Many boomer business owners are going to be looking to plan their exit strategies in the short years ahead. With careful analysis and evaluation, a well-planned strategy can help ensure they leave a legacy for their families and communities.
Survivorship universal life insurance offers the potential to lengthen, or extend, that legacy as well. As the case study below demonstrates, SUL can take a generous plan for charitable giving and transform it into a self-sustaining legacy for the future.
But well before contemplating charitable giving, important considerations must be addressed. A “planning pyramid” can help.
Such a pyramid starts with a solid foundation and builds on it from there. In this case, the foundation first and foremost must consider the financial needs of the client and spouse (Generation I) and the risks they face.
Next build a “buffer” (surplus) around each to help ensure those needs are sufficiently protected. Has inflation been factored in? Expected rate of return? Has the risk of longevity been considered and addressed?
Example: To buffer the risk of longevity, formulaic life expectancy may be to age 87, but you may want to consider assuming client and spouse both live to age 100. What about the bite of income tax (buffer 40% vs. 50%)?
The next level of the planning pyramid comes into play only after sufficient preparation has been done regarding the financial security of client and spouse. Said another way, attempting to address the needs of family members or philanthropic goals without first assuring the needs of Generation I are met is folly.
At the second level of the pyramid, clients should review and consider the needs of the rest of their immediate family, including children or extended family members they wish to ensure are financially cared for in the future, as well as provision for nieces, nephews, grandchildren, elderly parents, or close friends.
This is the time for the boomer to focus on growing estate tax concerns, asset protection strategies, business-succession planning and exit strategies.
The top tier of the planning pyramid comes into play after the plans to protect loved ones are solidly in place. It is time to discuss the impact of planned giving.
Understanding the client’s motivation can help determine the best solution to achieve giving and legacy goals. Is the client driven by a desire to give back to the community? To make a positive difference in the lives of others? Allegiance to an educational or religious institution?
Let’s now take a look at a simple case study. The boomer business owner is a 62-year-old man, with a net worth of approximately $23 million. For the past several years, he has been giving to his very small, rural community church an annual gift of $100,000. This figure amounts to roughly 20% of the church’s annual budget and he was looking for a way to sustain this gift over time.
The man and his wife were concerned that if he were to die prematurely, the church would suffer financially. They originally considered a testamentary gift of $500,000 at the time of his death. His expectation was that this would allow his annual gift to continue past his death for 5 years.
After reviewing his options and his goals, however, he chose a SUL policy with a $3 million death benefit. This offered him the ability to provide a self-sustaining (inflation-protected) endowment for his church, with a one-time payment of $500,000.
To summarize, the estate is out of pocket the same $500,000 as if the gift were made in a testamentary fashion, but in this case the church has an additional $2.5 million.
Additionally, if properly structured, the gift of the $500,000 premium will offset the boomer’s current 1040 taxable income.
Working with the planning pyramid helps ensure that clients’ goals are met at each step of the process, and that the financial foundations are built on wise counsel and solid planning before significant charitable gifting begins.
The strategy, leveraging survivorship life insurance, comes into play to help business owners like the boomer profiled here make the most of charitable gifting and lengthen their legacy. That, in turn, maximizes the benefit to their chosen charities.
Russell (Russ) Jones is executive director of Sagemark Consulting Private Wealth Services / Lincoln Financial Advisors, Denver, Colo. Michael Parker, FSA/MAAA is assistant vice president, insurance solutions at Lincoln Financial Group, Greensboro, N.C. They can be reached at [email protected].