Insider Tips for Incorporating Life Insurance into Your Law Corporation. (#109) — Transcript
Updated: Oct 26
THE PICTURE OF WEALTH · EPISODE 109
Dustin Serviss explains his spending accelerator framework and discusses how life insurance can fit into a law corporation’s financial planning. This is part four of his financial wellness miniseries.
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This transcript was generated from the episode audio and lightly edited for readability. It may contain transcription or speaker-attribution errors. Refer to the recording for exact wording.
Chapters
[00:00:03] Why the Spending Accelerator was built
[00:01:27] Investment buckets and priorities
[00:02:28] Purposeful spending and old beliefs
[00:03:40] Cash-flow awareness and insurance
[00:05:00] Corporate-owned life insurance
[00:06:16] Protecting a law partnership
[00:07:33] Funding a partnership buyout
[00:08:49] Critical illness and corporate ownership
[00:10:15] Planning how benefits are paid
[00:11:35] Working with your accountant
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Transcript
[00:00:03] Dustin Serviss: Welcome to mini series episode four, insider tips for incorporating life insurance into your law corporation. This tool, the spending accelerator, was born out of my own world. I was very work first, family second, and that I didn't know balance. And so a few years ago, we had a child. Life changed, extreme pressure, in in stress, because I couldn't figure this out. And so I built this for myself to say, okay. Could I take a little bit of, not time off, but could I not be as as, so focused and sorry. Thanks, on the chat. I can enlarge that for sure. So I'm so focused on the work. How can I back off and know that I'm doing the right things and
[00:00:51] Dustin Serviss: take a Friday off? So where does the the spending... How does it work? The spending accelerator is there's money in your corporate bank account. This could be for sole proprietors, and you're you're not incorporated. It's the same idea. Money go... You know, you do have billings or you get paid into your bank account. Your bank account then flows money to your BAM, which is your bare ass minimum expenses. Then you're gonna flow a small amount of money into your emergency cash. Maybe you have some real estate. That could be rental. That could be your house. Then you're gonna flow money into the right insurance.
[00:01:27] Dustin Serviss: Then core investment, everyone has their own sort of views on investment. There's different kinds, but I'm talking about something like S and P five hundred or an index. And this isn't, you know, a buyer or sell recommendation. But I'm talking about a dividend fund, something middle of the road. Then you've got a high risk bucket which gets less money. So then you've got an alternate investment that could be, you know, your neighbor has a, a compost business he's gonna invest. I don't know what it... You know, you you fill in the blank, but you want a small amount into that. So everyone might have different numbers.
[00:01:57] Dustin Serviss: The real estate focused person might say, okay. Well, I'm gonna put a thousand dollars a month into the real estate and only five hundred into the core investment. So that... You know, different people. Some people would say, I don't wanna deal with tenants. They do more into the core investment. Younger people might have a little higher risk bucket. So you... What you've done is you've automated every month. You know what you spend on living. You know you've got... You need a little bit of emergency, and then you know where your goals are. Okay? We've managed our risk also. So if something happens, we've got the right insurance.
[00:02:28] Dustin Serviss: If there's money left, you purposely spend it. You spend it on the things that you maybe think you can't have. This is sort of getting really deep into your old beliefs. You know, these are the things that, you know, when you grew up as a child, you you heard your parents talk about. Well, maybe you're in a totally different boat. Maybe you make four hundred thousand a year and your parents only made eighty, but you've still got those old beliefs of what your folks have. And so you need to be aware and be in in tune with yourself and be aware of, okay, what what is real in my life?
[00:03:01] Dustin Serviss: And are the beliefs and things that I have about how I can spend old? And can they be refreshed? Maybe they need to control alt delete. But that spending is going back to the life clarity summit that you are very intentional about where you spend. And when you do your BAM when you do your BAM, you know where the money's going. It is a very, very powerful exercise to sit down with your partner and layout. If you wanna get really nerdy about it like my wife and I do, we print three months of visa statements. And we say this is this is, a safe place for us to look at the numbers, not to point fingers, but to be aware for both parties,
[00:03:40] Dustin Serviss: for me as well, of where where does the money go? Where does it go? And it isn't about changing. It might be... Well, I like my life. So So it isn't about trying to cut costs. It's just being aware so that you just go, okay. Well, I've got some extra money. I wanna make sure that I spend it on what I believe is valuable and not get sucked into spending on things that that aren't really that valuable. Strategy number two, we're moving on to insurance. Again, fifty one percent of you are... Fifty nine percent of you are incorporated. This is powerful. For any of you, and I'll make this bigger, who have a corp or a law corporation, you have
[00:04:20] Dustin Serviss: life insurance, and you own it personally. Here's how the money flows. You have billings. Those go to your corp. You pay some corporate tax. Then you pay yourself a salary, and you pay some personal tax. And what's left, you use some of it to pay your life insurance. It's a very simple strategy, and I'm referring specifically to term insurance. For any of you with whole life, universal life, feel free to ask me offline or send me a message, and I can comment on it. But I'm talking about term life insurance. So Lawyers Financial has a great term five and a great twenty year term, and this is applicable to those policies as well.
