I get asked many times what the most efficient way is to leave cash to grandkids.
Probably one of the most efficient and cleanest ways to leave cash to a grandchild is through a life insurance policy.
Let’s take Bill for example. Bill is 60 and has two grandkids. The grandkids are 14 and 16 years old. Bill does not have a particularly large estate but wants to make sure each grandchild will get $100,000 on his death. Bill purchases a term-life insurance policy for $200,000 which costs him $384 per month. Because Bill’s grandkids are still minors we advise that the beneficiary should be the estate, in Bill’s will he bequests $100,000 to each grandchild via a testamentary trust.
A testamentary trust is a trust that is set up at death as per the instructions in the will. Bill would obviously name a friend or a family member to be the trustee of the testamentary trust.
By having the money flow to the trust, the cash does not end up in the office of the public trustee. If minors are named as beneficiaries on an insurance policy the cash would be tied up at this government office and control would be lost.
Clearly if the grandkids were adults then the proceeds of the insurance policy could be left to them directly via beneficiary designations on the policy, the advantage is that kids would get the money within a couple of weeks and this cash would bypass the estate and the will, thereby avoiding probate and executor fees.
Let’s talk about efficiency. Firstly proceeds from a life insurance policy are deemed to be tax free, pretty attractive I would say. Secondly, the insurance company’s break-even point on the policy.
If Bill has $200,000 coverage for which he is paying $384 per month we simply take $200,000 and divide it by $384 which gives the amount of months he would have to pay in order for him to have contributed a total of $200,000 into the policy. The answer is 520 months, or 43 years.
In other words Bill would have to pay into this policy for 43 years for the insurance company to break even. This would take him to the ripe age of 103.
Let’s assume Bill passes away at age 80, this would mean that he has paid $92,000 (80 – 60 = 20) (20yrs x 12=240 months) (240 months x $384 = $92,000) into the policy. Each grandchild would get $100,000 tax free, that is a 117 per cent return tax free (200,000 – $92000 = $108,000) $108,000/$92,000 = 117%).
Sounds like a good investment to me.
One could also opt to put the $384 away in an investment for the grandkids, but a life insurance policy will always win hands down, more so if death occurs sooner rather than later.
Feel free to contact me if you have any questions. Remember to always consult your advisor before taking any action.
Written by Stuart Kirk, CIM. Stuart Kirk is a Retirement Planning Specialist with Precision Wealth Management Ltd. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd. For comments or questions Stuart can be reached at stuart@precisionwealth.ca or 250-954-0247.
