A Family Trust OR The Gradual Inheritance Strategy?

The gradual inheritance strategy. So the gradual inheritance strategy is basically that it's a way to take the legacy that you're going to leave behind and dole that out in a gradual way over a period of time.

Gradual inheritance strategy. It's not something that's particularly well known in, in Canada. Very rare that I hear anyone talking about it. But I think it's a really powerful option for people to consider because too often we're focused on the lump sum amount of money, and then it often brings up concerns, well, what if I don't want my kids or whatever to get a lump sum of money because I'm not sure what they're going to do with it? Well, when you have those kind of questions that show up for you now, you can recognize there are solutions. This one is a way that mitigates a lot of the cost of a trust. It's very simple to set up. You can do it on your own. You don't require the use of a lawyer. It can all basically be handled internally by the insurance company. And it gives you a great deal of peace of mind.

Hey, everybody. I decided I would pick a topic that I've been thinking about quite a bit lately. It's something that's come up in a number of conversations that I've been having with other advisors, with clients, and really even just something I've been pondering myself to some degree. And every now and again we find, I don't know, we won't call them secrets, but things that kind of are off to the side in the financial space that people don't necessarily know are available to them or an option that people recognize they can do. And so today I'm going to talk about one that's referred to as the gradual inheritance strategy. So the gradual inheritance strategy is it's a way to take the legacy that you're going to leave behind and dole that out in a gradual way over a period of time. So I like to refer to it as a method, a way that you can effectively control the death benefit of an insurance policy from beyond the grave. I mean, the reality is you could do this with other assets as well. It doesn't have to be limited to a death benefit from life insurance. But for the purpose of our conversation today, that's where I'm going to drive my focus into. And, you know, feel free to comment as you see along. If you have questions, I'm just going to go ahead and dive in. I'm going to look at some examples. So first thing is to just explain what is the basic premise, the basic concept behind this gradual inheritance strategy? Well, essentially, I guess I'll pick on me. I'll use myself as an example. So at present I'm 40 years old today and if something were to happen to me, there'd be some, something in the area of around four, four and a half million dollars, give or take that's probably going to show up for my wife and my family. Now I'm hoping to get that number up higher of course, as time goes on. In fact, every single day that I put my head down on my pillow and I wake up the next day, there's not only more cash values in the insurance policies that I've set up, but there's also more death benefit. So I have an increasing, constantly increasing death benefit, a legacy value tax free for my family. So that's pretty exciting. And additionally, of course, there's cash values. Now I'm using those cash values for a variety of things. In fact, I have a pretty substantial tax bill that I need to pay coming up soon. And coincidentally I'm filling in some policy loan paperwork where I'm going to use a policy loan from some of those policies to cover a large portion of the outstanding tax bill. So that's just one area where I'm going to use it now. Now if something were to happen to me after paying off any of the outstanding policy loans, there would be a substantial death benefit between 4, $4.5 million, roughly speaking. Now, projecting out into the future, I personally believe I'm gonna live a very long and healthy life. But we don't know our best before date, so we're not sure at what point in time I won't be here any longer. Of course we wanna make sure that we have the right amount of capital available. When that does so all we can do is put our best kind of foot forward. Right? That's our, that's our focus. Now in my example, there's certain things I'm going to want to have happen. I'm going to want to have certain capital come out as a lump sum and then I'm going to want to dictate some income components, make sure that my wife has a steady stable income for a long period of time. That's something that's important to me. And what's also important to me is because I believe so wholeheartedly in whole life insurance and what we've been setting up as a family and the family banking model, I'm going to want to ensure that there's a recurring either annual, monthly or quarterly income stream that's there to fund or basically pre fund premiums on insurance policies I've set in place. So those will be ones on my wife, ones on my, on my two children. In fact, I literally just settled a couple of policies, brand new policies on my two kids. So, you know, with that thinking in mind, I'm going to go through an example of what that could look like. And the key thing is that right now, if I just left everything the way that it is today, or for most people in general, generally speaking, for most folks, you get an insurance policy, you get an insurance contract, you put down a primary beneficiary, and then you probably add some contingent beneficiaries. If you've got a working with a coach, they'll likely recommend getting you to think about who contingent beneficiaries are. And so as it sits today, if something were to happen to me, then that money just goes directly to my wife and then my children are contingents. And so if my wife receives all that capital, that's great, that's fine, that'll work out, she'll know what to do with it. But I want to kind of simplify it for her. And I want to take the amount that we have and I actually want to spread it out so that there can be more created over time as well. And it follows through on some specific objectives. So, but, but for the average person, what happens is a death benefit is paid, it's a lump sum amount of money, it's tax free, Boom. There's a huge injection of capital. Now you probably are aware people that are lottery winners or people that come into a large amount of capital, if they're not really prepared for it, if they haven't been doing some of the hard work, some of the thinking and the planning around that, when they receive that large sum, they don't know what to do with it. And often it finds a way to disappear quickly if we're not prepared with what to do. So that's one of the other things I'm looking to mitigate. And many of our clients, many people who embrace the concept of becoming your own banker, they also want to want to mitigate that risk. They want to make sure that there's some stewardship in place and that what they've spent a lifetime working for a lifetime building up has a way to really, truly live beyond them. And so that's kind of the purpose of this gradual inheritance strategy. Now you can go and set up a trust. So when someone Passes away. A trust can be created. You can leave instructions in your will, etc. To do that. But sometimes there's a lot of extra costs associated with administering a trust. And there's certain rules around trusts. So this method or this concept of a gradual inheritance strategy, it's kind of like, I call it the lazy man's version of a trust. So you get the ability to have similar functions, similar features to what you may want in a trust without having all the expense and the hassle of setting it up. And it can all be kind of done with the insurance company. So instead of having the benefit beneficiary, the primary beneficiary be, in this case, my spouse, I'm going to change, or a person would change the beneficiary to be what's called an annuity settlement option. So that an annuity receives the money and then the money from there is now told what to do to produce an income stream. Now you can do this in a variety of ways. You can have it pay out an income over five years or over 10 years or 20 or 30. So there's several ways you can chop that up. You can choose the amount of years and then you can also maybe segment it a bit further. So as an example, you want to make sure that there's a term insurance that's converted when somebody passes away. And you want to make sure that new converted policy. So I pass away. There's a, there's term insurance on my wife.

