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so by structuring a tax exempt whole life insurance policy in a manner that permits its tax deferred cash value to be withdrawn by the child or grandchild at a future date after the original policyholder has died whole life policies have two components in addition to the death benefit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 1in 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 2 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 concepta 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 