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Editor’s Note: This Blog begins a series of three involving gifts to charity that are so efficient as to make them almost irresistible. We hope the information will be useful to you in your practice as you interact with clients who are charitably motivated. |
You all have clients who are charitably motivated to one degree or another. ?Some of them are not yet willing to consider one of the big three capital gifts:
- Charitable Gift Annuity
- Charitable Remainder Trust
- Charitable Lead Trust
I’ll deal with these three occasionally in later Blogs, but for now, let’s look at a simple way to set up a deferred capital contribution using a life insurance policy.
Art and Janie Bennett (not their real names) are ages 45 and 40. They are mid-five figure annual donors to a major U.S. Zoo and are interested in creating an endowment for the Zoo upon their death that will perpetuate their gift. They are considering acquiring a $1,000,000 life insurance policy assuming the Zoo can earn 5% ($50,000) annually on the policy death benefit.
They have considered insuring Art or Janie or, perhaps, both of them using a second-to-die survivor policy; however, since Janie is the incoming President of the Zoo’s governing board, they have decided to insure Janie for the $1,000,000 at a premium of $20,000 paid for five years. The Zoo, a 501(c)(3) organization, will be named owner and beneficiary, and the premium will be deductible by the Bennetts as a charitable contribution.
What is the best way to illustrate this plan? ?I like the discounted dollars approach that is present throughout the InsMark Illustration System, and we have one for charitable giving called "Dollars to Charity for Pennies of Cost" on the Personal Insurance tab in that System. ?I’ll use that illustration module in the following analysis.
Janie and Art are (obviously) wealthy, and they are in a marginal federal and state income tax bracket of 50%. The income tax deduction reduces the annual cost of the gift of the policy’s $20,000 premiums to $10,000 a year for five years. ?Below is a graphic showing the year-by-year cumulative cost to Janie and Art for each $1.00 of potential death benefit to the Zoo. ?It never exceeds 5 cents.
Note: ?Although the policy is issued with a level $1,000,000 death benefit, the cash values that develop force the face amount to increase beginning in year 46. This causes the cost per $1.00 of death benefit to decrease thereafter (to the low of 1.8 cents at the end of the analysis).
Below is a more comprehensive graphic:
Click here to view the full illustration on Janie Bennett.
Wealthy Clients Only?
Is this a plan for wealthy clients only? ?Not at all -- in a 25% tax bracket, the costs for Janie’s policy never exceed 7.5 cents for each $1.00 of death benefit for the Zoo. ?You likely wouldn’t utilize as large a policy for someone in a 25% bracket, but the discounted dollars valuation would work out similarly for someone the same age as Janie -- and it is favorable at any age, even very advanced ones.
Type of Policy
Dollars to Charity for Pennies of Cost works with any permanent policy form: whole life, universal life, indexed universal life, and variable universal life.
Conclusion
The planned giving representatives from charitable organizations typically welcome gifts of life insurance, and the discounted dollars approach to evaluating such gifts is an effective way to analyze them. ?Be aware, however, that those in charge of current gifts would rather have the gifts associated with these plans donated in cash instead.
Note: Due to mid-stream lapses, lifelong premiums for a charitable benefit are not a particularly favorable design feature for donors or recipients. This is why I illustrated a 5-pay premium structure for the Bennetts. In some cases, a single premium would be appropriate to consider even if the policy is classified as a modified endowment contract (“MEC”) as status as a MEC is irrelevant for a policy owned by a tax exempt organization like the Zoo.
Licensing
To license the InsMark Illustration System, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275). ?Institutional inquiries should be directed to David Grant, Senior Vice?President ? Sales, at dag@insmark.com or 925-543-0513.
InsMark’s Digital Workbook Files
If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.
Digital Workbook Files For This Blog
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Note: All of the illustrations and graphics associated with this Blog assume the non-guaranteed policy values shown continue in all years. ?This is not likely, and actual values may be more or less favorable.
Note: This information in this Blog is for educational purposes only. ?In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.