The Wealth Cascade: Insurance can be more than meets the eye
Frankie is a widower nearing retirement. Her parent’s complex estate was finally settled and she was a surprise recipient of a very significant inheritance. However, she does not require any new funds for her modest needs and would prefer to flow the funds to the children and grandchildren. She considered a donation to a host of worthy causes, but could not find one that met her criteria of low administrative expenses and responsible use of the funds for a purpose that made sense to her.
Her position is fortunate, but not unique as according to the CPA (Chartered Professional Accountants) “a seismic quantity of wealth to the tune of $1 trillion is set to move from Canadian baby boomers to their GenX and millennial heirs between now and 2026”.
We discussed an array of strategies and she settled on a plan outlined by a Canadian insurance expert taking advantage of some complex provisions. Frankie has a corporation and has arranged for that entity to fund an insurance policy on her life which still can be covered by reasonable premiums as she is in excellent health. Canadian women who are already 65 enjoy one of the best life expectancies in the world. Her corporation will overcontribute and the excess beyond insurance needs, can grow tax free within the insurance plan. The idea is that on her death, the assets of her corporation will all be deemed to have been sold at fair market value and a very large tax bill will be presented to her heirs.
Faced with such an obligation, her children may then be forced to sell some of the assets perhaps at an inopportune moment just to cover the tax bill. Instead, the insurance policy will pay out tax free, cover the taxes owing and leave her heirs with breathing room to decide how to manage the assets of the corporation.
In addition, Frankie will take out life insurance policies on each of her three children all of whom are in their thirties such that the premiums are very low. She will personally overcontribute to each of these policies for about ten years assuming she continues to enjoy good health. The excess funds will grow tax free and thus even with conservative management, will accumulate at a very impressive rate. At the end of ten years, she will turn the policies over to each of her adult children who can add them to their assets. If they are equally fortunate to not require the funds in their policies, they can leave them to grow and even consider signing them over to their own children creating a cascade of intergenerational funds.
KEY POINTS:
Frankie has led a modest life and her children have adopted her style.
She does not need additional funds so asked for a way to usefully pass them on.
Her adult children are also raising the grandchildren to be responsible and not extravagant.
The purpose of the cascade is to provide options and Frankie is confident that her children and grandchildren will use her windfall in a manner worthy of sensible people.