Before I tell you what this is,
I will tell you what this is not.
This process is not some ‘secret life hack’ that ‘the rich don’t want you to know’ or some ‘be your own bank’ shortcut to riches.
Life insurance is involved, but for this process to fully mature- this may take decades that outlast you.
I may describe this as a blueprint because if at all possible, this is the step by step process I aim to follow to establish for my own family.
The name of the game is "access to capital".
What is in the way for nearly everyone with dreams of riches is not having the ability to operate with leverage as you try to build the wealth.
If you do access the money, sometimes the terms of receiving it can slow your growth to the extent that you financially bleed out before the plan takes root.
If you reach riches without the understanding of money, how to attract it, how to maintain it, how to preserve it- the flow from your pockets will be greater than it's flow in.
If you have the ability to get your parents in on the plan; the maturity of the project could see a large jump forward. If you have siblings willing to get on board as well (as it is designed to include an entire family), the plan becomes much more stable in terms of its financial base.
Much talk about how the Rockefellers' sustained their wealth through generations shares similarities to this method; but much of that talk comes from life insurance agents wanting to suggest sales behind the method.
The goal of this process is to NOT create 'trust fund babies'. The aim is to encourage financial literacy, understanding, and participation in the entrepreneurial spirit of the family (if they have the interest).
The Process:
Begin with buy in- The following plan needs to be presented to the family, highlighting the benefits, fielding questions about possible blind spots and pitfalls, tweaking the plan to define and limit the risks or eliminate them completely etc.
This is an opportunity for the plan to be molded to fit the desires of the family, as broad participation and adoption is the goal.
Life Insurance- For the process to work, whole life insurance is required. Now, this can go one of two ways and it is up to the establishing/participating families who are creating this trust process.
They can either aim for capital access quicker and go with low death benefit/ high cash value Whole life (CVWL) insurance policies OR low cash value/ high death benefit Whole life insurance policies.
As mentioned earlier, the name of the game is "access to capital".
The following is completely hypothetical but illustrates the point- The national average business loan interest rate is between 6.43-12.45% (Nerdwallet). The national average life insurance loan rate is 5-8% (Bankrate). To take a loan on your life insurance policy, there must be underlying collateral in Cash Value within the policy(ies) to take a loan against (important caveat).
If the cash value within the life insurance policy were used, you may have more favorable terms for borrowing than through traditional banks.
We are trying to generate access to capital and by being selective about where we access it from, we potentially benefit. (Just wait until the plan is fully built out and see how this changes !)
If the goal is faster liquidity- minimum death benefit CVWL may be the option to pursue. If the goal is greater total liquidity- maximum death benefit CVWL may be the better option.
Trusts- With the first generation of the process, establishing a revocable trust allows for adjustments to occur. Transitioning the trust from revocable to irrevocable upon the death or incapacity of the first participating member may make the most sense. There is the freedom of greater maneuverability with the revocable trust while the trust does not have a ‘need’ for specific tax considerations.
Irrevocable trusts remove assets from an individuals taxable estate. Asset ownership by the trust becomes a future option for deploying capital. Funds held in the trust are also shielded from creditors and lawsuits. If there is a future need for medicaid or long term care; assets held in a trust are also excluded from the spend down requirement. Liquidity provisions and controlled distributions are also benefits of trust utilization.
*(While these are all broad overviews and options that trust offer, for the immediate use these would not be AS applicable.)
Step 1: Get family buy in
Step 2: Determine The method or blend of WL policies (Younger individuals get low death benefit/high CV policies while older individuals get high death benefit/ low CV policies for instance.)
Step 3: Establish a trust and name the trust as the policy owner and beneficiary.
Step 4: The first participating generation will have to fund their policies themselves. As the trust begins being funded (for following generations) the trust also becomes the payor on the policy as well.
Step 5: A family board is created (as detailed by the trust rules established) to oversee the flow and function of the money within the trust. Weekly/Monthly/Quarterly meetings occur to discuss money management. This will also encourage younger family members to be participants in the process, broadening their financial understanding at a much younger age than they would otherwise.
Step 6: Identify a Trustee. This Firm (ideally) can manage the trust for multiple generations to come. This pans out better as opposed to doing it yourself or finding a third party individual because the firm will outlast generations.
Step 7: As family members pass away, death benefit funds are paid out to the beneficiary (trust). The payout funds the trust to support premium payment for new life insurance policies and/or becomes capital that can be lent out to trust participants.
Step 8: As new family members are born, policies are established.
This is where things get good.
We discussed interest rates earlier and this is when the trust really shines and promotes generational wealth.
A family member comes to the meeting of the board with a business proposal etc. If the proposal is ratified based on the trust parameters, the funds requested for the proposal would be loaned to the family member, at say, 1-2% interest; FAR below the accessible rate for capital from the banking market.
If the family member defaults on the loan, the trust bylaws would address the levied penalty. Maybe they forever lose access to additional capital etc.
There may be questions reading this blog post. Such as- does my family get anything from the life insurance policy, why not let the trust just pay family members money etc.
This would be up to the established bylaws.
If I were the decision maker for this- the trust is paying the premiums for future generations so the individual is 'out' net zero dollars. If they want to purchase term insurance to cover their working years or their own whole life insurance policy for their family to be the beneficiary of, that is up to the individual. Or, it could be established that the trust pays for the funeral costs etc.
This is not a method to create residual payments to family members for life (though you could have your own style of social security payments for family members from this).
The purpose of this process is to encourage financial literacy and the entrepreneurial spirit.
If you can plant a tree and nurture it‘s growth, understanding you may never enjoy it's shade- you can establish something for your family that your blood line has never seen before.
Yes, the first generation pays for their own policy. Those proceeds in turn pay for the next generation's policies. So that by the third generation, capital is abundant.
This could be a conservative or an aggressive estimate; all I know is, if you have the patience and love to see beyond the immediate generation, greatness is inevitable.
It is a process completely customizable and ultimately, if the name of the game is access to capital- You will have achieved that goal.
None of the above is an explicit suggestion for the reader to endeavor. All strategies for future planning incur risks. Consult the necessary professionals if you have interest in implementing this for yourself.
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Questions, comments, topic suggestions?
johnny@paracletelife.com
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