Giving is a part of life Charitable Giving With Life Insurance
If you are interested in giving more to charity, life insurance may be able to help. When properly implemented, a life insurance policy may be able to promote charitable giving in these ways: Charitable Giving With Life Insurance Americans are generous people. Many regularly contribute to charities and non-profit organizations. Some people want to continue their support by including their favorite charities in their estate plans. By earmarking a portion of their estates for charity, loyal donors can help the charities they care about carry on their philanthropic missions. Life insurance may be an attractive way to make charitable gifts. Policy death benefits can supply charities with new resources to help them meet their goals. Life insurance is a versatile financial tool with features that may potentially be advantageous in charitable giving: Leverage Policy death benefits usually exceed the Death Benefits Delivered When Policy Matures If kept in force, the policy proceeds are paid at the insured s death regardless of how many premiums have been paid. Flexibility The policy owner generally has the right to change the timing and the amount of premium payments, the amount of the death benefit (subject to insurability) and the identity of the beneficiaries. While the insured owns the policy, he/she may adjust it to meet changing objectives and tax laws within the terms of the policy. I. Leveraging the amount passed on to charity A life insurance policy has the potential to make a charitable gift larger than the premiums paid into it. A life insurance policy may produce gifting leverage because the death benefits it produces usually exceed the premiums paid in. As a result a policy has the potential to increase your charitable legacy. Whether any leverage is produced depends on the size of the policy death benefit, the health and life expectancy of the insured and the number of As a hypothetical example, suppose Jim Black desires to transfer $500,000 to his alma mater at his death. Assume that Jim is insurable and that he can purchase a $700,000 life insurance policy on himself for an annual premium of $25,000. If Jim dies after 20 years, his $500,000 in total premiums would produce a $700,000 death benefit for his alma mater, $200,000 more than the premiums he paid. The life insurance policy gives him the potential to leverage his bequest into a larger sum. Whether there is leverage and the actual amount depends on policy performance. II. Making a charitable gift at a discount Life insurance may also be used to potentially make a charitable gift for less than its face value. That s because the premiums paid for the policy are usually less than the death benefit it pays out. As a result, a life insurance policy may give you an opportunity at your death to provide a benefit to charities of your choice at a discount. Whether there is a discount and its amount depend on the size of the death benefit, the health and life expectancy of the insured and the number of As a hypothetical example, suppose Jim Black wishes to transfer exactly $500,000 to his alma mater at his death. Assume Jim is in good health and that he is able to purchase a $500,000 policy on his own life. He names his alma mater as the beneficiary. If the premiums are $15,000 and Jim dies after 20 years, he will have paid a total of $300,000 but his alma mater will receive $500,000, $200,000 more than he paid. By using the life insurance policy to make his donation, Jim has contributed the $500,000 to his alma mater at a discount. 2
Alternatives for Owning the Life Insurance Policy III. Replacing assets given away to charity for the family In using the leveraging and discounting strategies, there are two general ways to own the policy. You may own it yourself or you may arrange for the charity to own it. If the charity owns the policy, it will name itself as the beneficiary. If the charity owns the policy, you may receive an income tax benefit. If you buy the policy and then transfer it to the charity, you may qualify for a charitable income tax deduction for the fair market value of the policy. If you make additional gifts of cash to the charity to help it pay the premiums, you may qualify for additional charitable income tax deductions. If you own the policy yourself, you will not be entitled to any income tax deductions. If you don t need the income tax deductions, or don t qualify for them, owning the policy yourself may make more sense. When you own the policy yourself, you retain complete control over the: Policy death benefits (which may be raised or lowered subject to insurability limits and policy terms) Premium payments (which may be changed subject to policy terms) Policy beneficiaries (If you become unhappy with the charity or want to have another charity receive a share of the death benefits, you can make changes; family members may also be designated to receive part of the death benefit.) If you are uncertain which ownership approach is best, it may be wise to begin by owning the policy yourself. If the time comes when you are certain you no longer need the policy and won t need to make further changes, you can transfer it to the charity. An income tax deduction for the policy s fair market value may be available at that time. If you decide to own the policy personally, a charity can receive all or part of the death benefits through the beneficiary designation. Possible beneficiary designations for a charity include: Sole beneficiary (only one beneficiary is named to receive the entire death benefit) One of several beneficiaries (including individuals and/or charities) Contingent beneficiary (if a primary beneficiary dies before the insured or disclaims all or part of the death benefit) Irrevocable beneficiary (once named, the beneficiary can t be changed) During life or as part of your wealth transfer plan, you can make a variety of charitable gifts. These gifts reduce what is left for your family to inherit. If you don t want your charitable gifts to reduce what you pass on to your family, life insurance may help you replace part or all of the assets given away. Replacing Lifetime Gifts You may make immediate direct gifts to your favorite charities while you are alive. These gifts can give you the satisfaction of seeing your gifts being used to benefit the charity. The death benefit from a life insurance policy on your life could help you replace for your family all or part of the charitable gifts you ve made. Replacing Charitable Gifts at Death You may have included specific written instructions to make charitable gifts in your will or trusts. These are called charitable bequests. The personal representative of your estate or your trustee makes the donation in your name after your death. Life insurance may help replace some of the value of your charitable bequests and may potentially reduce the impact on your family s inheritance. Testamentary Gifts of Tax-Qualified Accounts A type of asset people often consider donating to charity at death is tax-qualified accounts (e.g. pension plan balances, 401(k) accounts and IRAs). Tax-qualified account balances are attractive as charitable gifts because family members who inherit them usually must pay income