Episode Transcript
Speaker 0 00:00:00 You are listening to the Wealth Without Bay Street Podcast, a Canadian guide to Building Dependable Wealth. Join your host, Richard Canfield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on.
Speaker 1 00:00:17 The fact of the matter is, is that your money must reside somewhere, whether you're dealing with a dollar or you're dealing with a million, and we just so happen to be dealing with a million dollars a year and we, we recognize the truth that money must reside somewhere. And so in looking at this really amazing case that we're just gonna share transparently, you know, through the, through the podcast, through the YouTubes, and we're gonna describe this case where we have a business owner who's decided to put a million dollars a year into a dividend paying, participating whole life insurance contract because this business owner is operating a very durable business that has a lot of free cash flow and recognizes through our education and our process that the fact is money has to reside somewhere. And so this business owner took a portion of free cash flow, in this case, a million dollars and is committing that to a dividend paying, participating whole life insurance policy, or a timeframe initially of 10 years, could be longer, but at minimum it's a 10 year window.
Speaker 1 00:01:33 And so let's start having an open discussion about how this case comes together. But let's also look at numbers because our viewing audience, our listing audience, have told us that they really enjoy when we periodically look at the numbers. And so our hope is, is that this really serves as an inspiration for folks who are listening and watching who are in the same position as this business owner, this very established entrepreneur. And you've got a lot of free cash flow and you're wondering, okay, where can I put this capital to work? And we'll describe all the benefits of having it reside there. So let's get the party started that gets, get the million dollar premium party started. Yeah. As you're, as you're like rubbing your hands there in anticipation. Something that just came up for me as you're kind of doing a bit of an intro there, Jay, is that, you know, I've, I've probably heard e easily several times, maybe as many as five times in the last like week or two weeks from various people who have just told me and the exact language may verify, but it's just, it's, or maybe a little bit adjustable, basically.
Speaker 1 00:02:39 Like, I just wanna make sure I can get my money out of and not have any of it stored in a regular financial institution. Yeah. Because they're, they're concerned, they're concerned about some what's just going on in the overall kind of geopolitical space in general. And they are, I think as many Canadians, probably a lot of our colleagues down south of the border as well are, are actively at, at some level of unease around Yeah. How central banking system, the commercial banking system are manipulating money and just, you know, in general, yeah, there, there's reasons to have some, some measure of concern. And so putting your, your capital inside of an entity where you, your co-owner of that entity and they've done a really good demonstrated job over a really lot of long period of years at stewarding that capital for their owner's benefit is a pretty logical place.
Speaker 1 00:03:32 And so again, we're gonna go over this sample business owner who's gonna be putting a million dollars of free cash flow in and let, and, and let's, and we're just gonna talk about it's, yeah. And, and while you're bringing up numbers and we're ready to kind of dive into this case, let's, let's apply some additional logic so that we, we help our viewers and listeners to really examine their thinking. And so if you, I spoke at a wealth hacker event here in Toronto. Most recently there were 700 plus people in attendance. And one of the things that I had walked through with the group was just a, a series of questions that would inform your thinking. And one of those questions was recognizing that you do have the option to store capital inside of an entity that you own and control where the capital can only grow in value on a daily basis and it cannot go backward regardless of what's going on in the stock market.
Speaker 1 00:04:31 The economy, real estate cycle, political turmoil, taxes, this capital can only grow day in and day out. You co-own life insurance company and you participate as a co-owner in the form of dividends, which is a share of divisible surplus. And you're dealing with life insurance companies that have never failed to produce a divisible surplus. We're talking about 176 year track record just a couple of years, years, you're paying no tax on the daily accrual that is guaranteed when a dividend's declared it's guaranteed, cannot be repossessed, cannot lose value, you're paying no tax on the debt benefit proceeds, tax rates could go up to 80%, doesn't matter to you because the daily accrual is attracting none of that tax how much capital. My question to you, how much capital do you not want residing inside of that entity? And so I gave the audience a moment to really rethink their thinking and logically and reasonably, a person would say, well, there wouldn't be any amount of capital that I wouldn't want residing there.
Speaker 1 00:05:56 This eliminates the whole either or thing. I'm gonna put my capital into some form of investment, or I'm going to put my capital into a policy. This eliminates the either or. You can still go and achieve all those things that you're setting out to achieve, but you're doing it from a different place because this becomes your warehouse of wealth. Now this business owner RAs that very, very quickly. Very quickly. And so I just wanted to apply some additional and frame up some additional logic so that when we're looking at numbers, there's some context there, there's some rationale as to why the business owner said, like, is that all I can put in as a millionaire? No, it there there's opportunity to amplify and expand and grow a program, but this is a good starting point. And, and for the purpose of our example, again, we're there could be, there's, there's a whole layered list of reasons why a plan might be this size or could be some rationale.
