Ensuring the future by insuring your gift
by Steven A. Fishman, CLU

Some people achieve their philanthropic goals by donating to favorite charities with their checkbook, while others contribute stock or other appreciated property. Both means offer tax benefits to the donor. Life insurance adds a different dimension to philanthropic planning in that it assures the giver that his/her annual gift will continue after death, and results in an ultimate gift much larger than the premiums paid.

When a benefactor passes on, so does their annual gift. While people can be quite philanthropic during their lifetime, it is rare that they have the vision to ensure that their gifts will continue after their death. In my practice, it is not uncommon to see charitable planning as a secondary goal of the client – the primary being asset distribution and tax considerations – but the addition of the philanthropic component to insurance planning can significantly benefit the client, the family, and the designated charity. It can be a win/win/win for the donor, the heirs and the organization.

Life Insurance is simple to initiate and passes directly to the named charity as beneficiary. The premium paid for the policy, which is most often owned by the charitable organization, is a donation, and is tax deductible subject to the limits on adjusted gross income. When the owner of the policy is the charity, the insurance proceeds are not added to the donor’s taxable estate. For example, if you give $5,000 annually to a charity and would like to “endow” your donation, you would purchase $100,000 of life insurance. Upon your death, the named charity would receive the gift, invest the $100,000 corpus, and could earn 5 percent annually. Those annual earnings ($5,000) would be a financial legacy from you, in perpetuity.

Leaving a charity a large sum such as $500,000 or more, without utilizing life insurance, would require the donor to remove those assets from the family’s inheritance. Why not protect your heirs by gifting life insurance instead? In this way, the donor can preserve those assets for the family and make the same size gift to the organization by paying premiums that are cumulatively less costly. The donor has complete flexibility to design the policy and payments to fit within their unique personal circumstances, even utilizing survivorship insurance, an often less expensive choice.

Another interesting way to achieve your wealth transfer and philanthropic goals is to “reposition” low yielding assets such as CDs, municipal bonds, and treasuries into life insurance. When structured properly, the internal rate of return (IRR) on the premiums paid can be similar to or exceed the return on an alternative conservative investment. This allows donors to generate the same income that they were accustomed to from their conservative assets, while removing those assets from their taxable estate. The 45% estate tax savings could then be diverted to their favorite charity. Again, it’s a win for all involved.

Steven A. Fishman, CLU, is a principal in Norwood Financial Group LLC. He serves on the Jewish Community Foundation’s executive committee and as its insurance chair.