Waterfall Concept

What Is a Waterfall Concept?

The term "waterfall concept" alludes to a famous estate planning strategy in which a whole-life insurance policy is transfered\u4e00or "rolled over"\u4e00from the policyholder to their child or grandchild.

How Waterfall Concepts Work

The purpose of the waterfall concept is to guarantee that wealth is given starting with one generation then onto the next in as tax-efficient a way as could be expected. It does as such by organizing a tax-exempt whole-life insurance policy in a way that permits its tax-deferred cash value to be removed by the child or grandchild sometime not too far off, after the original policyholder has kicked the bucket.

Whole-life policies have two parts. Notwithstanding the death benefit that pays out when the insured passes away, whole-life policies likewise collect a tax-deferred cash value as the insured pays premiums. In the end, the insured individual transfers the policy to a relative, at which point the funds become taxable on withdrawal.

Notwithstanding its tax advantages, the waterfall concept can assist with staying away from a portion of the entanglements that can apply to gifts and other huge scope transfers of wealth. For instance, waterfall concepts can be carried out utilizing just the terms and conditions of the original insurance contract, without requiring the inclusion of possible exorbitant legal counselors and intermediaries. Essentially, transferring wealth through a waterfall concept can assist with keeping those assets from being allocated to different parties as part of the probate cycle.

Real World Example of a Waterfall Concept

A regular illustration 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 just while pulling out funds from the policy. To the degree that the grandchild's tax rate is lower than that of their grandparent, this would bring about tax savings overall.

While utilizing the waterfall concept, it is important to structure the policy in a way that safeguards against the risk that the original policyholder could pass on before the policy is transferred. One method to do so is by assigning an outsider, like the child's parent, as a contingent or irrevocable beneficiary, with the expectation that the parent would then transfer the policy to the grandchild once the individual grows up. This cycle could be completely stipulated utilizing the terms of the life insurance contract itself, without requiring the utilization of a trust or other such legal entity.

Features

• The waterfall concept is an estate planning strategy that utilizes whole-life insurance contracts to transfer wealth between generations efficiently.
• It must be utilized to transfer wealth from a more established generation to a more youthful one, for example, on account of a grandparent providing for their child or grandchild.
• Notwithstanding their tax benefits, waterfall concepts can likewise assist with lessening probate issues and legal costs.