Speaker 1 00:07:03 There's, well, there has to be some rationale around the death benefit and there's other, there's other components and everyone's business and structures a little different. So, but we just want to keep, try to keep it very simple, although there's gonna be a lot of numbers on this sheet. So again, if you're driving around in your car listening to this, you know, you might wanna reference back to the YouTube video, but let's go ahead and bring it up Jay and we'll just kinda walk through. So I'll, I'll start by going over some of the columns that we have here. So we have obviously the, the year and the age. Now this person is a non-smoking male, the business owner starting at age 50. We're seeing the, the beginning of the year premium deposit, which is a million dollars. I'm showing a column for cumulative deposits. So we're adding up all those deposits after 10 years, 10 years of a million bucks, obviously we're at $10 million.
Speaker 1 00:07:45 It kinda stays there. For the purposes of this example we're going through today, we're not gonna put the business owner's not putting any more deposits into the way of premium, right? Okay. We have a cash value column, we have liquidity showing what's available to access from that policy by way of policy loans. And I even put in something that I call a liquidity ratio. So what amount of capital access does the business owner have relative to what he's contributed into the policy so far? And if I, if I can add to what you just said around liquidity ratio, one of the exercises that we discuss with clients that is so critical, especially clients who are entrepreneurs who are business owners, if you look at, if you add up basically all the, the value of all of your assets and you subtract the liabilities, essentially you're describing your net worth, right?
Speaker 1 00:08:37 Liquidity means how quickly can you turn that asset into cash? But here's our criteria without triggering tax and without reducing the asset's value. So how quickly can you turn that asset into cash without triggering tax and without reducing the asset's value? If you look at all the other assets on the balance sheet, you're going to do one of two things to turn it into cash. You're either gonna trigger tax, you're gonna reduce its value or it's gonna be both. And when you're dealing with this contract that Richard is outlining, you're not doing either <laugh> and so Carrie Oder, it's, I just wanted to add that because we, it shouldn't be probably a little bit of a shocker to people who are listening, watching that. Clients that we work through this exercise with, the overwhelming majority have less than 5% liquidity, less than five, and Richard's demonstrating 69% liquidity in the first year.
Speaker 1 00:09:47 So again, beg begs the question, how much capital do you not want residing there? It gets worse, well better than that, I should say Jay, because that's 69% liquidity if the business owner's alive. But if he, if he died the next day after setting up the policy or at the end of the first policy year, there's, there's 18 million <laugh> of of liquidity that's gonna show up, right? Because, because something happens and a lot of people don't have, they might have some access to liquidity on their other resources, but what they don't, they may not have or they may have often very little proper setup on is death benefit liquidity. What's the amount of money that's gonna show up and solve problems if we kick the bucket early? So here we put a million dollars in the total cash value at the end of the first year after a dividend has been paid 765,000 and we can access, again, this is the end of year number, about 688,000, which is 69% of every dollar.
Speaker 1 00:10:44 That's basically being contributed in the first year. Now I, I like to reference this to real estate investors a little bit because you buy a piece of real estate and you put 20% down. Now you're, in this case, let's assume you're using your own money to do that. You put 20% down on a piece of property, well that 20% goes in there and it forms part of the equity and then you're financing the balance. For most real estate investors, they don't have access to any of that 20% right away. It's, it's gotta wait, you gotta wait, the mortgage has gotta be paid down. The, the property's gotta appreciate a little bit, maybe it'll be another, somewhere between five and eight years before you're able to actually access that original down payment money again, which means you're borrowing it back outta the property, but you have very little to zero liquidity at the very beginning of that property.
Speaker 1 00:11:30 So you put all the money in and you have none of it you can access. You're hoping for a positive return and cash flow and all these other things, but your liquidity is, is garbage. There's nothing available versus an asset like this where liquidity is, is and the ratio of that liquidity can be very, very high in the structure we built. So, and the, the loan, the the ability to access liquidity in the form of a policy loan is a provision. And so we're, we're not putting this entrepreneur, this, this established business owner in a position of anything but total and absolute control. And when the, the business owner requests a policy loan, the insurance company asks, would you like it electronically deposited or can we mail you a check? There's no credit checks. Personal guarantees, letters of letters of intent, you know, having to, to produce additional collateral.
Speaker 1 00:12:26 This is a, there's a built in loan provision. And so when you're able to do that and you request that loan and you're not interrupting any of the daily accumulation of the total cash value that's piling up inside the policy. Again, it begs the question, how much capital do you not re want residing in an entity that gives you all of these elements of control and, and guarantee. Uh, logically you would say, gosh, I want as much capital flowing through this instrument as I as I can. And it shouldn't surprise you. The largest purchasers of dividend paying, participating whole life insurance contracts are the wealthy and commercial banks themselves doesn't surprise me, but I of course I I also order any of that. So now, now in our example states we put a million dollars in year $1 million in year two. So in year two we have a cash value of 1.714 million and we're at about a 77% liquidity ratio.
