As estate planners for our clients, we often talk the talk, but do we walk the walk?
Our intensive and advanced education on the big impact and nuances of estate tax exemptions, control issues, and the leverage opportunities of GRATs, CRUTs, ILITs and QPRTs is part of our daily work. The mastery of the technical, blended with the understanding of our clients’ legacy goals — as well as our empathy and caring for them and their family — often results in effective planning on our part. But, how can we do more?
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We can be even more effective with our clients, their families, their grandchildren and prospective customers by tending to our own estate and charitable planning. Here are five actions that each of us can take today to lead by example while creating a legacy of our own.
1. Designate a charity as the beneficiary of a life insurance policy. A seldom-used but simple change to an existing life insurance policy, group term benefit or 401(k)/IRA offers a benefit to a charity at no current cost to you. You can name your 501(c)(3) organization as a 10% or 50% primary beneficiary of a life insurance policy. Many foundations recognize these delayed gifts and understand their value. Rotary International, for example, formally recognizes this planned gift. But make sure you’ve checked out the charity and done your homework before making this important investment.
2. Gift an existing life insurance policy to a charity. Most charities will accept an existing life insurance policy, whether it’s term or permanent. While the term policy has zero gift value in terms of a current-year tax deduction, a permanent policy may. This can add significantly to the mission and endowment of the charity. Continuing premiums can generally be treated as donations to the charitable entity and are tax-deductible, but it’s important to consult with a tax professional.
3. Obtain a new policy with the charity as the owner. We place life insurance regularly for the benefit of our clients, their family and charity, but you also need to do the same for yourself. Approach a charitable organization that shares your passion for their mission. Apply for a new policy with the charity of your choice as the owner/beneficiary and yourself as the insured. You will need to commit to fund the policy until fully funded.
As we know, it’s important to recognize that the type of life insurance chosen is a big factor. Term insurance ends at the conclusion of the term it’s purchased for, so if a donor lives past the term, the charity designated as beneficiary may receive nothing. While permanent policies, such as whole life or variable universal life, require a larger premium, they may be better options for this type of giving.
Designating the proceeds to the general fund is often best for the charity; alternatives or specific uses can also be determined. The premiums are likely to be tax-deductible, and the benefits to the charity are priceless.
4. Recognize parents or other loved ones through a new policy. If you are still in your 40s, designate a loved one in their 60s or 70s as the insured. This will enhance the IRRs and result in the funds arriving at the charity sooner. Be sure to gain approval by all parties involved and check with your state insurance laws, your broker/dealer or agency compliance department.
5. Create a legacy with cost recovery. Creating a legacy gift for a charity can be a meaningful way to have an impact on an organization’s future. But it is important to be smart about the way you set up the arrangements. Creating a trust and then naming yourself as one beneficiary and the charity as the other is an effective method.
Let’s say the trust decides to buy a life insurance policy with a $1 million death benefit. You decide to make annual loan payments to the trust, which then uses the amount to pay an annual premium on the policy. In 15 to 18 years, by design, the policy will have enough cash value to pay back your notes and still have a paid-up policy. You could also choose not to recover the loan amounts, which would drive the death benefit even higher.
Your costs are the future earnings on these loaned dollars. In today’s world, most people are giving up 1% or less to a fixed rate investment. If you die before they have recovered the loaned dollars, the trust will pay the estate the same amount and receive full cost recover. So, the charity receives a dramatically larger gift, and they appreciate your support.
In summary, using the assets you know best, like life insurance, allows you to make a much more substantial gift than what you may otherwise be able to afford. Although the premiums are relatively small, the amount the charity will receive can be quite significant. So, next time you want to inspire a client, think about your actions and consider using new and existing life insurance policies to create your legacy.
Paul Gydosh Jr., CFP, is managing director of Kensington Wealth Partners, Columbus, Ohio. He has more than 20 years of experience in counseling and implementing personalized strategies and solutions for the management, preservation and transfer of wealth to future generations and charities. An advisor who handles all aspects of an individual’s financial life, from investment portfolios to retirement plans, insurance and estate plans, Paul helps his clients make wise decisions and gain a clearer picture of their future. He is a registered representative of Lincoln Financial Advisors. For more information, visit www.kensingtonwealth.com.
Kensington Wealth Partners is not affiliated with Lincoln Financial Advisors Corp.
Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and a registered investment advisor. Member SIPC. Insurance offered through Lincoln affiliates and other fine companies. CRN-201012-2049391
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