How To Build Generational Passive Income

So this is an example. This is a recent family that I helped out here kind of in the last six months. And I'm just going to walk you through kind of what happened here. It was actually an accountant that recommended they see me and it was really just to get insurance. They were just going to get some basic term insurance. I said, well, that's really cool. I mean, we might be able to help you with that. However, I won't help you with that unless you're prepared to learn about what you could do better and understand how to have more control over your financial life. The gentleman agreed to do so. He ordered a copy of the book, he watched some of the content that you guys have all watched, and he decided that he really wanted to implement IBC rather than just get a basic term policy. So the end result is little couple summary here. What I want to show you is basically where the flow of money come from that we were able to determine how to get all their premiums for their system. We put four policies together. The total premium was about 60,000. And here's where it all came from. They were already diligently putting $250 a month into resps for their kids. At this point in time, their kids are about 10 and 12 years old, roughly speaking, or 11 and 13, I think. And they had already maxed out the Canada Education Savings Grant. So they'd done a good job. They had a good balance in this account. One of those resps was with a company that is really not very friendly and doesn't give them any information. But nevertheless, they have money set aside for their kids education. They're happy about that. And they've maxed out the government grants. So anything additional they put in would just be going into the rsp. They wouldn't be getting any extra benefit or bonus other than potential gains on that account. So they decided to redirect that money and set up policies on the kids. So boom, that's where the kids policies are being funded. The same 250amonth moving forward. They were diligently paying down their mortgage and in fact they were doing weekly accelerated payments. The gentleman made a call and found out that they were putting an extra $360 per week towards their mortgage. And additionally $24 was going per week to cover mortgage insurance. So imagine for a moment they've got a mortgage balance and they're rapidly declining that mortgage balance. In the event there was an issue where there was a death of one of the spouses, the bank would pay the loan off. Okay, assuming that the mortgage insurance would actually pay out because a lot of times it may not, but under the, let's just assume that it would have. They're paying $24 per week for both spouses to be covered for a declining balance that they are rapidly declining themselves. So once we got to the crux of that, they said, you know what, once we get the new insurance in place, we'll just get rid of that other, that other cash flow and we'll get, we'll get that $24 back and we'll line that back up with our, with our other funds. So that's what they were able to do. So now they're in a position where, you know, we're just going to look at how much did they actually recover of that payment cash flow? Well, it turns out 384 a week is almost basically just shy of $20,000 a year. That's a pretty big differential. Now they were voluntarily doing that. They were accustomed to that payment in their month. It wasn't changing their cash flow at all. They just decided rather than building equity in the house, we're going to redirect that capital so we can make sure their family's properly protected. Because they weren't at that time, they were not properly protected. And we're going to redirect that so we can build equity with the life company that we co own versus strengthening the balance sheet of the mortgage holder on our house instead. Now additionally, the gentleman, he had moved from a position where he was, he was working, he'd been working for a company for a long time. They gave him an opportunity to contract to them and he could also pick up some extra contracts and he set up a new corporation. All that was quite new. It's, you know, he's maybe, you know, about four to four to six months into that role. And so it was still pretty new but they were doing really well and living on one income. And so the extra income that he's going to be making now into a corporation, he no longer needed to withdraw that out and pay tax on it immediately. He can instead choose to let it grow inside of the corporation because they didn't need it as part of their day to day cash flow. So with that in mind, although there was some uncertainty yet because it's still a new, new venture, he was going to be no longer pulling down capital out of the corporation because it wasn't necessary. Being that that's the case, his personal income went down to almost zero. When is the best time to take money, generally speaking, out of a registered account in RRSP in order to be the most tax beneficial.

Beginning of the year.

Beginning of the year. But wouldn't it be in a year where your income is the lowest?

Oh, okay. Specifically, yeah, whenever you're on a lower income bracket.