Speaker 1 00:13:24 What you can access off that policy, the death benefit went up and the increase in the cash value went up year over year. In fact we put a million dollars in and the increase in the cash value was 949,000. So it got pretty close the third year we put a million dollars in and the in increase in that year was 1,000,050 6,000. So now we, we refer that as a business milestone. You're plugging money into a business, you started a brand new business that didn't exist. You're putting money in, you're putting money in to grow the business. That business is now turning a decent profit and it's at a point where every time that you plug money back in to feed the business to grow it, the business is giving you more than you're feeding back into the business. Okay, and I'm gonna scoot ahead to year six.
Speaker 1 00:14:06 So if six years in we put in 6 million, we have a cash value. Our asset value now on the balance sheet of the corporation's books is 6,000,090 5,000. So we have a larger asset value than every dollar that we've contributed. In other words, the insurance company has essentially you put in $6 million of capital and the insurance company is piled up 6,000,090 $5,000 of capital. Basically the insurance company paid you or paid this business owner 95 grand for the privilege of owning the insurance and being a co-owner of the insurance company itself. Yeah, the death benefits gone up. We were at about 18, you know, 18.3 million. Now by the sixth year we're at 27.7 million. Now in this death benefit I will indicate there is some term insurance. I have a term insurance rider on here cuz the business owner needed that. That's exactly right. Actively engaged in business.
Speaker 1 00:15:02 He was 50 at the start. We put a 10 year term insurance on this because he's plant to either sell or exit or try to, you know, transition outta the business within about a 10 year timeframe. And we, that term insurance is about 9 million now at the end of the 10th year and I have like a giant, you know, orange box here, the death benefits risen to 35 million. Well we get rid of the 9 million of term insurance and the following year in year 11 there's 26 million left. So we have a higher whole life death benefit protecting this, the business owner and the business itself than what we started with when we, when we began the program, a much higher amount. So you've completely cost neutralized it at year six and at year 10 we've got 10 million that's gone in. We have a lot more cash value that's piled up than what was put into the policy that the death benefit, as you've indicated in year 11 is now 26 million.
Speaker 1 00:15:56 You've got a credit to the capital dividend account of 16.781 million in year 11. And we have an annual increase in cash value of 474,000 and we didn't put a penny in, in premium in year 11. Yeah. So that would be a pretty good business to have. You, you put a bunch of money in to grow the business, get it operational and then you didn't have to put any more money into it in the 11th year and the business just kicked back 474 grand every single year for the privilege of for, for saying thank you for everything that you did leading up to that point. Basically. Good. Yeah, it's not too bad. And and again, we're at a liquidity point where we have access to more than every dollar that we've contributed at that point in time and it just keeps, you know, cruising along, continuing.
Speaker 1 00:16:42 Now we're we're showing $0 going in into premium and in Nelson's book he has several examples of this, what's really happening. It doesn't mean that there's no premium being paid, it just means that the premium is being paid from internally within the policy. In this example we would refer to that as what's called dividend offset. Again, there's certain rules around how that happens and what needs to be in place to make that happen. But to just keep things very simple, there's a minimum required premium that must be funded here cuz the million dollars was the total maximum amount the business owner wanted to put more than a million in. He wasn't able to, we, we structured the policy in such a way where that was the ceiling that was the cap. Yeah. But the minimum on the policy was ah, I believe it was somewhere around 370,000 somewhere in that range.
Speaker 1 00:17:26 And so that's still being funded but it's being funded by the dividends and a portion of some of that accumulated death benefit that's happened. And because you see the death benefit here, it actually goes down for a couple of years, then it levels out and then rate year 16 and 17, it starts going back up again. What that's saying is that the dividends are big enough now to cover the entire minimum required premium and there's a left leftover that it's gonna go back to continue doing its regular job of buying paid up insurance and it just keeps accumulating. So, and the total death benefit can never be less than what you began with. And so you're always, you're always at, uh, an advantage and the contractual guarantee of the total cash value matching the total death benefit by age 100, it applies to this contract no different than it would to a personally owned contract.
Speaker 1 00:18:16 Cuz remember the corporation itself is paying the premium and the corporation itself is the owner of the contract policy and the corporation itself is the named beneficiary of the death benefit proceeds. So the corporation is paying into this contract and bolstering its balance sheet and taking control of the financing function becoming its own banker because we're not trapping the liquidity in a vice liquidity is the corporation's gonna need to buy some stuff if if they've got a million dollars a positive cash, they're gonna need things, equipment, totally hire more employees, whatever it's they need to do, buy a building by their, by, you know, buy track of land that they need for lay down yards for their business. Like whatever it is, they're gonna need to run money back into the business for business growth and operations. They don't necessarily know when, but as the business owner, they wanna be empowered to have that liquidity available so that when the right decision, the right opportunity that says the business owner's like, oh my god, if I go and do blank I can automatically increase my revenues because of this new thing that I did.
