Published September 28, 2012
Not a Rockefeller, Gates, or Buffet yet want to leave a legacy for your alma mater, church, or favorite charity? NO PROBLEM! Before you write off the idea that you don’t have anything extra to give to your favorite charity, do your research and explore all your options. Learn how giving a little can mean a lot by changing a gift or bequest into a lasting legacy.
Today, charities are feeling the money crunch just like the rest of us. The market and the economy have affected nonprofit endowment funds just like your 401(k) plans. Their budgets and programs are being cut, and their donor base has had to rein back charitable contributions because of their own financial hardships. Even government funding has been downsized for charities.
In a perfect world, wouldn’t we all like to leave a little something to each and every person, organization, alma mater, church or cause that has touched our lives in a positive way? In the real world, funds are limited, and you have to pick your favorite charities to share your hard-earned money with. As life goes on, you begin thinking of the estate you have worked your entire life to create and who will be the beneficiaries. Many times family is at the top of the list. Nevertheless there are ways for you to leave your estate to your family but also benefit your favorite charitable organization—get this—using the same money! This is called, “giving it away, and keeping it.”
You may have heard the terms Charitable Remainder Trust, Charitable Gift Annuity, Charitable Lead Trust, Private Foundations, Life Insurance, or Wealth Replacement Trust over the years. But what are they and which one is right for you? Which technique accomplishes your wishes in the best, most tax efficient manner? Which one allows you to “give it away and keep it” (what an interesting concept!)? To detail each of these strategies would take much more space than we can cover in this article, so we just want to touch briefly on our favorite technique.
Learn how a librarian has funded an endowment for scholarships at her alma mater worth $250,000 in perpetuity by donating $200 per month for ten years. Or how the train brakeman set up a $100,000 endowment for his church with a one-time gift of $10,000. Or how the son of a dedicated nurse is setting up a nursing scholarship in honor of his mother to help more nursing students afford an education.
All of these clients were able to create a lasting legacy through the benefits of life insurance! There are many creative ways to utilize life insurance policies in your charitable giving plans and all of them offer tax advantages to either you, the charity, or both.
You can donate an existing, unneeded life insurance policy to your favorite charity. Or you can simply change the current beneficiary to a charity, and they receive the proceeds tax-free while your estate also receives a tax deduction.
You can purchase a new life insurance policy as the librarian did and write off your premium payments as charitable donations on your tax return. This option works especially well if a husband and wife want to do a joint gift, and one of them is uninsurable. Certain companies have Second to Die policies that underwrite the healthier person, thus, still accomplishing the goal.
On the other hand, you may feel your children or grandchildren are counting on receiving your accumulated assets. A life insurance policy can be used as a wealth replacement vehicle. Here, life insurance can be purchased with your family receiving these proceeds tax-free and a highly taxed asset (your 401(K), IRA, stocks, etc.) can be left tax-free to your favorite charity. Careful planning ensures your family is taken care of, and your favorite charity is also remembered.
In addition, you can use life insurance to replace a specific bequest in your will. Instead of leaving a specific piece of land or stock to a child, gift that asset to a charity. The charity receives the gift and may sell it without paying taxes. Instead, purchase life insurance with the original heir as beneficiary. The heir will receive the proceeds tax-free.
As you can see, there are many creative ways to utilize life insurance in your charitable giving plans. The key is to do your homework and meet with a professional before settling on one strategy just because it is more familiar to you. It may not be the right fit for your goals. Just like you don’t buy life, auto, or homeowners insurance on the sole basis that you recognize the company’s name—you should research the best vehicle to use to leave your charitable gift, bequest, or donation to ensure you are maximizing your gift and doing so in the most tax-efficient manner.
The featured author is a 41-year veteran in charitable gift strategies. Corwin S. Freeman Jr. LUTCF, CSA, RFC of Valley Estate Planners, Ltd. is a 30-year Qualifying & Life Member of the Million Dollar Round Table and has 8 Court of the Table qualifications. Corwin has dedicated his life to insuring his clients financial goals are met through creative financial planning strategies. He serves on several community boards including the Senior Services Association and the Board of Trustees of the Fraternal Order of the Eagles #1047 in Gilberts, IL.