Waterfall Life Insurance Strategy (aka Grandpa’s/Grandma’s XMas Gift)

By , On , In General

Nearly 10 years ago I helped a wealthy family in British Columbia implement a tax saving strategy that is currently still available. The assumption is a successful family will likely pass away with significant amount of money in the bank. Or owning real estate, GIC’s and stocks or an active business. In this case there will be tax to pay when those assets flow to the next generation.

The strategy includes let’s say Mom and Dad, or Grandpa and Grandma depositing money into a life insurance policy on the lives of the younger generation. The tax act supports changing the owner from older generation to the younger generation with no tax. Consider Grandma puts money in a policy and then the money grows for 20-40 years with no tax. Plus the grandchild/child has life insurance for their own needs (new baby, mortgage etc etc) and family.

When grandma passes on, the policy is ownership is changed to the younger generation and then can cancel and take the cash out, they can keep the policy and stop paying, they can keep putting their own money in and growing the cash and death benefit. This ownership change can also happen before grandma passes if she wants.

It is easier to see with an example:

  • Grandma is successful and conservative retirement income projections show she will not run out of money in her life time. She will likely pass away with wealth and is going to have to pay tax. She wants to leave something for her kids and grandkids but still WANTS control while alive and will give them this gift when she feels they are responsible enough (or set age).
  • Grandma has 2 adult daughters age 32 and 35
  • Both of the daughters have 2 children each both age 5 and 7
  • Grandma takes out a life insurance policy on each person and deposits $5000 each, each year for 10 years
    • Daughter #1 – Deposit $5000
    • Daughter #2 – Deposit $5000
    • Each grandchild – Deposit $5000

Again, the strategy here is Grandma deposits $5000 for 10 years then stops and then at some point in the future, tells the kids about the policy. Maybe then giving the kids the ownership and decision power to keep the policy or cancel and take the cash.

This is called a Waterfall or Cascading Life Insurance strategy.

Should you have questions or want to book a no obligation phone call – BOOK a MEETING TODAY and I am happy to share if this is applicable or not to your family/business.

Canada Life Support Article – Cascading Life Insurance in more detail

*disclosure Canada Life is a company I do have a contract with but this article was not sponsored and the family I referenced above did not use a Canada Life policy. 
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