Speaker 1 00:19:30 Perfect. You're well capitalized, you can go ahead and do it. Totally. And there's so much opportunity that presents itself to the business owner because again, true to form Nelson being a hundred percent accurate and what he taught us so often over the years that when you have ready access to capital opportunities of high caliber will track you down. And that is so true. And so now the business owner says, well, when I get to the point where I'm ready to exit based on my planning, because you know, as a business owner you're gonna exit the business one of a few very select ways. You're either gonna sell it, you're going to retire, you're going to get sick, you're going to disappear, or there's, you're going to be voluntarily or involuntarily removed from the organization or you're gonna have some sort of financial insolvency event. So do you have a plan in place to address each one of those probabilities?
Speaker 1 00:20:27 Well this business owner has a plan to address the primary probability of him retiring. And so he wants to know, how's the corporation gonna take care of me because I put a lot of time, talent and energy and money into building this business. How is this business gonna take care of me? Well there just so happens to be a method by which the corporation can take care of him, a corporate preferred retirement solution. And rich, what does that entail? What is that gonna look like for this business owner? We're gonna look at that in a moment and, and I wanna identify a couple things. Those ideas that you just said are those methods that you're gonna exit the business. For a lot of businesses, at least in Canada, there's not like a, like a, a really good marketplace where you can just go and throw your business up there like an MLS piece of real estate and just someone's gonna walk around like, oh, I like the cut of that business's jib, I'm gonna go and buy that one.
Speaker 1 00:21:18 Right? It's, it's much less common for that. It, there's, there's more I think availability of that down in the, in the states than there is really here in Canada cuz there's certain maybe tax advantages and whatever. So the marketplace for being able to sell a business is much, I think a little bit more restricted. It's a little bit more difficult. And more importantly, not every business is really built to sell a lot of businesses. They, they might generate a ton of revenue, but the reason they're doing that is because of the business owner or, or the the leadership team that's there that's corrected something. They maybe don't have a business that really will transition well to an end use buyer. And so oftentimes when the business owner wants to exit the business may be saying goodbye as well. Like it's gonna be probably winding down.
Speaker 1 00:21:57 So in this example, now this business owner, if that were the case, they've captured and harnessed the potential of those profits over a quality 10 year period. They've moved them from being in the corporate bank account, building up and maybe doing something, maybe not doing something at risk in the, in the banking sector to, with the insurance company where they're a co-owner and now they're gonna create an exit plan from those those profits that are built up. And so that's what we're gonna talk about the preferr retirement. And, and on this topic I wanna highlight something very important. The business owner in this case, because they're working with the insurance, they are not subject to the passive income tax rules that is impacting a lot of business. Cuz if they had this capital building up, well they'd have to go put it to work somewhere.
Speaker 1 00:22:41 Yeah. And probability is they've put in a whole co or whatever and then that builds up and they're going buying investment real estate or they're going buying this and they're going by that. Well, all that stuff is gonna attract once they're over a certain level, a passive income tax, which is very aggressive and not particularly friendly for maintaining any of your wealth. It's basically a success tax. It says if you did pretty good, you did well, we're basically gonna say we're gonna, we're gonna hinder you from continuing to do that and it's gonna create a problem. Well this policy doesn't incorporat in that. So we've got, would you, would you, would you believe Richard, when I talked at that event, I asked 700 people, can you please raise your hand if you feel that you're not taxed enough? <laugh> not one hand went up in that room, thank goodness I'm surprised they, they, they, uh, and so you're right, this is exempt from the passive investment income tax rules.
Speaker 1 00:23:33 So again, begs the question logically reasonably, how much capital do you not want residing inside of an entity that provides you with everything that we've just described? You have to rethink your thinking because from this place, the corporation can go and invest in things if it chooses to do so without interrupting any of the compounding factors of growth inside of this contract. Isn't that good? Fantastic. The business owner gets it. Let's take a look. So in this case we're gonna start at the beginning year, age 66. Okay? Business owner is gonna go and set up a basically a, a business operating line of credit, a a cash surrender value line of credit, uh, to be able to start producing an income stream off of this policy. And there's some hoops they gotta jump through to get that done. They're, they're relatively minor for business of this type size and they're doing this from a third party lender at this point in time in Canada, we have other videos that we use.
