Commentary |  April 2016  |  by  Gary Crosby

Linked below is the special report on the 2016 federal budget prepared by CALU, the Conference for Advanced Life Underwriting. As you might expect, the budget changes with respect to life insurance are explained in more detail in CALU's report than you will have seen elsewhere.

For your convenience, we’ve summarized the key highlights of this report below.

1. Corporate groups can no longer increase the credit to the Capital Dividend Account (CDA) by naming a sister/subsidiary company as the beneficiary of a life insurance policy.

Under the old rules, it was common for a holding company to own a policy and name an operating company as the beneficiary under the contract. Under this structure, the death benefit would be received by the operating company and the credit to the CDA would be equal to the death benefit – without a reduction due to the adjusted cost basis of the policy. (The ACB was ‘owned’ by the holding company, and therefore didn’t impact the CDA calculation of the operating company.) Under the new rules the ACB will ‘follow’ the death benefit, reducing the CDA credit irrespective of which company
is named the beneficiary.

2. Rule changes for transferring insurance from individuals to corporations.

The ability to transfer a life insurance policy from an individual to a company – and extract tax free funds to the extent the policy’s fair market value exceeds its cash surrender value – is no longer available. Any amounts received in excess of the transferred policy’s cash surrender value will be taxed as income to the transferor.

3. Impacts to CDA credits for transferred policies.

Any prior transfers of policies to corporations that resulted in a tax-free payment to the transferor will not be directly impacted. However, the ultimate CDA credit when the death benefit from the transferred policy is received will be reduced to the extent the difference between the fair market value and cash surrender value of the policy was withdrawn from the company tax-free.

Professional advisors should take particular note of point #3, as insurance companies will not be tracking any of these types of adjustments when they provide the ACB for a policy at the time of death. Given the negative consequences of paying out excessive capital dividends, advisors should be careful in tracking the funds that were originally withdrawn tax-free.


Read the CALU report here.

Gary Crosby supports CMG and its clients with advanced tax and estate planning expertise.