Permanent life insurance is an ideal strategy to facilitate the transfer of wealth between generations. This strategy helps a parent or grandparent use a tax-exempt permanent life insurance policy to accumulate wealth tax-deferred, then transfer it to their child or grandchild as a gift without tax consequences to use throughout their lifetime.

Then how does this strategy work? The parent or grandparent purchases a tax-exempt permanent life insurance policy on the life of a child or grandchild and contributes to it, typically for five to ten years. The policy grows on a tax-deferred basis and is eventually transferred to the child or grandchild. The child or grandchild becomes the new policy owner without any immediate tax consequences. The benefits of this strategy are that the child or grandchild’s tax rate will most likely be much lower than the parent or grandparent, and taxes are deferred until the withdrawal actually occurs.

What are the advantages of this strategy?

First, the parent or grandparent can provide a valuable gift and legacy for their child or grandchild.

Second, the parent or grandparent avoids annual taxation on the investment income generated on the gifted amount.

Third, the parent or grandparent also avoids taxes when he she transfers the funds to his her child or grandchild. And when the child or grandchild withdraws funds from the policy, the funds are taxable to the child, not the parent or grandparent, at the child or grandchild’s tax rate.

Fourth, probate fees can be avoided and the parent or grandparent’s privacy respected by ensuring the transfer doesn’t go through the estate. And, all these can be done through the permanent life insurance policy without the need for legal intervention.

The wealth transferred is a gift a child or grandchild will never forget. Wealth transfer between generations enables parents or grandparents to give funds to a child to use for university, a wedding or any other important reason. They can give the child or grandchild the right start and help them create a valuable insurance policy, at very reasonable rates. The child or grandchild may also keep the policy in-force if they want, avoiding possible insurability issues down the road.

Here is an example to help you better understand the intergenerational wealth transfer strategy.

Emma, a 4 year old grandchild receives a unique and valuable gift from her grandparents on her birthday. It’s the first in a series of contributions to a permanent life insurance policy that can be transferred to her when she reaches age 18. Obviously Emma is too young to appreciate the value of this gift currently, but over her lifetime it will provide her with financial security and estate planning opportunities. It will also remind her of her grandparents and their love and thoughtfulness throughout her life.

For grandparents, the purchase of a permanent life insurance policy makes it possible to transfer assets that are generating taxable income into a tax-deferred growth vehicle. Any tax that may be payable if the value in the policy are accessed prior to the death of the insured, will ultimately be payable by Emma at her effective tax rate.

How does it work?

The grandparents are owners of the permanent life insurance policy on the insured life of the grandchild. They retain control of the policy until such time as it is transferred. When the grandchild reaches age 18, the policy can be transferred to the grandchild on a tax-deferred basis.

For Emma, the gift could provide financial assistance throughout her lifetime. Here are the potential outcomes that could be derived:

– Additional funds for university when Emma reaches age 18: $20,000 over 4 years.

– Funds to supplement retirement income starting at age 65: $20,000 for 20 years

– A death benefit , net of loan, for taxes, final expenses, and her estate: $450,000 at age 85

How was this legacy created?

The grandparents purchased a universal life insurance policy on the life of the grandchild. The original coverage amount was $500,000. The growth in the policy was projected at 5.00%. The grandparents invested $25,000 into the policy over 5 years.

The policy can be transferred to the grandchild at age 18 without any tax impact. Any withdrawals from the policy after this transfer would be taxed in the hands of the grandchild at her effective tax rate. When the grandchild begins university, she withdraws a total of $20,000 over 4 years to help fund her university education. The tax impact on those withdrawals will likely be negligible given the tax credits available to offset the costs of her post secondary education combined with the personal tax credits available to her.

At age 65, the available funds in the policy have now reached over $600,000. This amount can be used as collateral to borrow funds to supplement a retirement income as indicated above.

(Yan Li, 李燕，President of Canada Valuelife Financial Services Corporation; Registered Teacher and Licensed  Insurance Advisor in Ontario Canada;  President Award Winner;  Author; Translator; Value Life Coach.   Tel: 416-388-6484.  Email: yan@find-the-value-in-life.com. Website: www.find-the-value-in-life.com)

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