Paying Pennies on the Dollar for Your Estate Tax
After an estate freeze, a $300,000 personal tax bill falls on the estate. The cash sits in the HoldCo. How the next generation can fund that liability for 40–60% less than draining retained earnings
The Situation
Profile
Founder
Gregory, 74, healthy non‑smoker
Succession
Two sons successfully running the business
Structure
Estate freeze completed; growth belongs to the next generation
The Liability
Amount
$300,000 personal tax (estate)
When
Due at Gregory's death
Who Pays
Estate / beneficiaries
HoldCo Resources
Retained Earnings
Roughly $2,000–5,000/month
Savings
Several hundred thousand in passive savings
Tax Treatment
SBD‑rate income; dividends are non‑eligible
How Much Must the HoldCo Drain to Pay $300,000 Net?
The liability is personal (estate); the cash is in the HoldCo. Savings come from SBD-rate retained earnings. Paid out as dividends, they are non‑eligible. QC 2026 top marginal rate on non‑eligible dividends: 53.31%.
Source: iAssure Inc. (Quebec 2026; illustrative only.)
The Two Common Paths
The Alternative: Corporate Insurance & Investment
Redirect part of HoldCo retained earnings into $350,000 universal life at $1,601.56/month, or a dedicated investment account. Fund the $300,000 liability for a fraction of the cost of a one‑time dividend.
Cost Comparison: Total Corporate Outlay to Net $300,000
Alternative investment 7% rate of return. Assumptions in disclosure below. Source: iAssure Inc.
Illustration: Corporate Asset Transfer vs. Alternative Investment
Insurance keeps net estate value near $300,000 across ages 74–100; the 7% alternative investment lags in early years and carries higher tax drag. Year‑by‑year values for ages 74–84 and 85–100 available upon request.
A detailed illustration is available upon request. Illustrative only; not a substitute for professional advice.
Why Life Insurance Outperforms: The CDA
Death benefits received by the corporation are credited to the Capital Dividend Account (CDA). The corporation can then pay tax‑free capital dividends to the sons, bypassing the 53.31% rate on regular dividends. Investment accounts are taxed annually at high corporate rates, and payouts remain largely subject to personal dividend tax.
Insurance typically delivers the $300,000 target for 40–60% less corporate outlay than retained earnings, and preserves borrowing capacity.
Key Takeaways
What this case study shows
Liability vs. cash
The $300k tax is personal (estate/beneficiaries). The cash is in the HoldCo. Funding it via dividends costs ~$643k in gross payout.
Insurance vs. dividend
Corporate life insurance can fund the liability for 40–60% less than a one‑time dividend from retained earnings in typical age ranges.
CDA advantage
Death benefits credited to the CDA allow tax‑free capital dividends to shareholders, unlike regular dividends taxed at 53.31%.
Act while insurable
Timing and insurability matter. The earlier the strategy is put in place, the more flexibility the family has.
Review Your Estate Liquidity
If you have a post–estate freeze tax liability and HoldCo savings, understanding how to fund it efficiently can preserve wealth for the next generation. Work with your CPA, notary, and insurance advisor to see what fits your structure.
Important Disclosure
This case study is illustrative only and not a substitute for professional advice. Names and identifying details have been changed. This is an illustrative example of approach, not a guarantee of outcomes.
Assumptions:
- Gregory, 74, healthy non‑smoker; two sons running the business; estate freeze in place
- $300,000 personal tax liability (estate) at death; HoldCo has retained earnings and passive savings
- Quebec 2026: non‑eligible dividend top marginal rate 53.31%; corporate tax assumptions as used in comparison
- Insurance: $350,000 universal life, $1,601.56/month; level premiums. Alternative investment: 7% rate of return
- Cost comparison table: total corporate outlay to deliver $300,000 net to estate; insurance vs. investment vs. one‑time dividend from retained earnings
- Mortgage scenario: 4% over 25 years; monthly payment ~$1,578; gross dividend ~$3,379.50/month to net that amount
Outcomes depend on age, health, underwriting, tax rates, and policy performance. A detailed illustration for your situation is available upon request.
Always work with your CPA, notary, lawyer, and insurance advisor before implementing any strategy. Life insurance and tax strategies require professional advice tailored to your circumstances.
Source: iAssure Inc.