Transfer Wealth to the Next Generation using Life Insurance
If we asked a group of people to put their hand up if they know their grandfather or grandmother’s name, most people would put up their hand.
Then if we asked the same group if they know their great grandfather or great grandmother’s name, a lot of hands would go down.
Lastly, if we asked them if they know their great-great grandfather or grandmother’s name almost everyones’s hand will go down.
You know who’s great-great grandkids for sure know their name? John D Rockefeller …. why?
They are still getting paid off the legacy he set up more than 100 years ago. This is a tremendous legacy.
Many people know it today as The Rockefeller Method, and this method works in Canada with some alterations for our tax rules.
Would you like to build and leave a legacy so that your grand kids, great grand kids, and great great grand kids all know your name even if they never meet you?
Well this blog shows you how to set up what we call the Waterfall of Wealth that will leave a lasting legacy for your family for years to come.
How it works:
We’re going to use a tax exempt life insurance policy with cash values to put insurance protection on your child or grandchild or both.
We do this to give a tax efficient way to grow your wealth now, and transfer it to the next generation when you’re no longer here in a tax efficient way.
We structure it in such a way that when you pass, the life insurance that you own now, will transfer automatically to your child or grand child.
We set it up so that you can benefit from the cash value growth inside the policy now, to invest or spend while you’re alive.
Why use life insurance?
Well, when you transfer a life insurance policy to your child or grandchild whose life is insured under the policy, there’s generally an automatic tax-deferred rollover.
This is a unique feature of life insurance not available with other types of investments that are typically deemed disposed at fair market value when transferred to the next generation.
This waterfall of wealth insurance strategy is based on this tax-deferred rollover rule available for transfers to a policyowner’s child or grandchild.
The cash value growth inside the policy is tax-advantaged compared to other investments, which can be subject to income tax or capital gains tax. So you’re winning all around.
The Waterfall of Wealth Strategy
1) You, the parent or grandparent buys a permanent life insurance policy on your kids or grandkids
2) Then you fund the policy with cash that you were going to leave to them for school, or a down payment, or starting a business or any other life event. This is your legacy.
3) In this situation you are what’s called the Owner of the policy and your child or grand child is what’s called the Life Insured.
4) When we set up the policy, we name your child / grandchild as a contingent owner on the policy which means that when you pass away, they automatically become of policyowner. This allows the tax-free ownership transfer to the child.
5) If you want, you can also transfer the life insurance policy to the child (life insured) while you’re still alive so they can access the policy’s cash values.
6) Remember, the insurance is on them. So you are also setting up the following generation because when you child or grandchild passes, there will be a life insurance payout to their kids or whatever beneficiary they choose.
Now 3 generations in your family have benefitted in this insurance contract.
When we say child or grandchild here we obviously mean your kids, but we are talking about the definition of child as defined in the Income Tax Act which makes space for different types of grand parent / parent / child family structures.
The child who receives the policy doesn’t have to be the same person as the child who is insured under the policy.
For example, a grandparent can buy policy on their grandchild and then transfer ownership to their child (the grandchild’s parent) on a tax-deferred basis.
This Waterfall of Wealth benefits each generation involved
For you the Parent or grand parent
1) You keep control of the life insurance policy.
2) You can reduce your tax on some of your other investments by redirecting them into a tax-advantaged life insurance policy. Say you have a few million dollars in a portfolio – you can take some of those funds and wrap them up in an insurance contract.
3) While you own the policy, you can use access the policy’s cash value.
For the kids or future generations
1) When ownership transfer happens, your child gets permanent insurance for their family.
2) They can access the policy’s cash value to pay for things like education, buying a house other real estate, building their own retirement, or continuing the financial legacy that you’ve started for future generations.
The Waterfall of Wealth strategy is a great way for you to pass money down to future generations in a secure and tax efficient way that still gives you control and use of the funds while you’re alive.
Schedule Your Legacy Now:
Since 2011 we have helped 100s of Canadian families and business owners across the country set up enduring legacies that can last for generations.
If leaving a strong financial legacy for your family is important to you, schedule a no-pressure Discovery call with one of our advisors using the button below.
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