Strategic Charitable Gifts Deliver “Win-Win” Results
A recent study indicated that if the total of all the U.S. charitable organizations were viewed as a separate country, it would be the eighth largest economy in the world.
Reflective of that huge economic presence, insurance and financial advisors are including strategic charitable giving elements in our work with clients now more than ever.
In every initial fact-finding meeting with clients, it is vital to develop information on clients charitable giving history and goals. In the process, we encounter attitudes toward philanthropy ranging from enthusiasm to revulsion.
Some clients have experienced the joy of giving. They have developed a charitable urge–a desire to give even more. Sometimes, these clients will make significant gifts, which have a big impact on the charity.
On the other end of the spectrum are clients who seek ways to keep all of their assets. During the planning process, such clients discover that their assets will be divided among only three recipients: heirs, governments, and charities. When clients fully realize that the estate tax is a voluntary tax, they frequently conclude that a charitable strategy is the preferable alternative.
Knowledgeable clients prefer to pick charities where they have some understanding and knowledge about how the funds will be used, rather than having no input in how the government uses their assets.
Ironically, these two opposite client attitudes present the potential for use of similar charitable strategies. In each case, the result will achieve the clients objectives and also move assets to charitable institutions. Happily, after implementing these strategies, the reluctant giver frequently learns to experience the joy of giving, plus the recognition that may accompany it.
Leverage. Life insurance is an ideal financial tool for charitable planning for several reasons. It is flexible as to design and funding options. It provides leverage, turning a series of small annual payments into a much larger capital sum. Through this leverage, a donor who gives from annual income is able to make a capital gift. An annual giver becomes an endowment giver. Life insurance creates synthetic capital.
Liquidity. One client recently decided to make a major gift to a college, but the clients principal assets were non-liquid interests in family businesses. As he succinctly put it: “Im asset rich, but Im cash poor.” Advisors will agree this is a common circumstance for high net worth clients. Through the use of life insurance, the client was able to make a seven-figure gift to the college. The client used some of his annual income from his businesses to make tax-deductible premium gifts over several years.
Another client made a pledge for a six-figure gift involving a combination of appreciated stock and premium payments on a life insurance policy owned by the charity on her life.
Publicity. For the philanthropic client, the leverage of life insurance presents an ideal opportunity to set an example for other potential donors.
For example, during a capital campaign, the campaign chairman planned to make a $5 million gift, payable at $1 million per year over five years. Life insurance made it possible for him to make a $10 million gift by just adding an additional $1 million pledge in the sixth year. The school obtained $5 million of life insurance on the chairman and used $167,000 per year from his six annual gifts to pay the policy premiums.
Second-To-Die Plans. While life insurance on an individual provides substantial leverage, insuring two persons with second-to-die coverage provides even greater leverage. In the case above, instead of $5 million of single life coverage, the same premium cost would have delivered $10 million of second-to-die coverage on the chairman and his wife.
Second-to-die coverage is also an ideal gift option when the potential charitable donor has a medical impairment that may create difficulty when obtaining single life coverage. It also enables the charity to develop a stronger relationship with the spouse, a potential future donor.