If a farm owner ties oneself to fixed assets without anticipating the future, even if his farm is well-established, it is bound to fall no matter how much farmers earn. In events such as death, debts may arise quickly, and tax may devour estates, which makes succession impossible.
Life insurance helps to pay for funeral costs, tax liabilities, debts, and, most importantly, it supports the family. For farms that families run, life insurance helps in distributing inheritance equally. Also, for corporate farms, it is wise to make a liquid investment that is tax-friendly.
In an insurance plan, there are three parties involved: the individual/s insured, the beneficiary, and the owner. The individuals insured are the farmers, while the beneficiary and policy owner is the corporation. The government usually levies a corporate income tax amounting to 16%, which is less than a personal income tax rate of 46%.
When the inevitable happens, the corporation becomes the beneficiary and receives a tax-free insurance payout. The capital dividend account or CDA, which is a national account, will then distribute the funds to the shareholders.
Open a CDA account
A CDA account is a medium for corporations to release tax-free money. One strategy is to borrow funds from the policy and use it to purchase more insurance. The more policies, the higher amount of CDA can be collected. For example, one owns a $1.5 million insurance policy and doubles that up to $3 million. If one dies, the corporation will receive $3 million free from tax and uses that to pay the debt. One shouldn’t worry about changing rules since the Canada Revenue Agency doesn’t apply current rules to old policies.
Purchasing insurance for individuals can help increase the investment to cover for liabilities. It is also one way of equalizing estates to non-farming heirs. Without insurance, the farm will have to pay out siblings, sell assets, or give the land to family members. In agriculture, property ownership is transferred to the spouse or children without tax.
When a corporation is still growing its farming income, it needs insurance to pay for debts or to pay out shareholders at death. Usually, for businesses with shorter goals, they purchase term insurances. For example, three individuals plan to open a business that they hope to sell after ten years. On the other hand, family farms that continue from generation to generation should consider purchasing whole life insurances.
Shelter Capital Through Insurance
A corporate farm may have extra capital. Maybe their successors are not interested in farming or are not fascinated about paying debts or are getting close to retiring. Therefore, the ROI or return on investment one gets from whole insurance will only benefit the beneficiaries. However, payouts are guaranteed 100%, but it doesn’t multiply. Moreover, if you fear that your farming income won’t reach your retirement age, you can borrow from whole life insurance policies while you live.
Life insurances help corporations protect their farms even after death. Without insurance policies, unexpected events may come like a storm for a corporate farm, consuming all that is left of the farm.