Helping parents accomplish financial and charitable objectives
One in four parents between the ages of 70 and 79 is charitably inclined and one in two care about leaving a financial legacy as part of an estate plan, according to a survey conducted earlier this year by Mathew Greenwald & Associates.
The survey, sponsored by Hartford Financial Services Group, also found that 59% of parents believe it is important to help children improve their lifestyles. But accomplishing both charitable and family objectives simultaneously, especially when clients have other pressing financial needs such as retirement income, can seem practically impossible for all but the ultra-affluent.
It need not be so, especially if parents work with a skilled planner who understands the value of combining a charitable remainder trust (CRT) with variable universal life insurance. A CRT can help a client achieve multiple financial goals such as generating income, avoiding capital gains taxes on highly appreciated assets and making a tax-deductible gift to a favorite charity. Adding VUL to the mix can help a parent replace the value of a donated asset in his or her estate or even enhance the amount passing to heirs.
Variable universal life insurance policies have charges such as premium-based loads, cost of insurance, administrative and issue charges, and surrender charges. These charges are different for each product and some may vary by age, gender, face amount, underwriting class, premiums and policy durations. These charges will have a significant impact on policy account values.
VUL policies also have a mortality and expense risk charge and underlying fund operating expenses that include fund management fees and 12b-1 fees, if applicable. These expenses also have a significant impact upon policy account values.
Together with the additional charges, these expenses are reflected in each product’s prospectus and should be reviewed with your client. Policy account values for VUL policies vary with actual underlying fund performance. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
The best way to understand the dynamics of combining a CRT and a VUL policy is to consider an example. Let’s help the fictitious Martha Pillsbury, a 68-year-old widow with three children and one grandchild.
Martha owns a large tract of Vermont farmland that has been in her family for many years, originally as part of a former dairy. Although Martha generates a small income from haying her now cow-free fields, she could sell her property for $1 million to a developer who has built several new neighborhoods around her.
Martha could use additional income to travel more often, including trips to visit with her children. But selling her property would generate a substantial capital gains tax and reduce the amount she could reinvest for income. That’s a shame because Martha would like to make a meaningful gift to her church and leave a financial legacy for her family.
After consulting with a local financial professional, Martha learns that she can use a special type of CRT–a charitable remainder uni-trust (CRUT)–to accomplish her goals. Finally, Martha’s cows have come home.