So if you know your income is going to be the lowest in this case, he was aware of that because he knew he wouldn't have to take money out of his corporation. He could basically keep his income extremely low. He recognized this was the great opportunity for him to start taking out those RRSP funds at his choice. Obviously he spoke to an accounting professional to verify that for himself. But he had about $300,000 in an RRSP, a couple of them. And he could take that out basically at 30 grand a year. There's a withholding tax, there's, I believe it's 20% that comes off the top. So he gets $21,000 and $9,000 is withheld towards paying his eventual tax bill. Now if his income is very low, he might actually get some of that back. Of course we didn't factor that in, but basically that's going to help him fund the policy. And he was actually going to lend that money from his personal resources to the corporation to have the corporation get the policy so he could augment the policy that he's putting in place. There's. So when we add all these sources up, there's $47,000 a year in annual premiums that we've come up with. And then additionally, he had been diligently putting money into RRSPs on a regular basis for his life. He was accustomed to sending a certain amount. Roughly speaking, it worked out to being about $1,130 a month. And some of it was done annually, some of it was done throughout different periods of the year. The end result is they were committing as honest bankers to, to continue putting that amount aside for their future. They just decided, rather than putting into the RRSP accounts that we were accustomed to doing, we're going to reallocate that now to the, to the policy system. But the end result is we've got about $60,000 worth of policy premium. Here's a summary of what ended up happening. So each, each spouse, now husband and wife, they're about the same age, they each had $250,000 whole life policy. And these are in, we've talked about equity, these happen to be with equitable life. And they each got a 20 year term rider with about 750,001 had 750. The one had like $1 million. So additional coverage there. So their family is well protected, they still have kids at home, etc. And they can, they can have conversion power if their income goes up and things they have the ability to convert into another policy down the road. What we're going to look at is basically the funding of these policies and then we're going to look at drawing the passive income out. And one thing to note is that one of these policies is a corporate policy. All right, so the RSP funds were being redirected as a shareholder loan. Henry, again, maybe you can chime in here. They've been funding this. Now they're going to put about $300,000 into the corporation. They'll be able to extract that money back out at a later date if they want to do that from a retirement standpoint. And you maybe just chime in and make sure that that sounds accurate for me, Henry. So I'm not misleading our folks here. Yeah.

Personally, the money is taken to fund the corporation and then eventually when the company gets, you can pull it back out tax free.

So now let's go ahead and let's look at the actual example. So here we go. Both husband and wife are about 45 years old and we have kids. I was wrong on the ages. One's 13, one's nine. So we have policy funding. All of this is the funding. So we can see the two kids here. That's the $250 a month amount going in. We have policy on the wife. And again, this is showing the base premium plus the term costs plus the additional PUA premiums. The EDO that they're putting into the policy on both of them. And the one policy on the husband is a corporate, corporate policy. Now we add it all together. Here's our combined amount, $60,000 a year. Now, my example I'm going to show they may choose to fund premium longer. Nelson Nash, he funded premiums all the way until age 88. I'm showing just for the purpose of our illustration here, that they're going to stop paying premiums in the 20th year. Now, if they do it and they're being good bankers, maybe they've accumulated a seg fund or a GIAs or premium deposit fund that they can pay another one or two years worth of premium on the back end of this. Okay, so I want you guys to use your imagination a little bit when you think about putting premiums in later on if you've been accumulating a side account of paying yourself an excess amount of premium. But for our example, we're just going to, we're going to turn that off in the 21st year at age 65. They're going to keep funding the kids plans. They committed to doing that until age 70 and then they're going to start drawing an income basically beginning age 70, 71. And so you can see here what I've got is I've got negative. So the wife's policy, they're taking about 44 grand a year. On the corporate policy, the corporation is actually borrowing the money and then the corporation is issuing a shareholder dividend to them. So there's some tax paid when that money comes from the corporation down to the shareholder. So that's why we see a slightly lower amount on this. The actual amount the corporation is getting is higher, but after the tax is being paid, when they get it distributed, it's a, it's a bit of a lower number. Now what I'm not reflecting is what Henry and I just talked about. Technically speaking, they have shareholder loans outstanding personally, so they'll actually be able to pull more capital out than I'm showing. But I wanted to keep everything very, very simple.

When you're pulling money out of a corporation, if it's on tax, generally dividend tax rates, if you pull an amount less than 30,000, you don't pay very much tax at all compared to salary.

