Strategic Charitable Gifts Deliver “Win-Win” Results

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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.

Advisors familiar with second-to-die plans will agree the product is designed to pay the estate tax and other death-related liabilities at the lowest possible outlay. At the same time, the financial tool designed to make the least of estate costs is able to make the most of charitable gift leveraging.

Donor-Advised Funds. Because of its flexibility, life insurance can be used in combination with other financial tools to achieve client objectives. Consider the client whose net worth includes appreciated assets, such as marketable securities, who wants to assist several charitable organizations with insurance gifts. If the client sells securities to raise cash for premium payments, the client incurs a capital gains tax.

As an alternative, the client can create a donor-advised fund and then contribute the stock to the fund. The fund, as a tax-exempt entity, is able to sell the stock without the capital gains tax. The fund can then use cash to pay premiums for insurance on the donors life. The insurance may be owned by each charity selected by the donor, or it may be owned by the donor-advised fund.

Use of life insurance in conjunction with a donor-advised fund is an exciting strategy that may be new to many advisors.

Wealth Replacement. Another attractive planning strategy involves a combination of life insurance and a Charitable Remainder Trust (CRT), also known by its more donor-friendly name: Wealth Accumulation Trust. In addition to a CRT, a life insurance trust is created. While this trust is designed like the typical life insurance trust, when paired with a CRT, it is called a Wealth Replacement Trust.

Because of its multiple benefits to the grantor, the CRT can be an attractive strategy even for clients who are not charitably motivated.

The ideal fact situation for the CRT is a client with low yield, highly appreciated assets, a desire to diversify investments, avoid immediate capital gains tax erosion, and reduce estate tax liabilities.

Assets are placed in the CRT. The trust sells the assets and invests the proceeds in a diversified portfolio. The trust is tax exempt, so no capital gains taxes are paid by the trust. Each year a percentage of the trusts assets, for example 8%, is paid to the grantor. (This percentage is set at the time the trust is created and typically ranges from 5% to 12%.) Because the principal in this trust will pass to charitable beneficiaries at some future point, the transfer of assets to the trust represents a gift to a charity, providing a charitable gift income tax deduction for the grantor.

At the time the CRT is created, the grantor also obtains life insurance, owned by the Wealth Replacement Trust (WRT). When the CRT makes its yearly distribution to the grantor, the grantor gives some portion of it to the WRT to pay the life insurance premium. This portion is often the income on the funds that were not needed to pay capital gains taxes.

At the death of the grantor, the CRT passes to one or more charitable beneficiaries named by the grantor, perhaps even to a private foundation or a donor advised fund created by the grantor. The Wealth Replacement Trust collects life insurance proceeds that benefit the beneficiaries named by the grantor in that trust.

Estate taxes do not apply to assets in either trust. (Of course every strategy described here assumes proper execution of the strategy through the close involvement of competent legal counsel.)

The results of this CRT/WRT strategy may be summarized as follows: reduced estate tax impact, increased asset values pass to heirs, a more diversified investment portfolio, increased income stream to the grantor, decreased income and capital gains tax, and a charitable endowment.

These are but a few of the charitable gift strategies available to advisors and clients. There are numerous others that may also apply to clients, regardless of whether their charitable instincts are strong or weak.

Through solid fact-finding and a clear understanding of the results desired by the client, advisors can frequently implement strategies that deliver win-win results for both the client and the charitable organizations of their choice.

George B. Pickett Jr., J.D.,CLU, AEP, is a managing partner at Pickett, Bradford & Associates, P.A., Jackson, Miss. He is presently second vice president on the Million Dollar Round Table Executive Committee. He can be reached via e-mail at gp@pba-centerpoint.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 7, 2002. Copyright 2002 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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