Throughout her working years, our long-standing client, Ann, had regularly donated to charities. She was proud and happy to contribute to causes in which she believed, and to help those who didn’t have her advantages. But after she retired, she began to think more deeply about a legacy and how she could help in a way that went far beyond the time she expected to be around. One charity, a foundation that set up schools for girls around the world, was where she had been focusing most of her energy, and she wanted a smart way to maximize her contributions. Luckily, life insurance can do just that.

When she came to us, Ann’s kids were older and no longer needed the insurance protection she had put in place. We also knew she preferred to focus on an eventual “big gift” rather than simply writing smaller checks each year. While simply changing the beneficiary on her life insurance policy wasn’t the strategy we went with, she was surprised to learn that life insurance can be an extremely efficient vehicle through which to give to charity while reducing the size of your estate and potentially receiving a tax deduction.

Using life insurance as a tool for charitable giving allows you to:

  • Create the gift that gives forever: Why limit your charitable giving to your lifetime? You can immortalize yourself by purchasing a life insurance policy inside a trust, endowment, or charitable foundation that can give annual gifts in perpetuity after you’re gone. For example, you may be able to buy a $1 million policy today for a $300,000 lump sum premium. Then that $1 million can give $40,000 in interest every year, forever.
  • Give a big gift with a small outlay: Depending on your age and health, the size of your charitable gift could be much bigger with life insurance than without. Let’s say you had been giving $10,000 per year to your alma mater. If your total net worth is around $5 million, that may be the most you can afford to give. But if you took the same $10,000 each year and used it to pay the annual premiums on a $1 million life insurance policy, you could be giving a future gift that’s 100 times the size of your current gift.  
  • Avoid market volatility: People are always making projections about what the money they have today will be worth tomorrow. After all, the market can be a volatile beast. So when you invest in stocks and bonds, you really have no idea what that money will be worth, especially once you adjust for the ordinary income and capital gains taxes that you’ll have to pay on your investments. But you can eliminate market volatility altogether by purchasing a life insurance policy instead, which offers a predictable, guaranteed amount payable in the future.
  • Reduce your estate tax exposure: What’s a good way to remove assets from your estate? Give them away! For every dollar you don’t give away now that ultimately becomes subject to the estate tax, your heirs may only get 50 or 60 cents. But if you fund a $5 million life insurance policy with a $2 million single premium this year, not only do you create a $5 million gift for charity—you can also remove that $2 million from your taxable estate.  

How Does Charitable Giving with Life Insurance Really Work?

Let’s say your children no longer need the $3 million policy that you’ve been funding for the past 20 years. If your policy allows for ownership assignments, you can gift this policy over to your favorite charity. Then you receive a charitable deduction for the cash value and the charity eventually receives the death benefit proceeds.

If the policy still requires annual premium payments, you have to either continue funding the policy or make donations to the charity, which they can then use to make the annual premium payments. These ongoing donations may be deductible depending on your income and what the rules are at the time that you make the gift.

Along the same lines, you could fund a new policy instead, where you are the insured and the charity is the policy owner and beneficiary. If you fund the policy using a single premium, nothing else needs to be done. When you eventually pass away, the charity will receive the death benefit. In most cases, you’ll also receive a tax deduction for the premiums you paid.

If you want to retain control over a policy in case you change your mind about where the death benefit proceeds should go, you can own the policy yourself and simply change the beneficiary to the charity. Keep in mind that this would allow full revocability, which means you won’t get the income tax deductions like you would above. And this method doesn’t remove the policy proceeds from your estate, meaning it will still be subjected to estate taxes.

An Expert Can Help You Plan Your Legacy

Writing checks to charities each year is easy—and gives you total control over your donations—but it’s not going to maximize the size of your gifts. Life insurance allows you to leverage the value of your donations, and potentially give away much more money than you ever thought possible. And if you can minimize your estate’s exposure to taxes in the process, then it’s a real win-win. Speak to the experts at Howard Kaye to start maximizing your legacy or call us today at 800-DIE-RICH (343-7424).

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