit can still flow out your beneficiary tax free. This will not only provide you with the life insurance coverage you want, but free up additional cash to fund your retirement.
This strategy can have many advantages, however it comes with a cost. A transfer like this will require the use of professionals and there can be complications if any creditors of the corporation have a claim to the insurance benefit.
If you have term insurance and think this strategy may benefit you, it is possible to switch to whole life insurance. However, whole life insurance policies are typically more expensive than term insurance.
Looking for a way to expand on your tax free savings? If you have a whole life insurance policy this may be possible. These policies can allow you to contribute additional funds as an investment. Once there is an insurable event (due to disability or death) all amounts can be taken out tax free (including the gains).
Whether or not you should have a joint policy with multiple people insured should be considered after seeking professional advice.
Under expected regulation changes, there will be less tax exempt room available for policies starting in 2017.
Contact a professional to make sure your plan is right for you.
