Helping Clients Leave Positive Tracks

There is an old Native American proverb that states, “We will be known forever by the tracks we leave.” You may be surprised by how many of your clients are searching for ways to “leave positive tracks,” in other words, leave a lasting legacy that benefits society long after they have passed away.

Unfortunately, according to a recent Philanthropic Initiative report, an overwhelming number of donors stated that they, and not their advisors, typically raise the subject of charitable giving.

Initiating the “tracks” conversation is an outstanding sales opportunity, but more importantly, it is a way to strengthen client relationships and potentially build new, cross-generational relationships. Though discussing the legacy your clients want to leave can be a difficult conversation to start, it will likely prove beneficial to all involved. Asking your clients about how they want to be remembered will allow you to discover more about their families and their values. This will provide you the opportunity to discuss thoughtfully the alternatives available to them to control the distribution of their financial legacy.

It would be incorrect to assume that charitable giving is very closely correlated with the direction of the U.S. economy. We might have expected a decrease in charitable giving due to the recent economic recession and severe stock market losses since 2000. On the contrary, total charitable giving reached a record high of $241 billion in 2002, proof of our nations philanthropic spirit. And 76% of all contributions come from individuals.

Why Charitable Giving is Important to Advisors. In addition to the societal benefits of philanthropy, planned charitable giving is big business. Researchers at the Social Welfare Research Institute at Boston College believe that “the wealth we are seeing today is only the beginning and has the potential to lead to a golden age of philanthropy.”

Over the next few decades, an estimated $10 trillion to $40 trillion will transfer from the Depression-era generation to baby boomers. Historically, boomers parents have been very charitably inclined. And since women generally outlive men and also tend to give more to charity, philanthropic institutions should benefit from their larger donations.

Many of your clients may consider themselves people of modest means. The desire to make charitable gifts is there, but they feel that their limited resources will not permit it. There are methods of giving that can enable them to donate more, without depleting the funds they need for themselves and their heirs. And, while many people are inclined to donate to charity, they need to be made aware of the alternatives available.

Financial advisors are uniquely suited for introducing the topic of charitable giving to prospective donorstheir clients. Advisors should first review the core objectives of each client before attempting to determine the scope of potential charitable giving. Only after you have assessed their current financial requirements, retirement planning issues, survivorship goals, unique needs and the amounts to be left to heirs, should the discussion turn to philanthropy.

The most common form of a charitable contribution is the “current gift,” where money or property is transferred irrevocably to a charity. In recent years, however, “deferred giving” has become increasingly popular. For many, deferred gifts offer the most benefits: a current income tax deduction, a retained income stream (or a future interest in the asset for the donor or his beneficiaries), a charitable contribution to a favorite organization and a reduction in the donors taxable estate.

While there are various ways to facilitate deferred giving, including using a charitable gift annuity, a charitable lead trust, a community foundation, a private foundation, or a pooled income fund, the most popular methods involve products manufactured by life insurers. These products include life insurance policies, charitable remainder trusts and charitable annuity trusts.

Life Insurance: Can You Leave a Greater Legacy? Life insurance contracts offer a simple way to give a large gift to a charity. Your client can simply purchase a policy and name the charity as the beneficiary. Premiums are paid out of current income and do not deplete assets intended for heirs. If the client should need to access the policys cash value it will still be available, but keep in mind that doing so may reduce the amount left to the charity. Clients also can name the charity as the beneficiary of a policy they currently own, but no longer need, and still maintain control over its cash value. While this method offers no current income tax deduction, the policys death benefit will not be considered a taxable part of the donors estate.

A life insurance policy also may be gifted to a charity (or the charity may purchase the policy, if state law permits), with future premium payments gifted directly to the charity. By paying premiums directly to the charity, the donor is eligible for an income tax deduction of up to 50% of his or her adjusted gross income (AGI). If payments are made directly to the insurance company, the deduction generally is limited to 30% of AGI. This method allows for an immediate charitable income tax deduction as well as a reduction in the size of the donors taxable estate.

In either case, the end result is the ability to leverage small premium payments into a much larger giftthe proceeds of a life insurance policy.

Charitable Remainder Unitrusts and Annuity Trusts. Charitable remainder unitrusts and annuity trusts can provide your client with a lifetime of income, a current income tax deduction and a charitable legacy. In contrast to qualified pension plans, there is no limit on the amount that can be contributed to the trust.

Charitable remainder annuity trusts (CRATs) annually pay out a fixed percentage (not less than 5%) or fixed sum of the initial net fair market value of the assets. The fixed amount that is paid out cannot be changed regardless of fluctuations in underlying asset values. Additional contributions to CRATs are prohibited.

On the other hand, charitable remainder unitrusts (CRUTs), which currently comprise over 90% of all charitable remainder trusts, are far more flexible. They pay out a fixed percentage (not less than 5%) of the net fair market value of their assets each year. The distributions are valued annually, which may result in an increase or decrease in the amount paid out. Because of this revaluation, CRUTs also allow for ongoing contributions. In addition to providing a charitable gift, CRUTs offer a wide array of benefits, including the ability to increase cash flow, avoid capital gain taxes, reduce income and estate taxes, and diversify a concentrated stock position.

With both types of trusts, the initial gift (if other than cash) is frequently sold. If it is an asset subject to capital gains tax, the trust will not recognize a gain due to its status as a not-for-profit organization. An ideal way to fund either of these trusts is with an annuity. The annuity can guarantee income for the life for the donor and designated income beneficiary through annual cash withdrawals, with the remainder going to the charity. Utilizing the annuitys guaranteed death benefit can ensure that a specific dollar amount is left to the charity.

Since the beneficiaries will be ostensibly disinherited from the assets gifted to the CRT, the donors could create a Wealth Replacement Trust funded with life insurance equaling the value of the assets gifted to the CRT. At the donor(s) death, the life insurance death benefit is paid to the trust income and estate tax free and is then distributed by the trust to the estate in the form of loans or proceeds for purchasing estate assets.

The following example highlights the added benefits a CRUT offers. A physician wants to contribute an additional $100,000 annually toward his retirement. Given the limit on the amount he can contribute to a qualified plan, the doctor can contribute the $100,000 to a CRUT as an alternative. His family may derive income from that contribution until his death, at which time the balance passes on to the charity. If he wants to enhance his estate, a Wealth Replacement Trust would be established funded with life insurance gifted by the spouse and himself.

The benefits achieved by using this strategy include:

1. Lower current income taxes;

2. Additional income at retirement or for survivors;

3. A smaller estate subject to taxation;

4. A fully funded CRUT should the owner die prematurely; and,

5. A legacy for the chosen charitable organization(s).

A large portion of the U.S. population has accumulated a level of wealth that requires them to consider seriously the need to establish an estate plan. But because prior generations never found themselves in such a position, your clients may neglect to broach the subject. Your role as their financial advisor is to not only raise the subject of estate planning and charitable giving, but also provide them with the information necessary to make decisions that address their needs and wishes.

There are many alternatives in the charitable giving marketplace. The options range from the simplicity of an individual life insurance policy to the complexity of a charitable remainder unitrust. So once you feel comfortable with the subject matter, calls to clients who are likely contemplating charitable giving need to be scheduled. Neither you nor your clients will ever regret having raised the “tracks” conversation.

Peter A. Radloff is vice-presidentadvanced markets for Jackson National Life, Denver, Colo. He can be reached at peter.radloff@jnli.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 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.