What Is a Waterfall Concept?

The waterfall concept is a popular estate planning strategy in which a 澳洲幸运5开奖号码历史查询:permanent life insurance policy is transfered一or rolled over一from the policyholder to the✱ir child or grandchild.

How Waterfall Concepts Work

The purpose of the waterfall concept is to ensure that wealth is passed on from one generation to another in a 澳洲幸运5开奖号码历史查询:tax-efficient manner. It does so by structuring a tax-exempt insurance policy, such as 澳洲幸运5开奖号码历史查询:whole life in a manner that permits its tax-deferred cash value to be withdrawn by the chil🍷d or grandchild at a future date, after 🌠the original policyholder has died.

Whole-life policies have two components. In addition to the 澳洲幸运5开奖号码历史查询:death benefit that pays out when the insured passes away, whole-life life insurance policies also accumulate a tax-deferred cash value as the insured pays premiums. Eventually, the insured individual transfers the life insurance policy to a descendant, at which point the funds become taxable on withdrawal.

In addition to its tax advantages, the waterfall concept can help avoid some of the pitfalls that can apply to gifts and other large-scale transfers of wealth. For example, waterfall concepts can be carried out using only the terms and conditions of the original insurance contract, without requiring the involvement of potential🔯 costly lawyers and intermediaries.

Real World Example of a Waterfall Concept

A typical example of the waterfall concept would be one in which the policy is transferred from a grandparent to a grandchild. The grandchild would then pay taxes only when withdrawing funds from the policy. To the extent that the grandchild’s tax rate is lower than that of their𝔍 grandparent, this would result in tax savings overall.

When using the waterfall concept, it is important to structure the policy in a manner that protects against the risk that the original policyholder might die before the policy is transferred. One method to do so is by designating a third party, such as the child’s parent, as a contingent or irrevocable beneficiary, with the intention that the parent would then transfer the policy to the grandchild once he or she comes of age. This process could be entirely stipulated using the terms of the life insurance contract itself, without requiring the use of a trust or other such legal entity.

The Bottom Line

The waterfall concep𓄧t is a means of transferring wealth from one generation to a subsequent generation by using whole life insurance. In this strategy, the insurance policy is transferred from the policyholder to a child or grandchild. This can reduce probate issues and ultimately reduce taxes since the cash value of the insurance policy is tax-deferred.