What Is a Waterfall Concept?
The term “waterfall concept” refers to a popular estate planning strategy in which a whole-life insurance policy is transfered一or “rolled over”一from the policyholder to their child or grandchild.
Key Takeaways
- The waterfall concept is an estate planning strategy that uses whole-life insurance contracts to efficiently transfer wealth between generations.
- It can only be used to transfer wealth from an older generation to a younger one, such as in the case of a grandparent giving to their child or grandchild.
- In addition to their tax benefits, waterfall concepts can also help reduce probate issues and legal costs.
How Waterfall Concepts Work
The purpose of the waterfall concept is to ensure that wealth is passed on from one generation to another in as tax-efficient a manner as possible. It does so by structuring a tax-exempt whole-life insurance policy in a manner that permits its tax-deferred cash value to be withdrawn by the child or grandchild at a future date, after the original policyholder has died.
Whole-life policies have two components. In addition to the death benefit that pays out when the insured passes away, whole-life life insurance policies also accumulate a tax-deferred cash value as the insured pays premiums. Eventually, the insured individual transfers the life insurance policy to a descendant, at which point the funds become taxable on withdrawal.
In addition to its tax advantages, the waterfall concept can help avoid some of the pitfalls that can apply to gifts and other large-scale transfers of wealth. For example, waterfall concepts can be carried out using only the terms and conditions of the original insurance contract, without requiring the involvement of potential costly lawyers and intermediaries. Similarly, transferring wealth through a waterfall concept can help prevent those assets from being allocated to other parties as part of the probate process.
Real World Example of a Waterfall Concept
A typical example 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 only when withdrawing funds from the policy. To the extent that the grandchild’s tax rate is lower than that of their grandparent, this would result in tax savings overall.
When using the waterfall concept, it is important to structure the policy in a manner that protects against the risk that the original policyholder might die before the policy is transferred. One method to do so is by designating a third party, such as the child’s parent, as a contingent or irrevocable beneficiary, with the intention that the parent would then transfer the policy to the grandchild once he or she comes of age. This process could be entirely stipulated using the terms of the life insurance contract itself, without requiring the use of a trust or other such legal entity.
FAQs
Key Takeaways. The waterfall concept is an estate planning strategy that uses whole-life insurance contracts to efficiently transfer wealth between generations. It can only be used to transfer wealth from an older generation to a younger one, such as in the case of a grandparent giving to their child or grandchild.
What is waterfall and how it works? ›
The Waterfall methodology — also known as the Waterfall model — is a sequential development process that flows like a waterfall through all phases of a project (analysis, design, development, and testing, for example), with each phase completely wrapping up before the next phase begins.
What is waterfall with example? ›
A waterfall is any point in a river or stream where water flows over a vertical drop or a series of steep drops. Waterfalls also occur where meltwater drops over the edge of a tabular iceberg or ice shelf. Dynjandi, a series of waterfalls located in the Westfjords (Vestfirðir), Iceland.
What is the waterfall model and how does it work? ›
The Waterfall Model is a linear application development model that uses rigid phases: When one phase ends, the next begins. Steps occur in sequence, and, if unmodified, the model does not allow developers to go back to previous steps (hence “waterfall”: Once water falls down, it cannot go back up).
What are the real life examples of waterfall model? ›
Manufacturing projects are another example of a waterfall project. These types of projects typically involve the production of physical goods, such as cars, appliances, or electronics. The phases of a manufacturing project typically include planning, design, procurement, production, and delivery.
What are the 5 steps waterfall? ›
Waterfall methodology is a well-established project management workflow. Like a waterfall, each process phase cascades downward sequentially through five stages (requirements, design, implementation, verification, and maintenance).
How does the waterfall effect work? ›
As a result, when you look away, neurons that detect movement in the opposite direction (e.g., upwards) are more active in comparison. This results in the appearance of the stationary object moving in the latter direction (upwards).
What is waterfall in easy words? ›
A waterfall is a place where water flows over the edge of a steep, high cliff in hills or mountains, and falls into a pool below.
What is a waterfall answers? ›
A waterfall is a river or other body of water's steep fall over a rocky ledge into a plunge pool below. Waterfalls are also called cascades. The process of erosion, the wearing away of earth, plays an important part in the formation of waterfalls.
What is a simple sentence for waterfall? ›
She watched the magnificent waterfall cascade down the mountainside. The waterfall fell about twenty feet to swirling rapids.
The waterfall model is a linear, sequential approach to the software development lifecycle (SDLC) that is popular in software engineering and product development. The waterfall model uses a logical progression of SDLC steps for a project, similar to the direction water flows over the edge of a cliff.
How does a waterfall structure work? ›
A waterfall structure can be thought of as a series of pools where cash flows from an asset fill a single section, before spilling over into the next one.
What is a waterfall example? ›
One example of the waterfall methodology is the construction of a building. The project starts with gathering requirements from the client, followed by the design phase, where blueprints and plans are created. Then, the construction phase begins, where the building is constructed according to the design.
What is an example of a waterfall approach in project management? ›
Manufacturing: In manufacturing, teams use the Waterfall project management method to support different manufacturing and production phases and maximize efficiency. For example, an electronic device manufacturer may wait until the assemblers finish their work before preparing the project for packaging.
What are 3 benefits to using the waterfall model? ›
Among the advantages of the waterfall model are the following: Provides a way for large or changing teams to work together toward a common goal defined in the requirements phase. Ensures a disciplined and structured organization. Provides a simple method to understand, follow, and arrange tasks.
How does a waterfall payout work? ›
Waterfall payment structures allow higher-tiered creditors to be paid principal and interest ahead of lower-tiered creditors. Lower-tiered creditors are paid interest-only payments until the higher-tiered creditors are paid in full.
What are the 5 stages of the waterfall methodology? ›
Phases of waterfall project management differ from one project to another. But generally, you can group the activities of the waterfall approach into five stages: planning, design, implementation, verification, and maintenance.
What is the waterfall method of money? ›
The waterfall concept is an estate planning strategy that uses whole-life insurance contracts to efficiently transfer wealth between generations. It can only be used to transfer wealth from an older generation to a younger one, such as in the case of a grandparent giving to their child or grandchild.