I want her to convert that and.

Create a new policy so that we're creating a second legacy event. I pass away. There's a, there's a, there's an instant death benefit paid at that point. Now my wife lives a long and healthy life. At some long off future date, she passes away. I want to ensure there's a secondary legacy event created so that, you know, the kids can also receive that value and then they can, they can continually progress that thing forward, assuming that they, they listen to the rules and, and they watch this video or any other video that we have available on our site. So that, that's kind of the thought process of what we're trying to create now. If we go ahead and again she receives the money in lump sum, she can, whatever. If there's a mortgage, she could pay that off. If there's rental property mortgages, she could pay those off. She can do all those different things. But instead I want to create an income that says, look, instead of having this money disappear quickly, let's make sure it can fund things on a specific basis. So we'll do a conversion of some insurance and for the sake of our example, I think I put a number of about 28 grand as a conversion. So I'm going to show that and let's, you know, we'll make sure we pay that for a number of years. But you might say, look, I want to pay 100 grand a year for five years or for, or for seven years. So I need at least, you know, six or seven hundred thousand dollars set aside to pay that, you know, premium every year for five or seven years. And then that policy might be self sufficient and that can be there to help create that secondary legacy event. And it can also be there as a source of working capital because it's a, it's the insurance contract, the becoming your own banker strategy. And, and it can also be there to help support an additional long term income stream for that surviving spouse. So enough talk already, Richard, let's go ahead and look at something. So I'm going to go ahead and grab a quick example on my screen here.