[00:05:00] Dustin Serviss: So instead, you'd have your corporation own your life insurance. So we're gonna have the... Your law corp own the coverage. It's going to pay for the coverage, and your law corp is going to be the beneficiary of your coverage. And And so if you think about that, you've used your corporate dollars to pay for the life insurance premium. And, again, term insurance, when it comes into a a corporation or a law corporation, it creates something called the capital dividend account or a CDA. And those death benefit can pay out the CDA tax free to your family. So you've created a very...
[00:05:37] Dustin Serviss: And, again, if your if your life insurance premiums are twenty dollars a month, it's not a huge deal. If your life insurance premiums are, you know, four thousand a year, two thousand a year, then they all of a sudden... You... That that tax savings over years becomes something significant. Same with partnerships. We do a lot of work with with partners, and so the simple structure is you have a partnership, so it's Smith Brown Law Partnership. And there's two lawyers, so we got Kimmy Brown and Betty Smith. They both have law corps who are partners with the law corp... Or sorry, the law partnership. So the the...
[00:06:16] Dustin Serviss: And again, everyone's numbers might be a little bit different, but the situation is more specific to if one of them passes away or gets critically ill, what happens to the law partnership? In theory, let's let's say Kimmy passes away. Kimmy might have a spouse or Kimmy has an estate, and now her estate or her family is the owner of that law corp. And now that that estate, that family is on the law corp, they're part of the partnership. Now for any of you solicitors, you know, I know you're you're probably having a sip of coffee going, yeah, we know this. But a partnership agreement is very important.
[00:06:52] Dustin Serviss: A shareholder agreement, partnership agreement with everything laid out is extremely important. Why? Because if one of them passes away or gets sick, we could easily fund that using insurance. And the law partnership can own and pay for the coverage. So it's those expense... The expense of it is pre the split. So then you're both kinda participating. Yes. Kimmy might be older or Betty might be younger, and so the premiums might be different. And so if you're partners with somebody and there are... You know, there's an age discrepancy, don't look at it at they pay, you pay. Look at it as your your your partnership protection is more of a...
[00:07:33] Dustin Serviss: Is a is a bundle. And so if your premium's a thousand and their premium's two thousand, we're gonna protect our partnership with a three thousand dollar insurance plan. And if you think about how this would work, life insurance critical as we pay into the partnership. Again, we'd want accountants involved, but that life insurance would be used to then pay in in... When we passed away Kimmy, that life insurance would be used to pay Kimmy's spouse or a state to say, okay. You're now not partners with the law partnership, and I now... Or or Betty, in this case, owns the full law partnership.
[00:08:08] Dustin Serviss: Where this really becomes kinda like phase two is if these two lawyers have staff that they are sharing the costs of and the... To cover the costs, both lawyers need to contribute. If you think about that, if you, you know, are really passionate about your staff and your team, one person's gone, also in that workflow's gone. In this case, Betty would have to pick up Kimmy's workflow. Can she? And, you know, does she want to? And and then Kimmy's staff. What happens to Kimmy's staff? And this life insurance illness strategy can be easily tailored to say, okay. Well, to buy out Kimmy, I need to pay her two hundred thousand.
[00:08:49] Dustin Serviss: Well, we're gonna buy a three hundred thousand dollar policy. Two hundred goes to Kimmy's spouse or estate, and one hundred stays in the law partnership because we've lost a significant team player. And we want to cover that cost and find a new, you know, you know, person. Now critical illness is a little bit different. Critical illness, we can pay for it using the law corporation, but it doesn't have the same capital dividend account rules. So in this case, we've got, critical illness policy owned by a law corporation. It's paid for by a law corporation. And make sure... Because when you buy a critical illness policy, many carriers,
[00:09:32] Dustin Serviss: the standard is to make the insured, like the human being, the beneficiary. So when you have a corporation being the beneficiary, you need to designate that. That is a is a special spot either if you're doing an online app or you need... You know, when you're doing it with us, we would designate that. So make sure it is set up properly. So we've got law corp pays the premium, is the beneficiary, and also is the owner. What'll happen is if if this particular person gets critically ill, the money will go into the law corporation. Now you've gotta get that money out. So in in my case, in my holding company, that's where all my critical
[00:10:15] Dustin Serviss: illness lives. My stance is that if I get sick, the money comes in, we likely wouldn't need, you know, x amount, x... Hundreds of thousands in one shot. You know? So the the theory is, well, wow. If you had to push out four hundred thousand of critical illness benefit, you're gonna pay, you know, two hundred thousand in tax. So why don't you just donate personally? Well, the reality is I can probably pay my wife and I say thirty thousand each a year. And so... You know, and make that critical illness policy last a long time. So you're paying very minimal tax and you're splitting it. One comment I will make about disability insurance
[00:10:56] Dustin Serviss: is disability insurance, we often, unless an account advises otherwise, we often have the disability insurance personally owned. So the disability is personally owned, and you pay for it personally. And again, talk to your account before you do this, but you can pay for the disability policy with your corporate dollars. But you have to make sure that your accountant does what's called a journal entry or a t four a adjustment for the premium of your disability insurance. Why? Because if you don't and you collect on the disability, that disability could be taxable, which you don't want. And, again, you know, there's...
[00:11:35] Dustin Serviss: You all have designated advisers across the country in your regions, and there's also designated planners that are in house at Lawrence Financial who can help answer that question, but your accountant ultimately is the best case for that.