Inter-Generational Wealth Transfer Using Life Insurance

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Implications of Demographic Trends Population is increasing Population is getting older, tend to be more conservative Older people have more wealth and generally want to keep it in the family to pass on to the next generation Trillion dollar inter-generational transfer over next 25 years - government wants its share You helped your clients build this wealth - why not show them how to keep it? -

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth One of the goals of estate planning is to preserve capital assets in order to pass them on to the heirs of the estate, in an orderly fashion. Methods of doing this vary  The most effective are those that transfer the assets to the next generation with as few tax consequences as possible.

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 1 The Opportunity  Parent/Grandparent wants to build or create an estate to pass onto their children The Client Profile  Age  Parent/Grandparent wants to maintain control of funds, reduce or eliminate taxes, and have access to money if necessary

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Case 1 - Wealth Transfer to Heirs Father (50) wants to set aside $200,000 over the next 10 years to pass on to his children He considers a variety of investments: segregated funds, mutual funds, stocks, bonds, etc. that will require management of the investment You could suggest a Universal Life illustratation

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Father’s Gift: $500,000 Universal Life, illustrated at 5% Deposit: $20,000/yr for 10 years Life expectancy: 32 years Cumulative Deposits: $200,000  Based on an illustration using Manulife Innovision – July 2005 YearEstate BenefitCash Value 10$688,538$188,538 20$736,806$236,806 30$815,429$315,429 40$943,947$443,497

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 1 Review - Father’s Gift Father purchases policy on his own life  Children (age of majority) are the beneficiaries Father is the owner and maintains all rights to policy and has use of cash values if needed Upon father’s death, the children receive Death Benefit tax-free Total Compensation first year: $13,550 (gross)

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 2 The Opportunity  Parent/Grandparent wants to create education fund for child/grandchild The Client Profile  Any parent/grandparent  Child can be age zero to age 8 - need sufficient time to benefit from tax- sheltered growth

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Case 2 - Grandfather’s gift Grandfather, now retired at 60, wants to help his grandchild financially He is willing to invest $3,500/year for 10 years He wants an investment that provides  High return  Low tax liability  Low maintenance cost (i.e. other liabilities)  And above all... control

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Case 2 - Grandfather’s gift Alternatives: Establish Trust for children (cost & administration) Purchase RESP (limited) Purchase non-registered investment to give later (tax implications) Give funds outright and lose control Consider Universal Life …

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Grandfather’s Gift: $250,000 Universal Life, illustrated at 5% Deposit: $3,500/yr for 10 years Insured: Child, male age 0 Cumulative Deposits: $35,000  Based on an illustration using Canada Life’s Millennium – July, 2005 AgeDeath BenefitCash Value 10$486,976$40,807 18$502,155$55,783 20$506,831$60,459 30$537,935$91,563

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Grandson withdraws: $60,000 over 4 years ( ) for university Deposits: $3,500/yr for 10 years AgeDeath BenefitCash Value 23$514,703$68,331 30$537,935$91,563 40$587,438$141,066 50$664,651$218,279 65$776,704$330,332

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 2 - Grandfather’s gift Step 1  Grandfather purchases insurance policy with grandchild as insured  Names father of the child as preferred beneficiary  After premium payments end (10 years), ownership is transferred to the father  Control is maintained by the grandfather  No disposition (tax) on transfer

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 2 - Grandfather’s gift Step 2  Father retains ownership until child is 18 and needs the funds  When funds are needed, ownership is passed to the child but the parent retains irrevocable beneficiary designation  Withdrawals taxed in child’s hands  Withdrawals are under control of the father

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 2 - Grandfather’s gift Step 3  With parent’s consent, complete ownership can pass to the child later on  Parent ‘signs-off’ irrevocable beneficiary designation  Child now has foundation for future needs

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 2 Review – Grandfather’s Gift Why is UL so powerful?  Protection laws on UL  Use of irrevocable beneficiary designation for control  Potential creditor-proofing, bypass probate Income Tax Act allows for tax-free transfer of ownership from one generation to another Tax-preferred withdrawals Provides foundation for insurance protection for grandchild needed in later years Flexibility with deposits, withdrawals, and uses of income Total Compensation first year: $2,335 (gross)

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 3 The Opportunity  Adult Child wants to create wealth within life policy to:  generate retirement income (Leveraging or Cash Value*)  cover tax liability upon their death The Client Profile  Adult child with healthy parent  Looking for ‘second’ tax shelter - no more RRSP room  Have surplus funds to invest

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Case 3: Joint Last to Die Father, 60, would like to provide lifetime, affordable protection for child, 30 Would like a flexible product with possibility for accumulation Has $100,000 to invest over 10 years Universal Life insurance is a possibility

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Case 3: Joint Life Last to Die $800,000 Universal Life at 5% Deposits: $10,000/yr for 10 years Insured: Parent 60 years old, child 30 years old Cumulative Deposits: $100,000  Based on an illustration using Standard Life’s Perspecta – July, 2005 YearDeath BenefitCash Value 10$908,884$108,884 20$969,768$169,768 30$1,081,507$281,507 40$1,286,577$486,577

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Case 3 Review - Joint Life Last to Die: Parent/Grandparent: Purchases Joint-Last-To-Die policy with grown child as the other insured The policy is jointly owned Child has lifetime of protection and access to fund values They can elect to have funds paid out on first death If funds needed in the future, policy can be leveraged Total compensation first year: $5,298 (gross)

INTER-GENERATIONAL WEALTH TRANSFER USING LIFE INSJURANCE Transfer of Wealth Using Life Insurance Immediate estate enhancement Tax-free transfer of assets upon death Permanent life insurance protection Tax-sheltered investment growth

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