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Using Life Insurance for Charitable Giving

Posted on: December 1st, 2020

We all know that life insurance can help us take care of our families. But it also can come in handy in a way that might surprise you: making the world a better place.

Life insurance can help you magnify your charitable giving, enabling you to have a bigger impact in supporting the causes you care about and the organizations funding those causes.

Here’s how the Super Rich (people with a net worth of at least $500 million) often use life insurance to boost their philanthropy—and how you might use their approach when it comes to your own giving.

Life insurance and private foundations

The Super Rich often set up private foundations to support charitable organizations and causes. Private foundations can exist in perpetuity or for a set period of time. That makes them highly appealing to many wealthy families, as the fact that foundations can last for multiple generations creates an opportunity for truly long-term family giving.

That said, there have to be sufficient funds in the private foundation to do so. At a minimum, a private foundation needs to distribute at least 5 percent of its assets annually based on the previous year’s calculation of those assets.

The issue: Many private foundations don’t start out with all the money they will ever need in order to last indefinitely and adequately address the causes they want to focus on. When a family wants to grow the funds in their private foundation, they have a few options (see Exhibit 3).

  • Professional money management. Very often the assets in a private foundation can grow through the efforts of talented investment professionals. The increase in assets greater than the distribution increases the money in the private foundation.
  • The family adding assets to the private foundation. Aside from the assets used to establish the private foundation, the family can contribute more later on. As when they first established the private foundation, various types of assets can be contributed—including shares of companies. Different charitable structures, such as trusts, can be part of this approach.
  • Accepting donations from nonfamily members. A private foundation can also accept assets from others—such as friends, companies and business associates. Although there are considerations that people need to be aware of, such as attention to self-dealing rules, this is a viable option.
  • Using life insurance. Life insurance can be used to increase the assets in a private foundation. This can help ensure funding for charitable causes while not depleting assets that may be designated to heirs (such as business interests).

These approaches are not mutually exclusive, of course. For example, you can use life insurance and seek to grow assets through high-quality investment management strategies.

The benefits of using life insurance

Three parties can benefit when life insurance is part of a private foundation’s assets (see Exhibit 4):

  • Founders of the private foundation. Because of certain characteristics of life insurance, such as the certainty of the payout, founders of a private foundation know how its assets will increase if they use life insurance to fund the foundation. This can help ensure they can pursue their philanthropic vision.
  • Inheritors. By using life insurance to boost the foundation’s asset size, families can avoid other family assets (or minimize their usage). These other assets in the estate can then be passed down to heirs.
  • The private foundation. The certainty of the amount of the insurance policy’s death benefit can be helpful when planning for future grant making. It can reduce or even eliminate issues around investment performance and the need for family members or other parties to contribute to the private foundation.

Using life insurance with private foundations

Donors can take different approaches when using life insurance to help fund private foundations (see Exhibit 5):

  • Donate a life insurance policy to the private foundation. The donor takes out a new life insurance policy and donates it to the private foundation, making the private foundation the beneficiary of the policy. The donor gets to take a charitable tax deduction, while the private foundation owns the policy and controls it. That means, for example, that the donor can’t take loans against the cash account or cancel the policy.
  • Make a gift of an existing life insurance policy. The donor makes the private foundation the beneficiary of a life insurance policy that’s already in place. When the donor dies, the death benefit of the life insurance policy is transferred to the private foundation and the donor’s estate receives a tax deduction at that time. During the donor’s lifetime, he or she maintains control of the policy and can change the beneficiaries.
  • The private foundation takes out life insurance policies on donors. The private foundation, with permission, can take out life insurance policies on donors (such as the founder or officers of the private foundation). The private foundation then owns, and is the beneficiary of, these policies.

Note: A more recent development is the charitable gifting rider. These riders (provisions that add benefits to a life insurance policy) can, in general, pay 1 to 2 percent of a policy’s face value to a private foundation annually. The charitable gift rider can be used in all three of the previously described approaches.

Implications for you

Chances are, you’re not at the Super Rich level of wealth and don’t have a private foundation of your own. But you can still take advantage of life insurance in many of the same ways as you seek to make a charitable impact of your own.

For example, instead of cashing out an old policy you decide you no longer need, consider giving it to a charity or a donor-advised fund. The charity or charitable vehicle will receive the entire face amount of the policy upon your death—which could represent a substantial windfall, and a larger amount of money than you might be able to donate otherwise. You can also take a tax deduction for this gift.

Alternatively, you could name the charity or donor-advised fund of your choice as the beneficiary of your life insurance policy, which will give that charity the policy’s death benefit proceeds. This strategy doesn’t come with an income tax deduction, but it will reduce your taxable estate by the amount of the death benefit.

There are other ways that life insurance could potentially play a role in your philanthropy, and your best bet is to discuss the topic with a trusted advisor to determine the right path for your situation.

This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

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