Split Your Clients Charitable Gifts: Give Today, Provide For Tomorrow
Many clients pride themselves on their charitable interests. In working with clients on their charitable goals, the tools available can range from simple annual donations to complex planning involving trusts or foundations. Much has been written on some of these complex planning devices; however, for many clients a simpler planning technique is preferred. This article focuses on one example at the easy-to-implement end of the spectrum.
Keep in mind, clients who restrict their charitable donations simply to annual gifts, by cash or check, might fail to help a charity as fully as might be possible. In many cases life insurance, and its death benefit, can be used to parlay an annual charitable gift into a much larger benefit to a charity. This can be done by directing the annual gift toward the premium of a life insurance contract, with the charity as the named beneficiary. This may enable a client to boost his or her overall gifts to a charity.
Additionally, a large death benefit can aid the charity long after the insureds death. While other techniques, such as trusts and foundations, can achieve the same result, a personally owned life insurance policy, or contributing toward the premiums on a policy owned by the charity, can meet a charitys long-term objectives.
Charities face a dilemma, however, when contemplating life insurance as a gift. Many charities need annual revenue to maintain their operations and charitable works. Many planned giving officers are judged annually by the amount of donations made to a charity in a given year. Moving all of a clients annual gifts into life insurance may fail to meet a charitys short-term needs and might not be acceptable to the executives working for a charity.
Splitting Your Clients Gift to Charity. What if your client could achieve both objectivesthe ability to provide current funds to a charity and, at the same time, use life insurance to satisfy long-term objectives?
One way is to split the gift to the charity. Instead of gifting 100% cash to a charity each year, the split gift would consist of some cash for the charitys current needs with a portion of the donation used to pay the premiums on a life insurance policy. Typically the policy would be on the life of the donor, naming the charity as beneficiary.
The chart that accompanies this article shows such a split. In the chart, a 60:40 split is utilized, but any percentage can be used depending on the clients and the charitys needs.
For example, a charity with high current cash needs might be willing to enter into such a plan but would ask that a client direct a smaller portion of the gifts to premiums, such as a 70:30 split.
An Example. Consider the first result in the chart. A 73-year-old client, in a 30% tax bracket makes a cash donation to a charity. The charity receives a $100,000 cash donation. That amount can be added to its annual income and used for either operational or charitable purposes. For this donation, your client receives a $30,000 deduction on his or her tax return and can carry over unused amounts against future taxes for up to 5 years. Overall, it is not a bad result.
However, assume that your client has a goal to help the charity even beyond his or her lifetime. Rather than gift all $100,000 in cash, your client splits the gift 60:40. One portion, $60,000, continues to be gifted to the charity each year in cash for general purposes. But at the clients request, the charity purchased a $1,750,000 policy on the life of the donor. Assume the annual premium for a life insurance policy costs $40,000 a year.
