Life Insurance And Charitable Giving: A Timeless Mindset

Even simpler, a donor can absolutely assign an existing policy, designate dividends to specific charities, or name a charity as a primary or contingent beneficiary on a new, existing, or group term life policy. Every one of these options may have beneficial income tax benefits, estate tax benefits, or both.

SERP Swap

A relatively new twist that could be utilized to “create” wealth that could then be shared philanthropically is the “Benefit Exchange” or “SERP Swap” concept. While most practitioners are aware of the tax problems involved in transferring qualified plan assets to heirs, few consider that nonqualified plan assets face the same decimation. However, unlike their qualified plan brethren, the rules surrounding nonqualified plans leave room to maneuver. Enter the “Benefit Exchange.”

This concept is designed for high net worth executives with no real need for the supplemental income provided through their nonqualified plan. The exchange is essentially an election by the executive to swap all or a portion of the nonqualified benefits for a split-dollar life insurance plan.

Thus, assuming the insurance is held by a third party, such as an ILIT, the benefit goes from facing both income and estate tax to a mere recognition of the applicable income from the 2001 Table (formerly PS 58). From the company’s standpoint, the exchange can be structured in a manner that results in no additional net present value cost to the company.

The tax savings, coupled with the leverage of the life insurance, creates a windfall for the executive. In our experience, it has not been unusual to see a 10- to 15-fold increase in the benefit to be received by the heirs. Thus, if the eventual benefit to the heirs was to have been $1 million, the exchange created $10 million to $15 million.

Therein lies the potential for philanthropic giving. We have just created a multi-million dollar windfall. Perhaps the executive could be persuaded to share a portion of this gain with his alma mater or favorite charity.

It seems safe to conclude it is easier to get someone to give if it costs nothing out of pocket. Clearly, any ancillary planning technique that generates additional, multiplied wealth to a family could spark a charitable discussion.

These are but four relatively timeless examples of how a producer can take a comprehensive rather than modular charitable planning approach. Some of the most successful planners in this market have gone so far as to set a specific tangible goalto create $10 million in charitable capital during your career, for example.

Maybe it is time to re-think or re-invigorate your charitable planning approach to benefit your clients and your community.

Michael J. Brink, CLU, is with the insurance advisory firm of Nease, Lagana, Eden & Culley, Inc., Atlanta, Ga., a member of the M Financial Group. You may contact Michael at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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