Eleanor Roosevelt once said, “Since you get more joy out of giving joy to others, you should put a good deal of thought into the happiness that you are able to give.” That certainly resonates with those who incorporate giving back into their lives.
Donating dollars to a favorite organization or charity has dual benefits for consumers: It sparks the joy and happiness that Eleanor Roosevelt identified and can lead to potential tax advantages realized through thoughtful financial planning. Given the economic environment, opening up the checkbook and making a donation may not be an option for some, but many Americans are looking for different ways to maintain a charitable legacy.
The life insurance industry can bring many things to the table when discussing overall portfolio management with clients. As such, the key to finding that joy in life may come in the form of insuring it.
The timeframe for consumers to have the means to support their charitable endeavors as in years past is unclear. That is why it may be appropriate to discuss gifting strategies that make sense today for leaving a legacy tomorrow.
Once needed life insurance protection may diminish over time as individual circumstances change. Rather than cash in a policy, the individual who no longer needs life insurance but has built up a cash value may gift the policy to a charity. By transferring ownership to a charity, the individual can receive a potential income tax deduction based on the amount of the policy’s cash value.
In turn, the charity would be named as the owner and beneficiary of the policy and have immediate access to the policy values and receive the tax-free death benefit. An ownership transfer can be the answer for an individual seeking an opportunity to leave a lasting legacy.
Designate Charitable Beneficiary
Typically family members are named as beneficiaries when a client buys a life insurance policy. However, the beneficiary can be any individual or organization or a combination of both. This gifting strategy places the charity of choice in the beneficiary line of the policy. After the death of the policyholder the charity would receive the tax-free death benefit and the policyholder’s estate would receive a 100% charitable estate tax deduction.
Assume, for example, an individual has estate assets of $5 million and a $1 million life insurance policy with a favorite charity named as the beneficiary. Together, the gross estate assets are $6 million. Since the life policy is going to charity, the $1 million policy is deducted from the gross estate assets, leaving a lower asset amount to be taxed and allowing more assets to be passed on to all the beneficiaries.
By designating a charity as a beneficiary, policy owners can contribute to a worthwhile cause while making the most of their assets. Compared to policy ownership transfer, this technique allows the individual to keep control of the insurance until death (thus affording the ability to change the beneficiary back to the family should circumstances change). For that flexibility, the individual gives up the lifetime charitable income tax deduction.
Charitable Giving Riders
While not new to the industry, charitable giving riders are not widely offered by life insurance carriers. Typically these riders are at no-cost to the policyholder and offer the ability to donate 1% of the policy’s face amount to a designated charity. The policyholder’s beneficiaries will receive the entire payout of the policy while the life insurance company will make the 1% donation to the charity.
This rider can help consumers in managing familial support and charitable aspirations. Assume, for instance, an individual with an estate of $5 million that is only partially income-producing, estate settlement costs of $1 million, $1 million in life insurance for survivor income needs and $2 million in life insurance in an irrevocable trust to shield against estate taxes.
The issue: the individual can’t afford to purchase more life insurance to leave to a charity; the priority is to ensure that all assets, including some unique assets, stay in the family for financial support. A charitable giving rider lets this individual the give $20,000 to a charity without additional cost or sacrificing family wealth.
Through the gifting of life insurance, consumers can potentially increase the size of the gift to their favorite charities. There are options for continuing a charitable legacy in a time when adverse markets have inhibited outright monetary giving abilities for many Americans.
It is important we advisors bring these options to the table as we provide solutions for consumers’ financial needs and address their goals and interests. The recent markets have brought anything but joy to many, but as often is the case, opportunities arise from obstacles that obstruct our normal course.
By helping consumers in “…putting a good deal of thought in the happiness that ‘they’ are able to give,” we will further enhance the relationship between client, advisor and life insurer.
Ken Nordstrom, CLU, ChFC, AEP is vice president of advanced markets for SunLife Financial, Wellesley Hills, Mass. You may e-mail him at Kenneth.Nordstrom@sunlife.com.