Grandparents today are often concerned that their grandchildren are not going to have the financial opportunities that they had during their own lives. Name the challenge — the cost of college, the lack of high-paying jobs, the affordability of housing — many grandparents would like to do something specifically to assist their grandkids with these concerns.
However, while these grandparents have done well financially themselves, they’re also early on in their retirement and hesitant to risk running out of money. This means that typical wealth transfer strategies, where you take part of your assets and give it away to a future generation, is not necessarily desirable.
Creative use of life insurance can play an important role in a multi-generational legacy planning strategy, one that allows grandparents to set aside assets specifically to benefit their grandkids, yet still retain control over those assets during their lifetimes. This is a strategy I’ve used with my own clients, and you can learn more about it here.
The strategy is multi-generational in that the grandparents, which I will call generation one, will purchase permanent life insurance, but, unlike traditional wealth transfer strategies, generation one is not the insured life. Instead, the policy insures generation two, their children who are parents. While the initial beneficiary of the policy is generation one, ultimately the policy is intended to be used for the benefit of generations two and three.
For example, my 76-year-old mother may have $250,000 sitting in a certificate of deposit (CD) earning next to nothing in interest. She would like to do something to benefit my children, but that $250,000 is really my mother’s “fallback money” in case she has a change in her financial status, so she can’t gift it outright to my kids. We’re going to show her how to take that $250,000 to purchase a life insurance policy on my life. The cash value of the policy is going to grow tax-deferred, and it’s likely to grow faster than it would in the CD.
The policy would of course provide a death benefit in the event of my untimely death, which my mother could then use to complete gifting strategies to my children, generation three. If my mother passes away before me, which is more likely, then the policy would be conveyed into a Trust, where the cash value of the policy could be used to provide supplemental income for me, generation two, or for college expenses for my children, generation three.
At my death, the death proceeds from the policy would come into the Trust and then be distributed to her grandchildren, all based on my mom’s wishes as spelled out in the Trust.
In essence, this strategy allows grandparents to take assets they have in their right pocket, move it into a life insurance asset that they own in their left pocket, receive the preferential tax treatment that life insurance receives, and, ultimately, their grandchildren will receive a benefit at the death of their parent, generation two.
A big benefit to the grandparents is that, while they are helping their kids and grandkids financially, they’re not giving up control of their money during their lifetime. In other words, if at any point during their retirement years their situation were to change, they retain complete control over those assets and can redirect them or change them in any fashion they see fit. That’s one of the primary benefits of this planning strategy to generation one. Typically, they can also grow these assets more efficiently than holding them in cash or cash equivalent assets while still retaining access to them.
Obviously, generation three is the focus of this strategy, but even generation two benefits from this strategy, as it can alleviate the economic burden of paying the educational expenses for generation three. If the Trust is set up to do so, it can also provide supplementary income to generation two.
Penn Mutual is a standout in offering this type of multi-generational insurance. Typically, insurance companies would have a hard time justifying someone owning a policy on the life of their adult children. If I were to pass away today, while my mother may be emotionally hurt, it’s not going to have any negative financial impact to my mother’s lifestyle. Most traditional underwriting approaches would question that type of an ownership structure. Because Penn Mutual feels that grandparents have a legitimate interest in securing the financial futures of their grandchildren, we’ve embraced this approach.
Of course, this strategy isn’t right for everyone. Talk to your financial professional on whether this strategy is appropriate for your own circumstances.
This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for you or your client’s situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.