One of our clients stopped in recently to update his estate plan. After running an advertising agency for the past 40 years, James is now in the process of transitioning the day-to-day operations to his kids. He’s saved plenty of money and owns enough income-producing assets, so he’s not particularly worried about funding his retirement. But the issue of Social Security still came up. We had refrained from turning on this income source in prior years because the benefit amount was still rising. But now, at 70 years old, James is entitled to the maximum benefit.
While he doesn’t anticipate needing his $40,000 of annual Social Security payments to fund his daily living expenses, it still makes sense for James to start receiving them. If the payment were left with the government, he would essentially be giving up his hard-earned money. However, under his control, those funds can be used to support and sustain his favorite charity.
So the question then becomes: What’s the most effective way to use those Social Security payments to create the largest possible gift? Sending out checks every few months only provides minimal gifts, especially once you factor in the tax you have to pay on each check you receive. Collecting the money and investing it in stocks and bonds for the purpose of a future gift would only increase the size of your taxable estate and subject those funds to market volatility. That’s where life insurance can play a crucial role.
Funding a Life Insurance Policy with Social Security
Using Social Security payments to fund a life insurance policy helps you maximize your gift. However, there are some tax considerations involved. When it came to developing a plan for James, we didn’t want him to own the policy directly, with his charity as the beneficiary, because that would have created future estate taxation risks. What we decided to do was have him donate the $40,000 each year to his charity. But rather than giving the charity immediate access to the funds, we dedicated the $40,000 as an annual premium payment on a permanent life insurance policy. Given James’ age and health, this allowed for the purchase of a $1.5 million policy. Not only will that eventual death benefit be tax free, but the $40,000 James donates each year to the charity is fully tax deductible against his income.
Maximize Your Gift and Maintain Your Legacy
The decision to use life insurance truly maximized the amount of money James will ultimately gift to the charity. Had he decided to keep mailing out smaller checks each year, the donations would have capped out at only a few hundred thousand dollars during his lifetime, and those gifts would stop altogether after he passed away. Instead, the $1.5 million death benefit payment can be invested in such a way that it lasts forever! For example, if you take that $1.5 million and have only the interest and dividends paid out each year, the principal will be sustained. That gives James and his heirs the reassurance that his legacy will last forever and his charity will continue to be meaningfully supported.
The experts at Howard Kaye have been creating solutions anchored by life insurance for decades. Besides Social Security, similar legacy-creation strategies can be achieved if you have income stemming from annuities, pensions, or municipal bonds. For many of us, the decision to include one or more life insurance policies within our estate plan means guaranteed returns, improved liquidity, and a level of tax efficiency not found with other financial vehicles. Call us today at 800-DIE-RICH and let one of our life insurance advisors create a solution for you.
