Leverage Your Clients' Giving Through Annuities and Life Insurance

To gain even more leverage from the situation above, Dixie could purchase a $425,000 life insurance policy on her own life and then assign ownership to the charitable foundation. The foundation can use the annual gifts it receives from Dixie as the premium payment for the life insurance contract.

When all is finished, Dixie will be able to make a sizeable gift to her favorite charity, preserve an inheritance for her children, and eliminate the tax liability on the annuity by itemizing the charitable gifts on her tax return.

Important notes on this strategy

In this example, we annuitized the annuity over a 10-year period certain. At Dixie's current age, this provides a substantial annual payout necessary to fund the life insurance. If death were to occur during the first 10 years, the remaining payouts could be left to her heirs in addition to the life insurance proceeds.

Depending on the client's age, estate value and risk tolerance, other annuitization schedules, including a life-only annuitization schedule, may be appropriate. Keep in mind that annuity contracts annuitized in the early years may be subject to surrender charges and/or other fees. They may also be subject to a 10% premature distribution penalty tax if annuitizing prior to age 59 1/2 .

In our example we used a universal life insurance contract illustrated to endow at age 100 based on current interest rates and the cost of insurance. It is important to note that the contract is not considered paid-up after 10 years; and the death benefit is not guaranteed to age 100.

The use of a secondary guaranteed UL contract may provide a larger initial death benefit and longer guarantees with less cash value growth potential. We also assumed a standard non-tobacco classification for this contract. In some cases, a substandard rating could make the premiums much higher and the strategy inappropriate. You should determine the client's qualification for life insurance before implementing this strategy.

Had Dixie been married, the use of a second-to-die contract may have provided even greater leverage to both the children and charity, with death benefits paid at the second death.

In situations involving larger taxable estates, third party ownership of the life insurance contract outside of the insured's estate may be appropriate. As always, it is important to involve the client's tax advisor and accountant before implementing this strategy. In addition, whenever possible, include the client's children in the discussion.

As we work with clients and prospects, let's not forget to uncover charitable "wishes." You may be surprised how many individuals would like to do more and are just looking to you for answers.