Split Your Clients Charitable Gifts: Give Today, Provide For Tomorrow

Many clients pride themselves on their charitable interests. In working with clients on their charitable goals, the tools available can range from simple annual donations to complex planning involving trusts or foundations. Much has been written on some of these complex planning devices; however, for many clients a simpler planning technique is preferred. This article focuses on one example at the easy-to-implement end of the spectrum.

Keep in mind, clients who restrict their charitable donations simply to annual gifts, by cash or check, might fail to help a charity as fully as might be possible. In many cases life insurance, and its death benefit, can be used to parlay an annual charitable gift into a much larger benefit to a charity. This can be done by directing the annual gift toward the premium of a life insurance contract, with the charity as the named beneficiary. This may enable a client to boost his or her overall gifts to a charity.

Additionally, a large death benefit can aid the charity long after the insureds death. While other techniques, such as trusts and foundations, can achieve the same result, a personally owned life insurance policy, or contributing toward the premiums on a policy owned by the charity, can meet a charitys long-term objectives.

Charities face a dilemma, however, when contemplating life insurance as a gift. Many charities need annual revenue to maintain their operations and charitable works. Many planned giving officers are judged annually by the amount of donations made to a charity in a given year. Moving all of a clients annual gifts into life insurance may fail to meet a charitys short-term needs and might not be acceptable to the executives working for a charity.

Splitting Your Clients Gift to Charity. What if your client could achieve both objectivesthe ability to provide current funds to a charity and, at the same time, use life insurance to satisfy long-term objectives?

One way is to split the gift to the charity. Instead of gifting 100% cash to a charity each year, the split gift would consist of some cash for the charitys current needs with a portion of the donation used to pay the premiums on a life insurance policy. Typically the policy would be on the life of the donor, naming the charity as beneficiary.

The chart that accompanies this article shows such a split. In the chart, a 60:40 split is utilized, but any percentage can be used depending on the clients and the charitys needs.

For example, a charity with high current cash needs might be willing to enter into such a plan but would ask that a client direct a smaller portion of the gifts to premiums, such as a 70:30 split.

An Example. Consider the first result in the chart. A 73-year-old client, in a 30% tax bracket makes a cash donation to a charity. The charity receives a $100,000 cash donation. That amount can be added to its annual income and used for either operational or charitable purposes. For this donation, your client receives a $30,000 deduction on his or her tax return and can carry over unused amounts against future taxes for up to 5 years. Overall, it is not a bad result.

However, assume that your client has a goal to help the charity even beyond his or her lifetime. Rather than gift all $100,000 in cash, your client splits the gift 60:40. One portion, $60,000, continues to be gifted to the charity each year in cash for general purposes. But at the clients request, the charity purchased a $1,750,000 policy on the life of the donor. Assume the annual premium for a life insurance policy costs $40,000 a year.

A portion of what had been a $100,000 annual gift, $40,000 or 40%, is now received by the charity and directed to a life insurance policy naming the charity as the beneficiary.

The result with the 60:40 split: By making a $100,000 annual gift to the charity, the client continues to receive an annual tax benefit of $30,000.

The charity continues to receive $60,000 each year for its annual objectives and at the clients death, $1,750,000. At the clients death, the charity effectively receives a benefit that amounts to roughly 17 years of future gifts from the donorwithout even taking into consideration possible investment growth or other investment options. And, the charity receives this amount all at one time, which can help it on specific initiatives.

This also works financially for both the charity and the client. Assuming the client lived to age 90 (another 17 years) and continued to make $100,000 annual donations (without the purchase of a life insurance policy), the net present value to the charity at a 6% discount rate is $1,047,725. By splitting the gift 60:40 between cash and the premiums on a $1,750,000 life insurance policy, the net present value to the charity is a higher $1,256,250. In both instances, the client receives the same tax benefits.

For younger, healthier clients who might be able to purchase larger death benefits for the same dollars as an older client, or those where it is possible to use a second-to-die life insurance contract, another possibility is using an even smaller percentage of gifts toward life insurance yet providing the charity with a potentially larger benefit.

Practical Considerations. A key consideration is whether or not the charity is a willing participant in a plan where donations are split between cash and a life insurance policy. As noted earlier, as meaningful as the death benefit may be, a charitys immediate cash needs (and the needs of its fundraising officers) may tip the balance of gifts more closely to cash.

Still, where a client is a major donor, a charity would be ill-advised to ignore the potentially large death benefit knowing that all cash donations will end at, or soon after, a major donors deathdistributions from a will, trust or foundation notwithstanding.

Additionally, a charitys officers must consider the design and stability of a life insurance policy that they own or purchase on a client. If a policy is not properly designed, the death benefit will decrease or fail years before a clients death. In those cases where a life insurance contract is not properly designed a charity would have been better off taking the amounts earmarked for premiums and using them for other purposes. In other cases a policy that is subsisting on internal loans may find itself failing, thereby requiring a charity to replenish the policy values, or lose the death benefit it had hoped to receive.

Although there are many planning approaches for benefiting a charityfrom trusts through foundationsthis approach offers a simple straightforward method by which clients can make a meaningful long-term gift to a charity and obtain a current deduction.

Mark A. Teitelbaum, JD, LLM, CLU, ChFC, is second vice president of advanced sales for Travelers Life & Annuity, Hartford, Conn. He may be contacted at mark.a.teitelbaum@citigroup.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.