In some circles, the move to eliminate estate taxes has created anxiety because of its potentially negative impact on organizations that rely on death-time charitable giving. But given the current acrimony in Washington due to the war in Iraq and a growing budget deficit, the opportunity to repeal or reform estate taxes may be fading fast.
Small charitable organizations that depend on donors who give as part of their estate plans must also now face the reality that recent natural disasters may have changed the economic landscape. Because disaster relief organizations like the Red Cross have received much-needed national attention, donations to smaller charities that focus on other issues have likely been reduced, possibly impacting their endeavors for years to come.
Before we explore solutions to this problem, let’s take a look at the state of giving today and the underlying motivations people have for doing so.
Despite a somewhat sluggish economy, a rising deficit and effects on our culture from the threat of terrorism, charitable giving reached another high-water mark, $250 billion in 2004, according to the Giving USA Foundation. The majority of these donations come from individual donors and this is expected to continue as baby boomers become beneficiaries of the vast multitrillion-dollar transfer of wealth over the next several decades.
Emerging from this reality are new ideals and expectations on the meaning of giving. Today’s new donors are younger and wealthier than previous generations, are more proactive and want to be engaged in the causes they support.
Alongside the more traditional donors, those who have largely inherited wealth, the outlook for giving remains strong, especially to people and organizations they feel close to or to causes they deem worthy of their time and money. Their goal is simple: to make a difference in the world.
How can financial services professionals leverage this trend to build a substantial practice in charitable giving? Though studies show people have a strong desire to give, they often do not know how to take the next step. By engaging clients in a discussion of their values, and exploring their motivations and feelings about giving, you can begin an enlightening journey of possibilities to help your clients make a difference to those organizations that may never benefit from the national spotlight.
Consider the following scenarios and strategies where the relatively small dollars spent on life insurance can be used to make a big difference.
Scenario 1: Ultra-Wealthy Donor
Private bankers, independent brokers and investment advisors largely target ultra-high-net-worth clients: the top 1-2% of the population with $25 million or more in investable assets. Though competition is fierce to provide tax, estate and investment planning services to this limited market, these individuals have “issues, challenges and wants” in conserving their wealth for future generations. The ultra-wealthy require a values-based approach to understanding these unique needs. They want solutions, not products.
Let’s consider Mr. Johnson, a highly accomplished 70-year-old entrepreneur with assets exceeding $28 million. Lacking the foresight to form a general partnership with his wife and children to hold all of his assets, Johnson can no longer do such death-time planning. However, he can expunge his estate of “hot assets,” such as 401(k) and IRA accounts, replacing those assets with life insurance.
For example, assume he owns $2 million in qualified plan assets. Upon Johnson’s death, the bulk of these assets will be lost due to federal and state taxes. If such monies are donated to a charity before death, the tax benefits from the gift (or annual gifting thereafter) can be used to fund a $2 million life insurance policy inside an irrevocable life insurance trust. The result: an asset that would have lost over half of its value from taxes is preserved for heirs.
Scenario 2: Affluent to Wealthy Donor
Individuals with a net worth of from $5 to $10-plus million have many of the same issues as their wealthier brethren. But the former are afraid of giving too much to charity for fear they will not have enough for their own needs and for their heirs. You should therefore discuss with this group estate planning and charitable giving techniques that allow donors to maintain control of assets during life.
For example, consider Mrs. Wilson, a 75-year-old widow whose assets are comprised largely of real estate, antiques and a $7 million stock and bond portfolio accumulated through years of investing. Although she lives well within her means, Wilson has five children and 14 grandchildren; she has two favorite local charities to which she wishes to donate $1 million each.
Not wanting to diminish the assets left to her family, Wilson places $2 million of her investable assets in a charitable remainder trust (CRT). She uses the dividend income to purchase a $2 million insurance policy inside an irrevocable life insurance trust (ILIT) to replace the assets for her family.
Scenario 3: Mass Affluent Donor
For most people in the U.S., charitable giving is defined by “checkbook” philanthropy. They donate to institutions such as disease research organizations, places of worship or other local charitable entities. It is these small, lesser known organizations that may be most harshly impacted by reform or permanent repeal of the estate tax.
The recent tsunami and Hurricanes Katrina and Wilma have stretched many of these people too thin to give more. As a result, local charities that depend on these donors have fallen behind nationally known organizations that garner the lion’s share of donations when such disasters occur.
As the national spotlight focuses on the unfortunate victims of these natural disasters, make it a point to ask your clients about charities they care about. You just may open the door to a personal story. After all, isn’t that what your business should be about–the personal stories of your clients?
Charities will continue to depend on people who care enough to give. One vehicle that can supplement an individual’s cash donations is life insurance. Whether your clients own policies they no longer need or wish to purchase a new policy for the benefit of an organization or cause they care deeply about, a life insurance policy death benefit can be a powerful, lasting legacy for your client.
From a sales perspective, it is up to financial services professionals to ensure that charitable giving becomes a regular component of your practice. From the ultra-high-net-worth clients to those of more modest means, life insurance can play a powerful role in fulfilling the needs of many charitable organizations, regardless of size.
Len Scholl is assistant vice president of individual and small business markets at Sun Life Financial, Wellesley Hills, Mass. He can be reached at email@example.com.
‘By engaging clients in a discussion of their values…you can begin an enlightening journey of possibilities to help your clients make a difference to those organizations that may never benefit from the national spotlight’