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Broach Charitable Planning With Clients To Broaden Your Practice

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Washington, D.C.

Although charitable giving fits into the planning objectives of many high-net-worth clients, a lot of planners fail to broach the subject, said Christopher M. Duffy, an attorney with Capital Analysts of New England, Quincy, Mass.

Speaking in a workshop at this years Association for Advanced Life Underwriting meeting, Duffy said, “If you have business planning or other high-net-worth clients, they are potential charitable giving clients. You can leverage your relationship to broaden your practice.”

When discussing charitable giving opportunities with these clients, its important to first address their philanthropic goals. In many instances, these people are already making gifts to charity. Its the planners job to bring up some creative ideas to ensure their clients are “getting the biggest bang for their buck,” he said.

Charitable planning can be used to address a number of different obstacles clients face when developing a financial plan. Income and capital gain taxes can be reduced through creative gifting strategies. Cash gifts to a public charity are fully deductible up to 50% of the clients contribution base, Duffy explained.

Short-term capital gain property and ordinary income property are also deductible, at the fair market value or cash basis up to 50% of the contribution base. “Life insurance is in this category,” he said.

Furthermore, gift and estate taxes also can be completely avoided”everything you give away is completely free of gift and estate tax,” Duffy noted.

But charitable planning must be done carefully, especially when working with life insurance. Duffy warned of some technical wording that may cause problems if not addressed properly. “If you pay premiums to a life insurance company for a policy that is owned by a charity, it may be looked at as a gift for the use of the charity, rather than a gift to charity,” he said. These for the use of gifts limit a clients deduction to 30% of the contribution base.

A better way to structure this type of arrangement, he continued, is to make outright cash gifts to the charity, so the charity can then pay the premium to the insurance company directly.

Aside from the tax benefits, there are several advantages to using life insurance in charitable planning, he said. The life insurance contract provides the charity with a lump sum of cash in the form of a death benefit, he said, and it gives the donor the opportunity to leverage donations to maximize the ultimate charitable gift. And in the event the charity needs immediate access to funds it can access policy cash values.

Some of the gifting strategies Duffy discussed involve making outright gifts of cash or property and split interest gifts.

Making an outright gift of life insurance to a charity can be done a different ways. The first is to simply name the charity as the beneficiary of an existing policy. But, in order to get the benefit of an income tax deduction, the client must assign all incidents of policy ownership to the charity, due to the partial interest rule, he said.

To avoid violating this rule, clients must not retain the right to: change beneficiaries; surrender or cancel the policy; assign or revoke the assignment of the policy; pledge the policy for a loan; have any access to the cash values; and hold any reversionary interests.

Another option donors have is to gift a new policy to a charity. In this instance, the deduction will be equal to the premiums paid. “If you decide to buy a policy and gift it to charity you would have to make sure that the charity has an insurable interest in the donors life,” Duffy explained.

The insurable interest rule varies by state law and failure to establish an insurable interest will result in disallowance of both the income and the gift tax deductions.

Furthermore, the policy proceeds may be included in the insureds estate due to the “three-year rule” on gifts, he said.

Gifting an existing policy may also be an option for donors. In this case, the amount of the deduction is determined by the policys value. For policies that still have premiums due, the value is determined by the lesser of the interpolated terminal reserve (cash value) and the donors adjusted cost basis.

Making split interest gifts to charity involves “taking an asset and splitting it into two legal assets,” he said. One of the most popular tools used to accomplish this is the charitable remainder trust.

“If I make a donation of real estate to a CRT, the CRT can sell that asset and what I receive is the income from that asset,” he explained.

This type of arrangement works well when donors have property that is not generating any income and has greatly appreciated in value, he said.

For example, if a donor gifts real estate worth $1 million dollars to a CRT–which is then sold for cash and invested in a portfolio of securities–a portion of the trusts value will be distributed to the donor for the rest of his or her life.

This scenario provides “greater income because low-income producing, but highly appreciated assets can be sold and reinvested to provide more income,” he continued. Estate and income taxes are reduced since the donor is entitled to a deduction for the amount left to charity, and the donor is able to diversify the asset without paying capital gains tax. “The trust sells the real estate, theres no capital gains. The income that goes to the donor will be taxable, but the capital gain is not recognized at the time of sale.”

Reproduced from National Underwriter Edition, May 12, 2003. Copyright 2003 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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