Speaker 1 00:24:32 Uh, episode 100 of our podcast talks about the reason, the rationale where you might wanna do this. And so go ahead and reference episode 100. It'll, it'll, it'll frame up some of that context if you haven't already served that, saw that one. So in this example, the business is going to be accessing $418,000 a year as a loan. And that loan instrument is, is on the business' books. It's not at the business owner's books. The business is gonna take that money and then they're gonna issue out to the business owner a dividend and that dividend will have some tax associated cuz we're moving money now out of the corporation to the personal world. So there's always a transaction that has to happen there. Now, if the business owner had outstanding shareholder loans, well they could pull some of those back like there, there might be again.
Speaker 1 00:25:14 Yeah, yeah, yeah. Accounting perspective. Some things they could do this is, it's assuming that none of that existed, but they're just gonna issue out a dividend and the business owner's gonna pay tax on the dividend. I gotta jump in here. So who paid the premium for the policy corporation and who is issuing the dividend to the share owner corporation? So who's paying the tax? Technically the corporation. Yeah, it's not technically the corporation is giving the business owner a $418,000 dividend and the business owner gets to spend 292,000 of that. So Richard, if I handed you a check and I said, rich, here's a check payable to Richard Canfield for 418,000, you get to spend 292 of it. I would not turn the check away. You're you're gonna go and cash that check. I wouldn't look at you with a pouty face and say, but Jason, so here's my question.
Speaker 1 00:26:13 My key question is who's spending the money shareholder. So we have a corporation that's paid the premium. We have a corporation that has utilized this policy. We have a corporation that is issuing a taxable dividend to the share owner using, using the bank's money. So the corporation's taking the bank's capital, receiving it, and then taking the bank's capital, handing it over to the share owner. The share owner is spending a portion of that capital mm-hmm. <affirmative>. And that's $292,000. How much would you have to earn in pre-tax income and actually exchange your time and talent and energy to earn in order to spend 292,000? Think about that for a moment. The share owner didn't put a dime of his own capital into that insurance contract, the corporation did, but the share owner is spending $292,000 and doing so for the rest of his lifetime. And there's no, there's no stock market volatility to contend with.
Speaker 1 00:27:25 There's no real estate cycle to contend with. There's no economic turmoil to contend with because the insurance company itself is contractually guaranteeing the collateral which must grow in value every single day. It sounds almost like it's a peaceful, stress-free way of financial life. Oh gosh, when you put it like that. And, and we're making a big assumption here that people watching this and listening to this want to achieve a peaceful stress-free way of life financially. So if that's true for you as a listener or a viewer, the best way to do that is what Richard's describing here isn't that good? If you want to go have some fun in the markets, we'll then earmark some of your capital to do that. But maybe get your peaceful stress-free way of life and then take some of that, that you're willing to go and put into whatever else and get your kicks and stuff.
Speaker 1 00:28:19 And I'd much rather, I would much rather go on the Everest rollercoaster in malt Disney, Disney World, which I went on and believe me, I got a lot of kicks out of that and had to get a new pair of shorts when I got off the ride. But I would, I do that at an amusement park. I don't do that with my money. And the business owner doesn't want to do that with his money either. He wants to be in an elevator that only goes up, he doesn't want any of the stomach churning ups and downs that you would get at an amusement park <laugh>. So that's what the business owner wanted. He wanted that certainty. He understood the, the contractual guarantees, all the elements of who's putting the money in, who's spending it, who's actually paying the tax bill and recognize that as an extreme advantage and then also respects the fact that he's gonna die someday.
Speaker 1 00:29:11 So let's kill this guy off. When's he gonna die? Well, just for the purpose of this, I'm just gonna scroll all the way down to 101st, so we'll get to kill him off. I'll let you pick a year you want to kill him off. Okay. Um, if we were doing this as a live, I would let the people watching let us know, but so here he's pulled out after tax money, if he lives to 100, he's pulled out 10,246,000 if he lives to 100 of capital that, that he got to use after tax as the shareholder money that he got to use and spend. And the corporation obviously put 10 million in. He, he got to spend it all, but there's still death benefit left at that point as well, whether there be a net death benefit after paying off this ginormous loan and that death benefit would be another 2.9 million.
Speaker 1 00:29:53 So the total amount would be the 10 million plus 2.9 was about 13 and 0.1 million of total value used and created in that environment. Now if, if we scroll up and we want to kill him off at a different date, so let's, let's kill him off at, let's kill him off at age 95. 95, okay, I've got that highlighted. So at 95 he's been taking $292,000 a year after tax, after paying, you know, himself that dividend. He's been doing that for quite a number of years. In, in total he has taken out 8.782 million after taxes paid that he's been able to spend, yeah, corporation funded 10 million. He's now spent 8.7 million. Okay? He, he dies, the total death benefit is 50 million bucks at that point. Okay? It has to pay off the outstanding loan, which is 35 million bucks. Okay? So pretty big fat loan, 6 million is the, sorry, the, the net that goes to the corporation is about 6.6 million that's remaining that he has to, has to deal with after paying off the outstanding loan.
