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Giving Through Life Insurance – Leveraging Your Charitable Gifts

Oftentimes, life insurance is perceived negatively and is the subject of public scrutiny and criticism in the media and elsewhere. Whatever your view, it has a place in each of our lives and serves an important role in our estate and lifetime planning. Many individuals own a policy or policies that they have held for many years without much thought as to the structure of that policy or the potential application of the policy to purposes beyond those considered during the initial purchase. Traditionally, these policies are obtained to provide security for loved ones or to provide needed liquidity for the payment of estate and death taxes and other estate administration expenses. However, with the passage of time, children grow up and—if you’re lucky—move on to achieve their own financial independence. With the increased estate tax exemption, the need for liquidity to pay taxes has also passed.

In this edition, we will explore the many and varied uses of life insurance, both existing and new policies, in estate and charitable gift planning.

Five Ways to Utilize Life Insurance in Charitable Planning

1.  Assign a currently owned policy to the UW Foundation  

If you have a life insurance policy that was intended to protect a spouse and/or children that you no longer need, this is the perfect opportunity to assign it to the UW Foundation. A policy that was intended to pay federal estate taxes may no longer be necessary due to changes in the federal estate tax laws or changes in your own personal financial situation. If that policy has a cash value or an investment component, you are entitled to an income tax deduction upon gifting the policy. The deduction is roughly equivalent to the cash surrender value of the policy on the date of the gift. The UW Foundation can keep the policy, and if the policy is not paid up you can make annual tax-deductible gifts to the foundation to cover the premium. Another possibility, the UW Foundation as the owner can surrender the policy and immediately apply those funds toward the college or program of your choice.  

2.  Secure a new life insurance policy with the UW Foundation as the owner of the policy  

Another alternative to truly leverage your contribution through a life insurance gift is to secure a new policy naming the UW Foundation as the owner and beneficiary of the policy. Again, under this planning scenario, the payment of the annual premium on the policy is fulfilled by tax-deductible gifts from the donor. The example below details the leverage opportunity available through the use of a life insurance policy gift.  

Example: A 50-year-old donor who is committed to giving $5,000 annually for a period of ten years could use a permanent life insurance product with an assumed internal rate of return to ultimately generate approximately $360,000 in death benefits for UW. Benefits from a second-to-die policy are even greater—a couple, both age 50, could potentially turn that same $50,000 into an $800,000 gift to UW.  

3.  Name the UW Foundation as the beneficiary on a new or existing policy while retaining ownership of the 
     policy  

A simple way to include UW in your estate plans is to designate the UW Foundation as the beneficiary of all or a portion of the death benefits from a life insurance policy. While you do not realize any income tax benefits from structuring your gift in this fashion, the proceeds from the policy are effectively removed from your estate by virtue of a charitable estate tax deduction. An added benefit to structuring your gift this way is flexibility—the beneficiary of the policy (and/or the percentages) can be changed as your life changes, if necessary.  

4.  Wealth replacement strategies  

Those considering estate gifts are often concerned about how their heirs are going to be affected, and rightly so. For example, a donor considering a Charitable Remainder Uni-Trust (CRUT) or a Charitable Gift Annuity will often be concerned about the wealth that essentially has been “taken” from their heirs, almost like a disinheritance. As a consequence, one of the most popular ways to address this concern is through “wealth replacement”— utilizing life insurance in charitable planning in a more indirect fashion. The example below illustrates the use of life insurance in a wealth replacement plan in conjunction with a CRUT.  

Example: A couple, both age 65, are contemplating a CRUT funded with highly appreciated real property valued at $500,000. Using a CRUT will help them avoid tax on appreciation when the property is sold. They want to increase their income but also are committed to making a significant gift to UW. This couple will receive approximately $25,000 per year in annual payments from the CRUT for the balance of their lives. In the year of funding the CRUT, they will also be entitled to a charitable income tax deduction of $173,425.00. The only concern is that, if they go through with the CRUT, their two children are going to receive less from their estate.  

However, by employing a wealth replacement life insurance structure, they are able to pass on significantly more wealth to their children. The UW Foundation suggests using the income tax savings in the year the CRUT is funded and a portion of the annual income payment from the CRUT to fund a second-to-die whole life insurance policy with a no-lapse guarantee. By investing their projected tax savings of $60,000 in the first year and an additional fixed amount per year for ten or more years thereafter, the couple can pass significantly more to their children unencumbered by income or estate taxes.  

5.  Zero-Tax Estate Plan            

Another planning technique utilizing life insurance that is gaining in popularity is the “Zero-Tax Estate Plan.” In its simplest form, this type of plan involves a properly structured irrevocable life insurance trust (ILIT) and is for someone who wants to leave a sizeable gift to charity while providing heirs with security in the form of life insurance. For example, an individual with a $10,000,000 estate would be facing a potential estate tax liability of $2,925,000 if she were to simply leave her entire estate to her children. After taxes and expenses, the heirs would net approximately $7,000,000. Also, by giving all of the assets to her heirs, she would not be able to fulfill any of her charitable goals. On the other hand, if the donor were to implement a Zero-Tax Estate Plan by purchasing $10,000,000 of life insurance inside an ILIT and leaving all of her other assets to the UW Foundation, the heirs would receive $10,000,000 and the University of Wyoming Foundation would receive $10,000,000. For supporters of means who want to contribute to higher education at the University of Wyoming, this plan makes a great deal of sense.  

Call Tracy R. Richardson, Director of Planned Giving, at 307-766-3934 or e-mail, trichar6@uwyo.edu, for more information about Retained Life Estates or any other planned giving opportunities at UW.

Have you visited our tax and planned giving library? I would encourage you to click on Gift Legacy below and spend some time looking around at all the wonderful resources we have made available to you as an Allied Professional.