With holiday festivities in full swing, many among the high net worth are planning to make year-end donations to secure a charitable deduction on their income tax returns. But only a tiny percentage of them will entertain a donation that can have a really positive impact: a planned gift funded with life insurance.
A key reason for the low interest is that advisors are failing to bring planned giving strategies to their clients' attention — gifts that can substantially benefit not only the intended recipients, but also a client's own retirement and estate planning objectives. Consider the charitable remainder annuity trust or CLAT, one of several techniques explored in the January issue of NU.
By transferring highly appreciated assets to a CLAT, the donor can secure an immediate income tax deduction and carry it over five years of tax returns. Assets sold by the trust for cash can then provide a guaranteed income stream for life to the donor, the monies paid out free of capital gains tax. And if establishing a legacy for heirs is desired, the donor can also set up an irrevocable life insurance trust, the policy proceeds replacing at the donor's death the assets given to charity.
This is and other strategies explored in my January feature — the charitable lead annuity trust, gifts of life insurance policies, donor-advised funds, among others — can effectively realize planning objectives. And despite higher estate tax exemptions since passage of the 2012 Tax Relief Act, the strategies retain strong appeal for those looking to avoid other taxes — on income, capital gains and dividends — as well as for those motivated chiefly by philanthropic aims.
Planned giving techniques ought to be part of every advisor's fact-finding when discussing legacy planning goals with clients, particularly during year-end reviews. The fact that only a minority of the wealthy incorporates a charitable component into estate plans — one advisor I interviewed pegs the proportion at 20 percent — suggests that many financial professionals remain ill-equipped in this space.
Some reasons why: a lack of charitable planning expertise and an excessive focus on other aspects of wealth transfer and income distribution planning. Many, too, don't have the skills with which to motivate the philanthropically inclined to make good on their charitable intentions.
In respect to the last, more advisors would find success in the charitable planning arena if they first approached the organizations — colleges and universities, facilities engaged in medical research, and non-profit organizations devoted to various causes — that potential donors closely identify with.
