Maximizing Charitable Giving Through Universal Life Insurance

Avoiding the complications of estate taxation and the U.S. probate system may be the key reasons to allow high net worth foreign clients to include sizable charitable donations in their estate planning. Like all clients, these wealthy foreign clients are looking for strategies to help them avoid the potential for significant increases in the estate and gift tax rates in 2013 and beyond. A universal life insurance policy can provide a unique solution to help foreign nationals meet their estate planning, business succession and charitable goals.

The Universal Life Insurance Charitable Donation

Donating the proceeds of a universal life insurance policy to charity requires that the donor purchase a life insurance policy naming the charity of his choice as beneficiary. When the donor dies, the proceeds of the policy are simply paid to the charity, rather than to his estate. Importantly, the funds will not be subject to estate tax and will not be required to go through probate, which provides the client with a degree of privacy that they might not achieve with traditional estate planning vehicles.

Using a universal life insurance policy to make a charitable donation in this manner can allow your clients to make larger donations. For example, a client who wishes to donate $10,000 annually can instead use that $10,000 to pay the premiums on a universal life insurance policy worth $1 million upon his death. If the client lives for an additional 20 years, the life insurance policy would pay $800,000 above and beyond the $200,000 in direct charitable donations that he would have made through the annual contributions.

Further, if the client retains ownership of the policy, he or she will be able to access the cash value built inside the policy if the funds should become necessary. This provides a degree of flexibility that may not be possible with estate planning vehicles such as trusts or private foundations.

Important Considerations

While using a universal life insurance policy as a vehicle for transferring funds to charity allows a donor to avoid estate taxes and the probate system, it also contains several unknowns. Because the exact lifespan of the donor cannot be known, it is impossible to know exactly how much the charitable donation will cost your client. A $1 million policy could cost $200,000 if the client lives for 20 years or it could cost $400,000 if he lives for 40 years after the policy is purchased.

Similarly, not knowing the client’s exact lifespan prevents the donor from knowing exactly when the charity will receive the funds. It is therefore important to periodically reassess the policy terms to ensure that the client continues to want to make the donation. Because charities can change their charitable goals, it is also important that the client remain familiar with the charitable beneficiary to ensure that his or her goals continue to be met.

Conclusion

A universal life insurance policy can provide high-net-worth clients with an effective vehicle for transferring assets to charity post-mortem while retaining control over the assets during life. For clients interested in making sizable charitable donations, this technique allows the client to avoid the U.S. probate system while simultaneously reducing their estate tax liability.

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