Blowing up your balance sheet returns

I have a friend who owns 40 doors.

He’s big into real estate. I mean really big. He’s the kind of guy that can tell the difference between “creamy mushroom” (?!?), Plateau and Wheat Bread. By the way, these are all neutrals paint colours for the uninitiated.

So, he’s big into real estate.

Though, he said its still a pain in the butt to own so many places. He loves it. He eats, breathes and lives real estate. It’s in his blood.

He’s also doing very well these days.

But, I wanted to draw this out a bit for all of you to see how we might go about calculating some insurance needs.

My friends 45 today and owns 40 doors. He also has a family. Draws an income of about $140,000 out of his corp. And, he has a massive amount of debt for all those properties.

Here’s his corporate balance sheet today:

Cash: $250,000

Real Estate: $18,000,000 (ACB: $12,500,000)

Debt: $13,000,000

Shareholder’s Equity: $5,250,000

The shares currently have an ACB of $1,000.

Now there are plenty of way to figure this out, but I like personally like to keep it pretty loose and simple.

If he were to die today, there would likely be a capital gain on his estate of more than $5,000,000.

That would be taxable at 50% (inclusion rate).

And the estate would pay tax about 50%.

His tax bill today would be about $1,250,000 and growing. But, let’s say he lives another 40 years.

What would be his future tax bill?

Well, that’s tough to figure out. But, if we grow the value at only 3% per year for 40 years, that brings the tax bill up to nearly $5,000,000 or even higher.

So here’s what I told him:

1. If you die tomorrow and you want to keep those assets in the family, someone needs to find more than $1M in cash to pay that bill. You should buy a term policy to cover off that risk.

2. But, that doesn’t account for future growth. So, you may need more. How much more? No one really knows. But, if you properties grow at only 3% per year, you’ll need about $5,000,000 in insurance by the time you die. And, it could be much higher.

3. The good news, is there are things we can do to stop a lot of that growth. Things like estate freezes and trusts to minimize the impact.

4. But, what if I were to show you something that was a little big of both? Would you be interested.

Our friends at Sun Life put out a great piece a few years ago called, “Bolstering The Balance Sheet,” and it’s a great piece if you haven’t seen it. So, I want to show it to you in action.

Here’s the link:

For those who haven’t read it. It’s all about taking money from one pocket and putting it in another.

My friend here has a life insurance need of about $1M today and growing.

So, why don’t I put together a nice illustration that shows exactly that and using the $250,000 in cash, but simply re-allocating.

What I’m going to propose is taking $50,000 each year for 5 years (but, we could continue it indefinitely) and buying the insurance he needs, which keeping his cash intact.

So, here’s what would happen to the cash pile:

Year 0: $250,000

Year 1: $200,000

Year 2: $150,000

And so on.

But at the same time, the cash value of the insurance policy would look like this:

Year 1: Cash Value - $43,354 - Death Benefit - $1,032,363

Year 2: Cash Value - $91,665 - Death Benefit - $1,150,853

Year 3: Cash Value - $143,385 - Death Benefit - $1,269,859

Year 4: Cash Value - $198,410 - Death Benefit - $1,389,094

Year 5: Cash Value - $257,188 - Death Benefit - $1,453,127

So you’ll see, after 5 years, you not only have more cash that you started with, but you now have a permanent policy that is growing.

Then my friend could stop paying the premium, the cash value will keep increasing overtime and the death benefit will settle in around $1M long-term.

Or, he could keep paying the $50,000 each year and take policy loans or withdraw cash whenever he needs it. All the while, sheltering cash and having access to the cash whenever he needs it.

And if you’re wondering, if he kept on paying the cost for 40 years, there would be about $4.9M in cash value and $6.5M in death benefit. More than taking care of his long-term tax bill.

And, he has access to the cash whenever he needs it. Use it as collateral for another investment or whatever he wants. And, everything is sheltered.

This is all because he likes to invest in real estate and keep cash.

So, my point in all of this.

Why don’t we make better use of your cash and bolster your balance sheet with cash that is accessible when you need it, keep it safe, grow it and buy you life insurance?

We know he needs a lot of insurance long-term. But, his priority is growing his business.

Why not use the assets he already has, but make much better use of them.

Want to know more about how to make this happen in your business. Send me a message and we can connect.

Have a great weekend,

Andrew