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Taxation Implications:

Taxation Implications of Policy Ownership

Income Tax

Capital Gains Tax

 

CGT Exemptions:

CGT Exemptions for Insurance

2015 Amendments

Death Benefits

Non-Death Benefits

Terminal Illness

 

Methods of Policy Ownership:

Ownership Implications

Cross Ownership

Self Ownership

Trust Ownership

Super Buy/Sell

 

Buy/Sell Cover:

Implications for Buy/Sell Cover

Cross Ownership

Self Ownership

Related Party Vendors

Deemed Dividends

Risks If No Agreement

Trust Ownership

Super Buy/Sell

Origins of Self-Ownership

 

Debt Reduction Cover:

Implications for Debt Reduction Cover

Cross Ownership

Self Ownership

Trust Ownership

Bank Ownership

 

Third Party Payments:

Implications for Promises to Distribute Insurance Proceeds to Third Parties

 

Commercial Debt Forgiveness:

Commercial Debt Forgiveness

Cross Ownership

Self Ownership

Trust Ownership

 

Super Fund Ownership:

Super Fund Ownership

Tax Disadvantages

Cost Disadvantages

Other Disadvantages

Geared Premium Funding

 

Aggregation onto One Policy:

Methods of Aggregation

 

 

 

 

 

 

 

 

Trust Ownership (Overview)

 

The IGS form of Trust Ownership means that a Trustee owns the Policy on behalf of the Life Insured.

 

Diagram

Click here to see a diagram that illustrates the Trust Ownership of Buy/Sell Cover and Debt Reduction Cover.

 

Indirect Self-Ownership

Under the roof of the Trust, the Life Insured is the "Beneficial Owner" of the Policy .

In effect, it is an indirect form of Self-Ownership and obtains the same tax exemptions as Self-Ownership.

 

Exemption for Death and Non-Death Benefits

This method of ownership obtains a CGT exemption for both:

 

The Nature of a Trust

A Trust is a legal mechanism or device that allows the ownership of an asset to be separated into two parts:

Normally, this separation requires the two parts to be owned or held by two different parties:

  • the Trustee is the legal or nominal owner of the asset; and

  • the Beneficiaries are the beneficial owners of the asset.

"Legal or Nominal Ownership"

Legal or nominal ownership means that the Trustee owns the asset in name only.

It might be registered as the "owner" of the asset in any government or private records of ownership.

For example, its name might appear on the policy schedule or the certificate of title of the property.

However, the Trustee does not own or hold the asset for its own commercial benefit.

It is held for or on behalf of the Beneficiaries who own or hold the beneficial interest in the asset.

In effect, the Trustee holds the asset as a custodian and must manage it for the commercial benefit of the Beneficiaries.

"Beneficial Ownership"

Beneficial ownership normally means that parties other than the Trustee own or hold or enjoy the underlying commercial benefit of the asset.

The Trustee must hold and manage the asset for or on behalf of the Beneficiaries.

If the asset has a substantive commercial value, the value belongs to the Beneficiaries, not the Trustee.

"Fixed Trust"

In the case of a Fixed Trust, the Beneficiaries have a fixed and defined interest in the Capital and Income of the Trust.

The commercial benefit of the Capital and Income of the Trust can belong to one or more Beneficiaries.

Single Beneficiary

If there is one Beneficiary, that Beneficiary will be the Beneficial Owner of the Capital and Income of the Trust.

It will also be "presently entitled" to the Capital and Income of the Trust for Income Tax purposes.

Multiple Beneficiaries

If there are multiple Beneficiaries, the commercial benefit of the Capital and Income of the Trust will be split between the Beneficiaries proportionately.

The Beneficiaries will be the Beneficial Owners of both the Capital and the Income of the Trust in fixed proportions.

This means that they will be "presently entitled" to Capital and Income in fixed proportions for Income Tax purposes.

"Discretionary Trust"

The Trustee of a Discretionary Trust holds the Trust Assets on behalf of all of the defined Beneficiaries.

However, because the Trustee has a discretion whether to give any one Beneficiary (a "Discretionary Beneficiary") any share of the Trust Assets (or the income from the Trust Assets), none of the Discretionary Beneficiaries has a fixed interest in the Trust Assets.

In this situation, the law considers that:

  • none of the Discretionary Beneficiaries is a Beneficial Owner of the Trust Assets; and

  • the Trustee is the sole Beneficial Owner of the Trust Assets.

Because the one party is both the Legal or Nominal Owner and the Beneficial Owner of the Trust Asset, the Law overlooks any theoretical distinction between the two forms of ownership.

In effect, the two forms of ownership are united and not separated at all in the case of a Discretionary Trust.