And here's our gradual inheritance example. And what I'm looking at is several examples. I'm going to have four annuity setup. Now I did this mainly not to say that that's the recommendation or that's what people should do, but mainly just to show some variation so you can see. Okay, what, what exactly is Richard talking about? So here let's say we had a lump sum amount was funded from a death benefit of $500,000 and we put it into an annuity that's going to pay an income stream for 30 years. Well, that would produce an annual income of $28,000 a year. Okay. The total payout over that 30 year period would be 852,000. So we put 500 in death benefit pays tax free. The tax free money funds annuity. The annuity pays 28 grand a year for 30 years. The result of that is that we took that $500,000 of death benefit and we actually turned it into 852,000 over 30 years. So we actually increased the overall payout from that death benefit by thinking in this long term range. Nelson Nash says you got to learn how to think long range. Okay. And there's going to be a taxable portion. I'm going to explain on that, you know, kind of near the end. I have a second example here where I'm showing, this is Also over a 30 year period I'm showing. Okay, well let's have an annual income of 50,000 in order to do that, we would need to have $879,000 put away. And this is in today's numbers. So we could create this $50,000 income. And so that would produce 1.5 million in total payouts over time. That's 50,000 over 30 years. So these are two different numbers. Main reason I wanted to see this is that you can see, okay, look, let's say all I had was a $500,000 death benefit or the remainder. The net Death benefit was 500 grand. Over a 30 year period I could create roughly this kind of income. But if I set a target that I actually wanted to create 50,000 in income, if that was what I was shooting for, that was my objective. Well, I would need to make sure that my death benefit or the net death benefit that remains, or net with.

The assets I have left over would.

Have to be just shy of 900,000. I would need $880,000 to accomplish that 30 year objective. So that's kind of the thought process here. I just wanted you to see the difference between having a lump sum of a likely amount versus solving for a target income.

How much would you need to have.

In place to get that accomplished? Okay, now another one I'm going to show here because an annual income is fine, but if you set up an annuity right away and there's no monthly stream of income, maybe you have a spouse that was a non working spouse. They didn't have, you know, maybe they weren't used, they had been out of the working field, whatever their field was, for five, 10, 15 years. There's a transition period of trying to get back into that workforce. So maybe you want to leave or perhaps a person's already in the retirement phase. Maybe you just want to leave a consistent income behind. So I've got a monthly income example here. And this is a 20 year income. Again, I'm just trying to vary it up a little bit so you can see the differences. And $5,000 a month, typically when you're doing monthly with a lot of annuities, they sometimes have a cap on how much they'll pay either monthly or annually. So in this case 5,000, which is a $60,000 year income. We need 824 grand to produce 20 years of $5,000 a month. Total payout over that entire 20 year time frame is $1.2 million. Now I'm going to talk about kids plan funding. So I kind of base this on generally like what my own kids situation, just to have a framework. So I have two policies for each of my children today and we're recording this in June of 2022. And I want to make sure that those policies are funded for my children for a minimum of 30 years. I'd probably be fine with 25, but 30 is the year that I've got in my head. So that's the number I'm going to run with. So in order to do that for 30 years, there's, there's, there's a $3,600 policy on both my son and my daughter. Then I have about a $2,500 policy on each one of them. So when you add that all up, that gets you to around $13,000 a year. And then I also have, I think, some critical illness in there for them as well. So I just set the number that I was solving for. I was solving for about $15,000 a year so that annual payment could come in and it would immediately be able to go and fund all of those different policies. There's four policies or five policies there, but it would, it would fund each one of them. There's enough of an amount of money to solve for all of them.