Speaker 1 00:31:02 Okay? So the total amount of money that is used, he got 8.7 after taxes paid the death, the corporation received 6.6. So the total is 15.4 million. That's basically used by this individual and the corporation funded it and the shareholder, and then his shareholders, heirs or the people he wants to give the money to who end up taking over the corporation as a state get to get, get the rest of that death benefit out tax free. And his, his death gives rise to the capital dividend account, which receives a credit for 50,374,000, which means that, let's presume for a moment outside of the 6.6 million in net cash proceeds from the death benefit, but there's also millions of dollars of other assets that the surviving shareholders want to be able to extract from the corporation. Their surviving shareholders are able to extract up to the credit amount of the capital dividend account on a tax-free basis.
Speaker 1 00:32:01 There's no other instrument that I've ever been made aware of that provides that benefit, that advantage. And so as the, as the, the, the corporate owner and the shareholders are saying, Hey, let's walk through all of the characteristics of the entity that this money is going to reside in, it was a resounding, again, are we able to put more capital into this entity? And the answer is yes. But this was a great, you know, a great starting point and for viewers and, and listeners, if your, if your amount is different, if you're saying, well, hey, am I, am I able to put a half a a million into the, the answer is yes. You're the one that determines based on comfort, affordability, and, and deciding who you want to actually retain earnings, right? Let's talk about retained earnings for a moment. This corporations retained earnings were being retained by the commercial bank, not by the corporation.
Speaker 1 00:33:00 And so the corporate owner said, I wanna be making sure that we are actually retaining this. And so the corporate owner picked the amount and we put together a cumulative death benefit that had merit that was required and that was necessary. And so that's why you've gotta work with, you know, and get connected with the right person on our team, you know, to put this together, especially if you're a business owner who's at the startup stage, sustained stage or durable stage, gosh, the, the longer you wait to store money inside of this entity, the more you're penalizing yourself, especially if you've got a really strong operating cash flow, free cash flow in the business, which, uh, we talk to entrepreneurs who are in that phase all the time. So if that's you and we're talking to you, then get connected with the right person on our team.
Speaker 1 00:33:50 I mean, there's, it's very easy to do and we're happy to work with. Well, and here's some things that we, you know, again, we we're looking at, anytime we put a spreadsheet or an illustration or something like that, there's, you're looking at a, at a, at a static document, it doesn't take into account the, the adjustable aspects of our life. So we have to use our imagination. Nelson said, this is an exercise in reason, imagination, logic, and prophecy. You really have to use your imagination. We can all agree as you're listening to this, that your life has probably changed a fair amount from day to day every single day in this last year. Yeah. And probably over the last three years. And so what was true for you three years ago isn't true today. Your kids are a little bit older, your business is a little bit older, it's a little bit bigger, it's gone through some challenges.
Speaker 1 00:34:35 Maybe, you know, like interest rates are up, like all these changing dynamics means that our life has to be able to maneuver with those things. Absolutely. When you self capitalize, you can make maneuvering decisions. Yeah. So as an example, this business owner, he's been drawing down an income, he's retired and he's having a great time with his wife, he's playing with his grandkids and doing all these kinds of things and then all of a sudden they get some bad news that someone has developed a, an illness or maybe some kind of a, maybe a, maybe a terminal diagnosis as an example, whatever that might be. Well, can he access more money than the 418 grand that the corporation was kicking out as a dividend? Definitely, yeah. He could, he could help try to solve that problem for a family member or if it was himself, he could go and rent a yacht and throw a big fat party down in Florida for all of his friends and, and you know, have a great time and say, I got to spend a lot more of the money before I went.
Speaker 1 00:35:28 And all of that money would be replenished by the death benefit that shows up. And I think what's interesting about this is, again, you, you we touched on the fact that the corporation could have accumulated other assets. If this business owner is putting a million dollars a year in probability they have other capital running through their businesses, life is high for sure. If you're running a business that size, the likelihood you might be able to sell that business, I think goes up a fair amount. So he probably owns this policy in a holding company as the most likely scenario. If he sells his operating business and he ends up with a big pot of extra money, well that money can come into the whole co and of course he might invest it in some other things. Maybe he buys some apartment buildings, maybe he buys another couple of businesses, maybe he pays off the loan, he pays up loan.
Speaker 1 00:36:13 When the business owner eventually kicks the buck and is no longer with us, all of that other accumulated asset base that's happen inside of this holding company, it still has to come out. It has to be extracted. So the beautiful thing, the magic of that capital dividend account allows for a vast, vast amount of extractable capital from other assets. It is a such a tremendous advantage in the community tax free environment and, and it doesn't exist in the United States. I was actually sitting with an accountant, I was at a strategic coach in Vancouver here last week. It was actually, it was about a week ago today. And I was meeting after I went for dinner with a couple of folks from the group. It was a new group. I hadn't been there before. And one of the ladies, she works for one of the largest, uh, uh, accounting firms in the states and I was explaining to her the capital dividend account, she was just blown away.