Direct Ownership

If the Owner of a Policy holds the Policy for their own exclusive commercial benefit, they will be both the legal (or nominal) owner and the beneficial owner of the Policy.

Like a Discretionary Trust, there is no separation of the two forms of ownership in this case.

 

Buy/Sell Cover

The normal method of ownership of all Buy/Sell Insurance is now:

CGT Exemptions for Death and Non-Death Benefits

Because the Life Insured is the "beneficial owner" of the Policy under the "roof" of the Trust, Trust Ownership obtains a CGT exemption for both Death and Non-Death Benefits.

Payment to Appropriate Vendor

One of the advantages of Trust Ownership is that it can pay the Purchase Price to the correct Vendor in cases where the Owner of the Equity is not the Life Insured.

In other words, the Life Insured (in its capacity as "beneficial owner") can direct the Trustee to pay the insurance proceeds to the appropriate Recipient.

In contrast, Self-Ownership must pay the Purchase Price to the Life Insured or their Estate.

This might not be appropriate from a commercial or family point of view if the owner of the Equity is not the Life Insured.

For example, the owner of the Equity might be a Company, Family Trust or other family member (who should be entitled to receive the Purchase Price of their Equity).

Trust Ownership Agreements

Please click here to read about Trust Ownership Agreements.

Trust Ownership of Buy/Sell Cover

Please click here to read more about Trust Ownership of Buy/Sell Cover

 

Debt Reduction Cover

Diagram

Click here to see a diagram that illustrates the Trust Ownership of Debt Reduction Cover.

No CGT Liability

Because the Life Insured is the Beneficial Owner of the Debt Reduction Cover, Trust Ownership obtains all available exemptions from CGT.

In addition, it can distribute the Debt Reduction Cover directly to the Creditor both securely and tax-effectively.

Secure Repayment of Creditor

While Self-Ownership means that the Life Insured (or their Executor) will be responsible for distributing the funds of the Business to the Creditor, a Business Insurance Trust means that a Trustee will control distribution of the Insurance Proceeds to the Creditor in accordance with the terms of the Trust Agreement.

This means that physical control of the Insurance Proceeds (and therefore the implementation of the "Business Will") is in the hands of a custodian that has a contractual and fiduciary obligation to comply with the directions of the Beneficial Owner in the Trust Agreement.

The Trust is therefore a more secure vehicle for protecting the interests of all of the members of the "Business Family".

Substitute Loan Accounts

One of the unique features of a Business Insurance Trust Agreement is that it establishes Loan Accounts pursuant to which the Continuing Proprietors lend the Debt Reduction Insurance Proceeds to the Business, which in turn repays the Creditor.

In effect, the Agreement creates new Loan Accounts with the Continuing Proprietors (who now own 100% of the Business between them) in substitution for the external Debt.

The Continuing Proprietors are referred to as "Substitute Lenders".

Avoidance of Franking Credit Problem

This structure avoids one of the adverse tax implications of Company ownership of Debt Reduction Cover.

While the receipt of Death Benefits by a Company would be CGT-free, there is an adverse income tax implication: because no tax has been paid, there would be no franking credits attributable to the Insurance Proceeds.

Therefore, any subsequent dividends attributable to the Insurance Proceeds would be taxable at the full marginal rate of the shareholders.

Under the Loan Account structure created by the Business Insurance Trust Agreement, the Debt Reduction Proceeds are lent to the Company.

This enables the Loan Accounts to be repaid tax-free in the future (i.e., the payments are repayments of principal owing with respect to the Loan Accounts, not payments of dividends).

Insurance Trust Solutions

In summary , the problems of both Cross-Ownership and Self-Ownership can be avoided by the use of a Business Insurance Trust Agreement (i.e., Trust Ownership).

Please click here to see a more detailed analysis of these issues.

Trust Ownership of Debt Reduction Cover

Please click here to read more about Trust Ownership of Debt Reduction Cover

 

 

Summary

A Business Insurance Trust Agreement is designed to achieve four principal goals:

  • It avoids Capital Gains Tax with respect to the Insurance Proceeds in the case of both Death and Non-Death Benefits;

  • It can distribute the Insurance Proceeds to a number of different Recipients (not just the Life Insured or their Estate);

  • It can aggregate different Business and Personal Cover onto one Policy with respect to each Life Insured; and

  • When the Life Insured’s needs change, it might only be necessary to change the allocation of the Sum Insured in the Agreement (rather than changing the different Policies with the Insurance Company).

Please click here to read about Trust Ownership Agreements.

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

Trust Ownership can do everything that Self-Ownership can do, but Self-Ownership can't do everything that Trust Ownership can do.

See more Adviser Tips

 

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