In order to do that for a 30 year period of time, I need to set aside or the death benefit remaining amount needs to be 263,000. So now I have an idea. Okay, what's the target amount I need to have in place to accomplish that objective? I'm setting out. I want to make sure these are funded. It happens on autopilot. It's not something that my spouse has to worry about. I can just ensure that I have predetermined and pre planned for this, this objective. So we add that together. Now I just summarized all these, let's say, let's assume that you did all these together and this was part of your planning situation. Well, if I add up the lump sum amounts altogether, we need $2.46 million in total death benefit, net net death benefit. So I mentioned earlier that I have policy, outstanding policy loans. In fact, I'm going to be submitting for some more recently in the, in the near future here. And I want to make sure that the net available would accomplish in my sample here, this, this particular number. So that means I might have to be cautious or aware of how much policy loan activity I'm doing at a given point in time. Now obviously I have death benefit that's rising each and every day as I talked about at the beginning of this video. But I don't know my loan activity or what opportunities are going to show up for me. And so I want to make sure that I'm exercising good opportunities. And if I have a great opportunity that's got the equivalent amount of value or equity as what was in the policy, the net differential is the same. Like my, my, my spouse can figure out what to do there with some basic instructions. But the end result is I need.

About 2.4 million here.

That will produce an annual income of 153 grand. So we have all these income streams here. One's being paid monthly, these other ones.

Are all annually paid.

And the total amount that's a payout over that timeframe is a little over 4 million, which means I took my $2.4 million on day one and I turned that 2.4 million into 4 million. So I had an extra one and a half million dollars of accumulated value that, that was able to happen even though I was gone. I'm no longer around. I'm six foot in the ground somewhere. And you have a huge advantage of.

Extending that legacy value. And I get to feel great about knowing that things are looked after when I'm gone. Okay, so this annuity settlement option or gradual inheritance strategy, you fill in some basic paperwork, you specify how much or what percentage of a death benefit you want to go as a lump sum, what percent you want to go as a monthly income or a quarterly or an annual income, and then you can break it down a number of times. So If I had one policy, and that one policy, let's say that one policy was $3 million. Well, I can take 3 million, minus 2 million 4, that gives me 600 grand, and I can say pay 600,000 as a lump sum. That takes care of, let's say, you know, any outstanding mortgage or whatever else is, is their final tax bill, final expenses for funeral activities and what have you. The big party that my wife's going to throw and I'm, you know, I've kicked the bucket, and the remaining 2.4, or, or percentage wise, whatever the percentage works out to give or take, will be allotted into these annuity structures. And then I can, I can fulfill these objectives. And then in my will, I would leave additional instructions that basically indicates and shows how I want those annuity payments to be utilized. Hey, there's $5,000 a month. That's for living. That's for making sure the kids, you know, have food on the table, can survive. You can live a good, a reasonable life without too much stress, too much extra effort, not having to be focused and worried. About going back to some kind of other job vocation. There's an extra $50,000 a year there that comes in one time per year, which will handle a lot of incidentals that'll cover for vacations and all the other things, some investments that you want to do, et cetera. And there's another policy there for about $28,000 a year. Hey, that's the one I want you to use to convert the existing term insurance that you have and make that into a new policy. So here's the different again the stacking of these different items. The kids policies are looked after, of course, that's working capital that'll be able to be used by the family. Still, they're still going to have access to this money. They're just transferring it slowly. Instead of having a lump sum amount of money today, they're transferring that into premium payments over a long period of time. And it's accumulating in cash values that are available to work with for the family. So again, we're just trying to multitask as much of the money as possible at all stages of life and then beyond life as well, which is really the powerful component of what we can create using this method. So anyway, there's kind of the summary, the basics of what a gradual inheritance strategy can look like. I want to touch base on this piece right here called taxable portion per year. So here's one of the interesting things about how annuities work. And I don't want to break down all the components. I don't want to profess to be an expert on that, get that category. But at a high level, if we're receiving. So in our example here, I'll pick on the $50,000 version, receiving $50,000 as income, rather than taking that entire $50,000 and having to report all of it as income. We're only having to report income, at least in Canada, on this $21,000 portion. So that means the actual taxable income just on this one annuity is only $21,000. The reason is a lot of that money that's being circulated back to the family is actually return of principal. It's a return of the principal off the original. It doesn't, it's not a taxable event. Only, only the amount that is basically an interest earnings potential is what is, is taxable. So here we've got $153,000 of, of money that lands that can be used and spent. The tax reporting is only on 57,000. So 57,000 is what has to be reported as annual income and then tax will be paid on that number. So now you shoot forward and someone's also collecting CPP and oasis. So this, you can kind of consider this around. How could you navigate these numbers to also be able to take advantage of some of the additional, you know, government benefits, you know, reducing or avoiding old age, security, clawback, etc. So it's pretty cool what you can do. Again, the concept is called an annuity settlement option. And it's a very, very neat method.

