Use the Waterfall Wealth Transfer Concept to Benefit 3 Generations

How would you like to invest money on a tax sheltered basis that you could access if needed and also be able transfer wealth tax-free to your child and your grandchild when you decide? In other words, create something like a trust without having to worry about the rules and tax issues related to Trusts.

If this sounds interesting, then you should explore the benefits of the Cascading or Waterfall Wealth Transfer Concept. It uses permanent Whole Life or Universal Life Insurance to grow tax sheltered value that you could access (if funds are needed), but is intended to be transferred to your child and grandchild. The strategy takes advantage of Section 148(8) of the Canadian Income Tax Act which allows you to transfer ownership of a life insurance policy to any of your children or grandchildren on a tax free basis, provided they are the insured under the policy. A natural or adopted child, grandchild, step child, son-in-law and daughter-in-law all qualify.

To understand how this strategy works and its benefits, let’s look at an example. George’s daughter Susan has recently given birth to a new baby girl, Francine. George and his wife would like to do something special for their new grandchild. They expect her to eventually go to university, get married and have her own family. The family business has been good to them and they are beginning to think about estate planning and transferring some of their wealth to their children and grandchildren.

The Waterfall Wealth Concept was recently presented to George. He originally thought it was foolish to purchase insurance on the life of his new granddaughter. However, as he thought about it, there was merit in the idea of purchasing a universal life policy with a very low cost of insurance (his granddaughter had just turned 1) and building tax sheltered cash value that he could access if needed. Further, the business had been good to them and there would eventually be significant taxes and probate fees to be paid when he and his wife passed away. Here was an opportunity to tax- effectively set aside funds for the benefit of his daughter and new granddaughter that he could control until he decided to transfer ownership.

He thought about the benefits of being able to use the accumulated cash value in the life insurance policy to pay for Francine’s university or as a down payment on a new home. Both future options would be costly, but he felt confident the power of tax-sheltered compound growth within the life insurance policy could be a big help to his daughter when it came time to pay for Francine’s university education or provide a very significant contribution towards the purchase of a new home. Further Francine would have a meaningful amount of life insurance in place at a very affordable cost when she needed protection for her family.

Given his age, George was unsure whether he or his wife would be alive to see either event. He did not want to transfer the life insurance policy until his granddaughter was old enough to understand the value of the gift. To protect against the policy ending up in his estate and being subject to tax and probate fees, he decided he would make his daughter Susan (Francine’s mother), contingent owner of the policy. This would allow the policy to transfer outside the estate and directly to her tax-free. This would protect the policy until his granddaughter is old enough to take ownership.

He also decided he would make Francine’s Mom an irrevocable beneficiary to help ensure the accumulated Cash Value in the life insurance policy was only withdrawn for intended purposes after the life insurance policy is transferred to Francine. An irrevocable beneficiary must consent to any policy withdrawals before the insured can access any of the accumulated value.  This would give Susan the power to act like a trustee to help ensure George’s wishes for the use of the funds are realized. With Susan as irrevocable beneficiary, policy changes could only be made with her (beneficiary) and her daughter’s (owner) signatures.

If you would like to learn more about this or other creative solution to help achieve your personal financial or estate planning goals contact, one of our team members at Pelorus Transition Planning.

 

Michael Greenwood is principal and managing partner at Pelorus Transition Planning (www.thinkpelorus.ca) and has more than 20 years’ experience developing group benefits and wellness solutions for clients across a range of industries.

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