Good to know. Thanks for that tidbit. So here we're also taking capital out of the kids policies. Now one of the reasons I wanted to show this is I want to show that often as parents, we put things together for our kids and we make an assumption that we kind of compartmentalize it for the kids and we don't think about utilizing it too much or we think we're going to give the policy to our kids early. I know for me that's not my intent with my family and for the, for this family, I showed them how they can put the resource together. Everyone can benefit from the resource over multiple generations. So we stack all these incomes together and we've created $92,000 a year of, of after tax income. Here's the key thing I want you to see. When we add up all the premiums that they funded, it's $1.2 million and change over that 25 year period. Now the corporation funded a bunch of that money, but the combined amount of resources that went in is 1.2 million and change. I'm going to run that income out now all the way to 96. That ends up being 26 years of income. So they took out 92 grand a year and they did that for 26 years. They took out 2.4 million of money after tax while they were alive. Now we don't know when they're going to go. Nobody knows their best before date. But we're just picking it to trying to keep it all simple here. So they put in 1,200,001.239 and they took out $2,400,000 before they passed away. In this example, I'm going to assume that both the parents pass away at that stage. Now what's going to happen is we're going to have a net death benefit. They've accumulated a big loan on these policies, either through the policy or in my example, I'm assuming it's a collateralized instrument which we won't get into today. But there's going to be a net death benefit. So the husbands will be a little bit bigger because it's actually a bigger policy. $580,000 tax free after the loan gets repaid and the wife gets $510,000. Well, the kids are now age 60 and 64. Again they were 9 and 13. Now they're 60 and 64. They're going to take this money and they have an outstanding policy loan because the parents were using the policy loans off the kids plans. There's $350,000 of loan outstanding, including interest on the kids policies. The kids can receive this net death benefit and they can immediately take that windfall of capital and boom, slap it right back down on those outstanding loans and they reset that whole policy back to the very first day. But they have all the time underneath their belt. So they have all that financial value to work with and they still have money left over outside of that that they can put to work and do, oh, maybe some other policies. Okay, here's another thing, and we don't have time to really dig into this, but I want you guys to recognize the capital dividend account in the corporation is also created and it has $3.1 million of a ledger entry that will allow them to extract other assets that they might accumulate in the corporation. Now we have a whole podcast episode on that. In fact, we have a couple new ones that are going to come out with Henry speaking to that same thing. So just aware there's another option for capital extraction that's there. Now I want to get into the kids. So I started with child two's age because it was the youngest child. And we're looking at the year, so the year that this policy system, we're now into the 52nd year, the kids policies are still enforced. The kids are paying for the policies. In fact, the kids started paying for their policies when the parents turned 70. Okay. When they started drawing an income, they said, kids, you're now responsible to pay for the policy. So they would get money from the kids and pay the premiums directly. So the kids are paying. And then I started at age 70 for each one of the kids. So here you can see Kid 2 begins 71 and the other child is a little bit older, so it starts earlier. So they're funding the policy up until a point there begin taking a passive income and each kid is getting between 27 and $32,000 a year of a tax free stream of income coming off that policy. Now they had other capital from the death benefit. There's probably other assets that got distributed and they've been saving probably on some of their own policies which we can't see. I'm just following through the whole line of the original four policies that were created. So we're going to run this down. Each kid started at 70 and I'm going to run their income all the way out to age 100. So.

Child one gets $810,000 out tax free. Child two gets out $960,000 tax free. And I'm assuming they only took about 80% of the value of cash that was in the policies at age 100, we're assuming each of the child passes away, they each leave a net tax free death benefit to the third generation of about 400 and you know, between 400,000 and $500,000. All of this got started because.

Somebody, an accountant referred an individual to us who needed term insurance. They were open to learning more, they did the educational process and they already could see how they could reallocate money in their budget, in their life that they were already spending to start putting together a program that would allow them to have more control over their financial life. Highlighting some bullet points on page 72, Nelson talks about an even distribution of age classes. And we actually, I think we did a Facebook live on this here recently. But some significant advantages about getting policies on your kids and grandkids, et cetera. It covers multiple generations and promotes long term planning. Underwriting problems are minimized especially when you're getting policies on kids and young kids. The tax free buildup of cash values over a long period of time is very clear to see. The outlay is small compared with the ultimate yield. So here's again we got policies on kids that are about $2900 a year. They were already spending the money anyway and now they're able to to see that over a progression of 100 years basically.

Death benefit occurs. The system becomes self sustaining. That I think is one of the key takeaways on this page. We're showing that when, when someone passes away there's already an automatic transition. Seventeen death claims were paid out when Nelson passed away and there's still 28 policies in force. Just think about that for a minute. 17 death claim, death, death benefits paid and still policies enforced. David said there's two policies on guys he's never even met that he's got now in his hands and eventually those people are going to pass away. It will happen. Passive income is assured. Estate planning is greatly simplified. The wealth mentality is transferred to seceding generations and promotes the understanding what stewardship is all about. So just really good bullets. That was kind of the idea of what this whole example I walked everybody through is.