It can do an awful lot for people. And I'll give you kind of a framework on what one of these examples kind of looks like. So here you would have a policy number. You would obviously list the policy owner. You would write down who that beneficiary is going to be, what the relationship is, and then what is your payout option? Here's a lump sum. Do you want a single life annuity? Is it term certain? Annuity is very common. That's the likely status. Yeah, I want this one to be for five years. It's a, the percentage of the benefits is going to be 10%.

Then I also want another version. This one's going to be a lump sum. It's going to be a lump sum of 15%. Hey, I'm going to do another version. This one's going to be a term certain. I'm going to do that one for 30 years. It's going to be 50%. So you can isolate those things, provide a few additional instructions and then in the event that both parties. So again, I'll pick on myself here.

So let's say, you know, heaven forbid.

Something happens to myself and to my wife and we're no longer available. Well, then I can also isolate with this paperwork who the contingent beneficiaries are. So if the kids are going to end up being receiving it, I definitely don't want them to get just a massive amount of capital that they're not prepared to work with. I would much rather dole that out over an extended period of time and then have some additional instructions in the will on how to, how to manage and work with that capital. There is a little bit of a high level overview of something called the gradual inheritance strategy. It's not something that's particularly well known in, in Canada. Very rare that I hear anyone talking about it, but I think it's a really powerful option for people to consider because too often we're focused on, you know, the lump sum amount of money and then it often brings up concerns well, what if I don't want my kids or whatever to get a lump sum of money because I'm not sure what they're going to do with it? Well, when you have those kind of questions that show up for you now, you can recognize there are solutions. Again, trusts can be a solution. There's a number of things you can do. This one is a way that mitigates a lot of the cost of a trust. It's very simple to set up. You can do it on your own, you don't require the use of a lawyer. It can all basically be handled internally by the insurance company. And it gives you a great deal of peace of mind. This is the other cool thing too, when you're doing this and it's really, it's an update to the beneficiary status of the policy. When you're making those changes, you can make changes again.

So I don't know about anyone watching.

This, but I would imagine your life probably a little bit different today than it was last week, a year ago, two years ago, before COVID Right. So there's some things that have shifted and changed and as that does happen for you, whether it's a relationship adjustment, an addition to the family, a new, you know, new child born, whatever, new grandchild, these, these kind of things that happen naturally. Maybe you acquired some property or sold some property that you don't have anymore, acquired or sold a business. Consider making a very clear intent of decision that on an annual basis, take the important time, set it in your calendar and prioritize reviewing who you've got as beneficiaries designated on your investment accounts, on your insurance policies, and know if you've implemented a strategy like this, the gradual inheritance strategy, that you can modify that as your life and things change and adjust on a go forward basis. So I hope you found this really helpful. I'm really glad to hop into the group and share this information and make sure if you got value out of this, tag someone that you know, share it with somebody that you know and have yourself an incredible day. Enjoy the rest of your learning. When this video gets posted on our YouTube channel and make sure you check out the new content that's showing up on the screen. Have an awesome rest of your day.