Charitable Planning: 4 Case Studies

Outcome: The client, a middle-aged woman in good health, made a substantial gift to a public charity designated as a 501(c)(3) institution. She received an immediate income tax deduction and years of future carry-forward deductions for her gift, and removed the value of the gift from her taxable estate. Then, working with the client’s attorney and accountant, the planner wrote a multimillion-dollar traditional universal life policy on the client. She donates the premiums, gift tax-free, to an irrevocable insurance trust created specifically for this purpose. The trust agreement provides for the future support of her partner and daughter in the manner and style she wants, using the policy proceeds instead of the assets given to the charity.

3. Administration of a charitable foundation
Situation: Provide competitive cost-efficient benefits for the employees of a newly established foundation.

Suggestion: Research, evaluate, propose, and implement group health, life, disability, and other insurance benefits — including 401(k) retirement plan — for the chief investment officer, VP-legal counsel, etc., of a new charitable foundation.

Outcome: The will of one of America’s leading liquor magnates provided for the establishment of a charitable foundation in his name for educational, cultural, and environmental purposes. As the will was settled, more than $400 million was donated to the foundation. The trustees hired young executives to manage the money and the foundation. Working with the trustees, the employees, and their accountants and consultants, the planner helped to establish a platform of employee benefits designed to reward and retain these eminently marketable (and poachable) professionals. The planner is currently working on a selective executive retirement plan (SERP) using variable universal life insurance to further strengthen the bonds between the foundation and their key employees.

4. Endowment and planned giving
Charitable foundations are used to create philanthropic legacies — and one way to leverage assets in a foundation is through the use of life insurance. The foundation may own life insurance, not only on a public donor, but also on members of the foundation’s board of trustees. To avoid tax problems, the foundation holds all incidents of life insurance policy ownership and is in complete control of the policy both economically and legally. Depending on the client’s age, health, and date of death, the ultimate benefits can be a significant multiple of the cumulative premiums paid. There is no easier way to leave a generous benefit to charity without substantially reducing what passes to heirs.

Situation: Many charitable organizations want to boost their endowments to build and guarantee a solid financial foundation for the future.

Suggestion: Establish permanent life insurance policies owned by the charities on the lives of their biggest supporters, funded by their friends.

Outcome: Squeezed between escalating operating costs and changing tax law, all charities are constantly struggling to build for the future while funding their current operations. This creates an inherent conflict between raising money for the future and paying their current bills. A planned giving and endowment program can encourage the largest and wealthiest donors to honor each other by gifting premiums for life insurance. The charity takes out policies on various members of the board of trustees as the owner and beneficiary of the policies. The policies are paid for by income tax-deductible gifts from the different trustees on the policies of their fellow trustees. The trustees receive substantial tax benefits from the gifts, the charities get the security of knowing that they will receive substantial tax-free proceeds in the future, and the trustees get the satisfaction of honoring each other while doing good works.

For more ideas on how you can leverage charitable giving in your practice, check out the upcoming charitable giving feature in the February print edition of the Agent’s Sales Journal.

Charles Cohn offers securities though AXA Advisors LLC. He can be reached at 212-408-9592.