Speaker 1 00:37:01 I'm like, wow, I had no idea you guys had anything like that. Yeah. So it's a huge advantage and that that's, that's part of where this planning comes in. So we're avoiding the passive income tax, we're creating the capital dividend account, we're doing all these extra things. And what comes up from, you mentioned the idea of maybe the sale of the business. If someone wants to buy the business, often that sale comes internally from a person they know or maybe an internal person in the business, a manager or a a group of people who wanna take over the business and keep it running. Well, in order to do that, the business owner still wants to get paid out. He's gotta get paid out what the business is worth, right? So if that's the case, why not create a policy system that allows you to harness the capital in place to be able to make that, make that payment happen and then you still haven't protected?
Speaker 1 00:37:49 And I'll give you an example of this. So I have a gentleman right now, they're, we'll see if the other partners are on board or not. They haven't had a chance to learn the strategy, so we'll see. Maybe it's a possibility. But they have a, a, a, a legal firm. There's four partners. One partner is the main partner, he has about 35% of the partnership. And realistically he's probably got about 10 years, maybe 12 years left before he wants to exit and he wants to be, so his partners are gonna have to pay him out, they're gonna have to buy out his share and it's the only way it gets done. In order to do that, they need to have the money. So what if they take some of their profits that are running through the business now, they take a slightly lower dividend that they're paying themselves, they take a little bit less out that they're paying themselves to their professional corpse and they allow the, the general partnership to fund a policy on the four port partners lives.
Speaker 1 00:38:39 Well, when that happens, they can use that capital reservoir and borrow against it to pay out the amount that's owing to the guy that's taken off. And then they can use that for each partner. And, and as that happens now it worst case scenario if a partner dies that the general partnership owns the policy. So if the this partner who's retired and dies ends up, you know, passing away another 10 or 15 years later, the death benefit still stays with that legal firm so that they can use it to go and expand and grow the business still. Mm-hmm <affirmative>. So there's many ways that you can look at doing this and, and using it in a format where you have a, a structured business, you know, like, like accounting firms and legal firms, these kind of companies that, you know, often they're purchased from internally, there's a, you know, you have a partnership level, et cetera.
Speaker 1 00:39:25 You can create a system that could be self-sustaining to allow that business to not only grow and flourish, but to also fund the buyout requirement that's necessary for the people that are leaving the business so they can go on their merry way and and carry off into the sunset. Yeah, those are all great and very accurate points. And in this case, with this business owner, the business owner got exactly what he was looking for and knew exactly with certainty what the outcomes were going to be, regardless of whether he lives long or he dies early. And so the need is met immediately, heaven forbid if he passed away a very short while after the inception of the policy and the need is met longer term, respecting what he is planning to have happen as it relates to the business taking care of him when he decides to take a step back or maybe apply his time, talent and energy to other things and be able to realize fruits of his labor long after his day to day involvement in the business is done understandably so, and doesn't want to be worried about what's happening with tax rates, doesn't want to be worried about what's happening with the economy, real estate cycle, et cetera.
Speaker 1 00:40:43 Because all of those outside factors are completely beyond his control. And what do business owners desire? A desire total and absolute control. And that brings with it certainty. And with that certainty brings a peaceful stress-free way of life financially, the business order is very clear. Like, I need $290,000 every year to spend after tax and be happy with that. This contract is engineered to provide it. Hey, are you okay with an extra couple thousand dollars? Like, is that gonna frustrate you to have a little bit more money? No, I'm good. Okay, good. Yeah, that's what the policy's engineered to provide. And so logically, reasonably, right, the how much capital do you not want residing inside of an entity that provides everything that we just described And so much more. And for all of our business owners or entrepreneurs who are listening and watching, review this a few times and ask yourself that very same question.
Speaker 1 00:41:44 Gosh, how much capital do I not want residing there? Because what's the alternative? Your, your money must reside somewhere. So naturally you have to review options and if this option checks all the boxes, that gives you certainty and it gives you confidence and it gives you a peaceful stress-free way of life, financially, get as much capital into that entity as possible and then from that place you can go and take additional risk if that's what you choose to do or if that's what you desire, but just get capital inside of this entity first and then from that place, go and do those other things. Don't make it an either or decision. You're penalizing yourself unnecessarily. Well, and one other food for thought I'd like to add in is, is we're trying to keep it simple here with one example, with a million dollars going in, it's nice easy round figure to work from, but the reality is that business owner probably has a spouse, they probably got some kids, they probably have maybe some key business people in the business that the business would really suffer in that cash flow if they weren't insured.
