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The Cascading Wealth Transfer Concept

Daren Givoque, CDFA, Financial Advisor

O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.

The cascading wealth transfer concept

As you age, and your children grow up and have families, you may be hoping to leave them an inheritance. Trusts are one way of doing this, but they come with a significant tax burden that you may wish to avoid.

The Cascading, or Waterfall Wealth Transfer Concept, can be an efficient way of saving money for your offspring. The concept uses permanent Whole Life or Universal Life Insurance to grow tax-sheltered value that you can access (if needed) but is meant to be transferred to your children or grandchildren. This takes advantage of Section 148(8) of the Canada Income Tax Act which allows you to transfer ownership of a life insurance policy to any of your children or grandchildren on a tax-free basis, provided they are insured under the policy. This applies to a natural or adopted child, grandchild, stepchild, or son/daughter-in-law.

This strategy can be applied for at any age. For example, a new grandparent may want to provide for a grandchild. It may seem strange to have life insurance for a baby, but there is real merit in purchasing a life policy at a very low cost and building tax-sheltered value that can be accessed if needed. It is an opportunity to tax-effectively set money aside, that you can control until you decide to transfer ownership.

The accumulated cash value in the policy could help children or grandchildren pay for significant milestones like post-secondary education or buying their first home. Having a whole life insurance policy in place at a young age guarantees a low premium that will help protect their children when they eventually start their own family.

You may also name a contingent owner on the policy, which is a good idea if you are concerned that your grandchild will not be old enough to own the policy before you pass away. Naming their parent as the contingent owner on the policy will ensure that it remains protected until your grandchild can benefit from it down the road.

Another possibility is naming someone you trust as an irrevocable beneficiary, to act as a trustee that sees your wishes for the funds are fulfilled. An irrevocable beneficiary helps ensure the accumulated cash value in the policy is used for its original intention and must consent to any policy withdrawals before the insured can access the accumulated value. Any policy changes must be agreed upon by the beneficiary as well as the owner of the policy.

This concept is a great way to use life insurance to shelter money and provide tax-free support to your off-spring and their children. I sometimes refer to it as an “Intergenerational Tax-Free Savings Account”.

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