taxes as they withdraw funds from the accounts. Qualified charities, on the other hand, receive distributions from tax-qualified accounts income tax free. Thus, the family members will only be able to spend the portion of the account left over after income taxes on the withdrawals have been paid. Depending on their marginal tax brackets and the possible application of state income taxes, anywhere from 15% to 40% of the account balance could be lost to income taxes. Even worse, if the taxable estate is large enough, federal/state estate taxes on the account may also be triggered. This will reduce the account balance left over after taxes for the family even more. When both estate and income taxes are due, as much as 80% of the account could potentially be lost to taxes. This could leave only 20% for the family. Qualified charities, on the other hand, receive distributions from tax-qualified accounts income tax free. That s why these accounts can be attractive as charitable gifts at death. A life insurance policy on you can be used to potentially replace the account s value. If you don t need to rely on the IRA income during retirement, you can take taxable withdrawals from the account to help pay the policy premiums. As a hypothetical example, suppose Jim Black has a $1,000,000 IRA balance at his death and that his heirs are in a 30% income tax bracket. It would cost them $300,000 in income taxes to terminate the IRA and convert it into cash they could save, invest or spend. These income taxes represent IRA funds that will be lost to the family forever. On the other hand, if Jim names his church as the IRA beneficiary, it can receive the entire $1,000,000 income and estate tax free. If he is insurable, Jim may be able to replace the $1,000,000 IRA balance for his family with the death benefits from a life insurance policy by taking taxable distributions from his IRA to help pay premiums. If he is over 59½, Jim can receive these distributions penalty-free. If Jim owns the policy or has any incidents of ownership in it, the policy proceeds will be includible in his estate. 3 4
Replacing assets given away to charity for the family... continued Gifts in a Charitable Remainder Trust (CRT) Charitable remainder trusts are often used to make deferred gifts to charity. You create the CRT and transfer assets to it in return for a series of payments based on a percentage of the trust s assets. This series of payments can last for a stated term of years, for your lifetime or for the lifetime of the survivor of you and your spouse. As a hypothetical example, suppose Jim Black, age 65 and in standard health, creates a charitable remainder annuity trust (CRAT) during his lifetime and funds it with $800,000 of property. He receives an annual income from the trust of 5% of the trust s initial value. At the time of his death, assume that the value of the trust s property is projected to be about $1,000,000. The assets in the trust pass to Jim s church as the CRAT s remainder beneficiary. With the income from the CRAT, Jim (assuming he is insurable) can purchase a $1,000,000 policy on his life and name his children as the policy beneficiaries. The policy s income tax-free death benefits could replace the $1,000,000 the CRAT will distribute to Jim s church at his death. If Jim has an estate tax problem, he may wish to create an irrevocable life insurance trust (ILIT) to own the policy so that the policy proceeds are not included in his estate. Instead of an ILIT, the policy could be owned by Jim s children. In either case, the premium payments Jim provides will be subject to gift tax (although they may qualify for the gift tax annual exclusion). Conclusion Life insurance has the potential to be a powerful and flexible financial tool for charitable giving. It may potentially help donors do more for the charities they care about. Life insurance may be an efficient way to transfer funds to charity. Depending on the health and life expectancy of the insured and the amount of premium payments, life insurance can potentially leverage premium payments into larger death benefits for the charity. It may also help replace assets a donor transfers to charity. A life insurance policy insuring the donor and/or his/her spouse may be able to help offset charitable gifts and keep the inheritance of younger family members unchanged. The hypothetical examples in this document are for illustrative purposes only. They do not represent any specific product and should not be deemed a representation of actual results as individual results will vary by individual and products selected. Involving Children in Charitable Giving You may want to encourage your children to become more involved in charitable giving in their community. One way you can do this is by combining a Donor Advised Fund and life insurance coverage on your own life (high net worth individuals may wish to use a Private Foundation instead of a Donor Advised Fund). In this strategy you purchase a policy on yourself and name your Donor Advised Fund (DAF) as the policy beneficiary. At your death the policy death benefits are paid to the qualifying DAF free from income and estate taxes. DAFs are non-profit organizations that invest funds and distribute them to qualified charities upon the suggestion of the donor or other authorized persons. You can designate your children as the people with the power to suggest that distributions be made to specific charities. The DAF isn t required to make the distributions requested, but it usually does so as long as the suggested recipient is a qualified charitable organization. By combining a DAF and life insurance, you have the potential to create a fund that your children may pass on to qualified non-profit organizations they select. Distributions from the DAF can only go to qualified charities, so your children can t benefit financially. However, through the DAF they may participate in three important decisions: 1) which charities will receive the money, 2) how much they ll receive and 3) when they will receive it. They get to be involved in charitable giving without using their own money. Suggesting distributions through a DAF could be a wonderful experience for your children. It may also create new contacts in the local charitable community and introduce them to interesting and motivated people. It could make a real difference in their lives. Do you want to know more about how life insurance might help you accomplish your own wealth transfer planning and charitable objectives? Talk with a Voya representative today. 5 6
These materials are not intended to and cannot be used to avoid tax penalties and they were prepared to support the promotion or marketing of the matters addressed in this document. Each taxpayer should seek advice from an independent tax advisor. The Voya Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws change frequently and the strategies suggested may not be suitable for everyone. You should seek advice from your tax and legal advisors regarding your individual situation. Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and its products issued. All companies are members of the Voya family of companies. 2015 Voya Services Company. All rights reserved. CN1019-18755-1117 144901 10/15/2015 Voya.com