Sign Florida Banking Promissory Note Template Free

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the next arrangement we'll look at is the promissory note arrangement it's a little bit more complicated but it is more tax efficient with the promissory note arrangement the corporation is now going to buy the life insurance on each of Jill and Steve that means we're paying for the life insurance with the corporations after tax dollars rather than Jill or Steve's after tax dollars that's generally going to result of cost savings of about 20 to 25 percent so that alone is a win right from the beginning with the promissory note arrangements okay now let's say that Steve dies the death benefit will be paid to the corporation as the beneficiary of that life insurance policy and let's assume that it's a million dollars of term insurance this will create a $1,000,000 credit to the capital dividend account for this corporation of course we saw a few slides ago that the capital dividend account allows the corporation to pay a tax free amount out to its shareholders so now Steve shares are deemed disposed because of his death just like we saw with the Jill example when we looked at the cross purchase agreement a few slides ago section 70 of the income tax act calls for a deem disposition of capital property on death so we've seen that Steve has this one million dollar capital gain when he dies he may be able to offset that using a lifetime capital gains exemption which may allow him to offset up to 750,000 dollars of capital gains then his shares were passed on to his estate which takes on those shares with now and ACB of a million dollars essentially they're all tax paid there's no more capital gain or capital loss waiting for the estate as long as the estate sells the shares for a million dollars Jill now acquires those shares from Steve's estate by issuing a 1 million dollar promissory note a promissory note is really like an IOU so JAL just writes a note that says here's a million dollars it's a negotiable instrument meaning that as long as the estate figures it has a value of a million dollars it has a value of a million dollars so the estate has taken now fair compensation and in exchange for that it will pass those shares to Jill so at this point Jill becomes the sole shareholder of this corporation the estate Steve whatever the cases is no longer involved however Jill does owe the estate 1 million dollars so the question is where does Jill get that 1 million dollars problem now Jill as the sole shareholder owns all the shares and she just has to take care of that promissory note so how is she going to do it we're going to have the corporation pay her a $1,000,000 tax-free capital dividend they will use the insurance proceeds to pay that capital dividend and then Jill will use that million dollars to redeem the promissory note issued to Steve's estate so effectively wiping out her debt to Steve's estate the promissory note will be redeemed and Jill no longer has to deal with Steve's estate which was the intent of the buy/sell we've now got jill as the sole shareholder and Steve's estate has gotten the value for Steve's shares in the company at this point Jill owns all the shares of the company her fair market value is now two million dollars and her ACB is 1 million dollars it's a fairly straightforward arrangement a little more complicated than what we've seen previously but it's it's reasonably straightforward not taking advantage of any complex tax provisions here although we'd like to have access to both capital dividend account credits and the lifetime capital gains exemption what do we like about the promissory note arrangements well it's much more tax efficient than the cross purchase agreement because now the corporation is buying the insurance it's much cheaper for the corporation to buy the insurance than it is for an individual to buy the insurance it allows for use of the lifetime capital gains exemption and the capital dividend account two measures of the Income Tax Act that allow a tax payer to generate some tax efficiency that they would not otherwise have it will increase the ECB for the surviving shareholder meaning that the surviving shareholder is not going to have a large tax liability waiting for them down the road and it works very well with multiple shareholders if we have three or four or five or more shareholders now the corporation is really taking care of the the middleman role here and we don't have the requirement for let's say in a three-person arrangement like we talked about in the cross purchase we don't have the requirement for six insurance policies to be enforced now we only need three insurance policies on the downside it is a somewhat complex arrange but not everybody understands that flow from the promissory note to the redemption of the promissory note the capital dividend account and lifetime capital gains exemption tend not to be part of most people's everyday vernacular and if the corporation does have debts when the shareholder dies we have to be careful here that the proceeds of that insurance policy could be attached by creditors there are some ways around that such as using a holding company to help create the proper structure for this but a basic arrangement you do run this risk and then we do have to have the lifetime capital gains exemption and the capital dividend account available for that maximum tax efficiency without having both of those arrangements available it's probably not appropriate to use the promissory note arrangement you