Speaker 1 00:42:48 So yeah, in reality that million dollars probably got chunked into let's say 500 K on him, maybe 1 50, 2 50 on his spouse. Maybe he put, you know, on the two kids he put 50 K each and in the balance he went and did on one or two key employees so that there's similar accumulation. The death benefits are all gonna be over the map because it's spread out a little bit more. But the result is still achieved. But now there's additional protection mechanisms in place because he's diversified in the bodies that are insured. So his risk mitigation, if somebody kicks the bucket early, which could happen at any time to any one of us, now he's well better positioned and the business is better positioned to be strong in the event it's this person or that person or that person. We don't know who's gonna go, but we're all gonna go.
Speaker 1 00:43:36 So having, having five people insured versus just the one person, it might, might be a better consideration relative to all the factors they have going on. Again, it's all gonna be situational specific, but our example is just showing one policy. It really could have been an amalgamation of four or five or six policies put together, accomplishing the same objectives. And, and the key attributes remain the same regardless of it's a quantity of one or a quantity of 10 or 15 policies. All the attributes remain the same. And it begs the question again of how, well, how much capital do you want shielded from onerous taxation too much tax? How much capital do you want shielded from that much as I can? Because if you think about this again, reasonably and logically, is the government going to require more or less money in the future? Well, there's a very high probability that it's going to be more, well, where is that money going to come from?
Speaker 1 00:44:35 It's going to come from taxable income, taxable gains and so on. So if you're subjecting more of your capital to taxable gains and, and to registered instruments where again, you have, you're not in a position of total control, whoever has the gold makes the rules. And whenever the government senses that there's going to be revolt or an uprising, the government creates an exception to the rules and they grant you an exception, an an exception so that you can put money inside of an instrument and they do it under the guise of giving you a tax break because they sense that uprising, they sense that of the, of the, the population, the citizenry who are saying this is not right, this is getting outta control. The government says, Hey, we gotta do something here to calm citizenry down. Well hey, let's grant them an exception to the rule.
Speaker 1 00:45:34 This sounds good to me and let's do it under the guise of giving them a tax break. If the government really wanted to give us a tax break, don't you think they would just cut the taxes? And do you really believe for a moment that they want to do that regardless of what your political leanings are? Doesn't matter. Government needs capital, where's it gonna come from? And so how much of, how much do you wanna shield from onerous taxation? Too much taxation. Because if I could ask a room of 700 people, show of hands, raise your hand if you feel like you're not being taxed enough. Because whenever we get into this conversation of pay your fair share and we, we respect political leanings, people have political leanings, that's your business. And hey, we respect that and good for you. But logically put your hand up if you think you're not taxed enough.
Speaker 1 00:46:26 So naturally you would wanna shield tax from onerous, shielded money from onerous taxation. This instrument does that. Well begs the question, if this is so great and this is this contract is the greatest exemption that exists in our tax code today, won't the government shut it down? We're solving a social problem here. Why do you think there's So they're gonna have to solve the problem of all the, all the grieving widows and orphans that don't receive a tax-free death benefit. Like we're the, the purpose of insurance is it solves a huge problem and it's voluntary that we get to solve that problem so we don't have to lean on social programs to solve it. Yeah, it's the best, it's the original social program. People why gather together socially to put an insurance company together to solve a problem so that no individual, one person has to be responsible for solving that problem.
Speaker 1 00:47:17 We can combine our resources in an efficient manner with the beautiful design of actuarial science. Maybe that sounds kind of weird, but it's pretty freaking awesome. The business owner said, this is what I want. We delivered what he wants. His question wasn't is, is this the direction that we want to go? His question was, can I get more capital into this entity? Business owners grasp this very, very quickly and when, when you normally think of a life insurance contract, you think of death. And when a business owner understands that this contract represents far more living benefits, business owner grasps it very fast says, this is something we need to do. And so if that's you, if we're talking to you and our assumption is correct that you're looking for those very same advantages and that peaceful stress free way of life financially and get connected with the right person on our team and let us help you. We're pretty good at this. This is what we specialized in. So deal with a specialist, you'll be glad you did.
Speaker 1 00:48:38 Awesome Jason, this is a ton of fun man. We've been looking. Yeah, it was great for a while and uh, hopefully we'll get a ton of value out of it and can't wait for our next episode. That's good. And for all of our viewers and listeners, if you're on the YouTubes, be sure to click on that playlist that you just saw up here and continue your journey of learning and look forward to connecting with you and hearing all these great stories about how you've been able to achieve what this very same business owner is setting about to get accomplished. Have a great rest of your day. Make it awesome.
Speaker 2 00:49:07 Thanks for listening to The Wealth Without Base Street podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast player and be sure to write the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies, and the mindsets that maximize your wealth.
