The Rockefeller family, a family known for its wealth, utilized a strategic approach that it got named after him, the Rockefeller Method, but this is also called the Waterfall Concept, and John D. Rockefeller used it to safeguard their legacy across generations.

In this week’s blog, we are going over this financial strategy that has empowered families like theirs to protect and grow their wealth intelligently. Whether you’re planning for your family’s future or securing your business assets, understanding the principles behind the Waterfall Concept could be the key to ensuring your financial legacy stands the test of time.

The “Rockefeller” Method, or the Waterfall Concept. One of the main things we have to preface this with is that in the United States, this strategy is heavily reliant on trusts, while here in Canada, these trusts do not have the same rules around them making it difficult to compare but in Canada you are to use life insurance heavily to do this strategy, it has even been called Waterfall Insurance.

So, let’s get right into it!

What is the Waterfall Concept?

In simple terms, the Waterfall Concept involves the tax-deferred accumulation of wealth inside a tax-exempt whole life insurance policy, followed by a rollover of the policy to a child or grandchild.

People call it a waterfall because the wealth flows down, like a waterfall, to a child or grandchild. Just so we’re clear, in the Income Tax Act, the definition of a child includes your children, grandchildren, your son- or daughter-in-law, your spouses’ children from a previous marriage, adopted children, and children from a common law marriage. These are the people that you can use this concept with.

How does it work?

You, the transferor would purchase a tax-exempt permanent whole life insurance policy on the life of a child and overfund it, typically over a three-to-five-year period. It all depends on how much you want to put in here and how fast you can put in that much. The policy would grow on a tax-deferred basis and eventually be transferred to a child of the transferor for no consideration, meaning no money or other assets are exchanged for it.

The child would become the new policyowner with no immediate tax consequences. They would only be taxed if they withdraw the funds from the policy, but we don’t recommend that. We would recommend the child use this for lending, as this is essentially setting your child up with the opportunity to take a loan out of these funds to use for big life purchases like a down-payment or to pay for school or set them up with something for retirement by the time they are 19, and when they pass many, many years later, the death benefit will go to the beneficiary.

Why would you do this?

As the baby boomer generation ages, we are on the brink of an unprecedented transfer of wealth. Current estimates indicate that over the next several years, trillions of dollars will move from baby boomer parents to their Generation X and Millennial children. This impending wealth transfer appears promising, potentially marking a significant financial turning point for many recipients.

However, there’s a critical consideration: this transfer of assets between generations must navigate through a filter — taxation. Improperly planned wealth transfers can result in substantial losses due to income taxes and probate fees.

One effective strategy to mitigate tax liabilities during the intergenerational wealth transfer process is leveraging life insurance. By incorporating life insurance into your financial planning, you can strategically manage and minimize the tax burden associated with passing wealth to heirs.

If you set this up while your children are young, then there’s even more time for these policies to grow and compound interest. And if you have a whole life policy on yourself, then you would be able to help them mitigate the taxation they will suffer from your terminal income tax.

And again, the tax advantages of being able to borrow money from the policy at a younger is a great opportunity for your children to learn more about financials and how and what to use them for, because they will likely have lots of money in this policy to be able to put towards the big purchases, they can focus on growing their wealth without having to worry as much about these big purchases. A concept like this can create such peace of mind for your family.

Why would you not do this?

The big reason you wouldn’t do this, is that you don’t have the funds necessary to put towards a policy for your child. As preferably, you would be able to put away at a few thousand every month for your child/grandchild.

Another reason you may not want to do this, along with the cost is that you do not a have a good money mindset and are not good saving money, so I would recommend building a good money and saving mindset if you intend to set something like this up for your family.

Final Notes

Whether you call it the Waterfall Concept or the Rockefeller Method, it’s tailored for Canadians seeking to protect and grow their wealth effectively. Consult with a financial advisor like us who have been doing similar strategies for over 10 years and explore how this method can benefit your financial future.

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