Restoring the Value of a Charitable Gift in Your Estate

Perhaps you would like to make a sizable contribution to your favorite charitable organizations now to help meet our current needs, but you don't want to reduce the estate you will pass to your family. The solution? Purchase life insurance.

"Sounds like a good idea," you say, "but then I'll have to pay the premiums on the policy." True enough, but depending on your age, health and top tax bracket, the income tax savings from your charitable gift may be enough to cover the premium cost.

Assuming your estate is taxable, dollar-for-dollar asset replacement isn't necessary. A smaller amount of insurance can be enough to restore your family's after-tax inheritance. If you are married, a second-to-die policy can offer the most coverage per premium dollar.

Strategies Avoid Tax
If you own the insurance policy, ultimately the proceeds will be included in your taxable estate. The remedy: If your sole heir to the policy is a responsible adult, make him or her the policy owner and beneficiary. Then give that individual a yearly amount adequate to pay the premium, utilizing your annual gift tax exclusion.

For multiple heirs or a larger gift, take advantage of an exceptional plan called a "wealth replacement trust" and name your spouse, children or other individuals as trust beneficiaries. The trust is the owner of the policy and eventually will receive and manage the proceeds. The trust is irrevocable, and if designed correctly, the insurance will be excluded from your taxable estate. You give enough money to the trust each year using your annual exclusions so the trustee can pay the policy premiums.

To avoid any gift tax (or use of your estate and gift tax credit) on yearly gifts to the trust over the annual gift tax exclusion, the trust agreement must give your beneficiaries the temporary right each year to withdraw these funds. However, should your beneficiaries exercise this power, the insurance may lapse due to insufficient funds to pay the yearly premium.

Replace a Deferred Gift
If contributing a particular asset to charitable nonprofits would reduce your income, consider establishing a charitable remainder trust with it. You will receive a life income from the trust along with an immediate and substantial income tax deduction. Ultimately the remaining principal will be paid to charitable nonprofits. Life insurance will complete your plan.

Example: Frank creates a charitable remainder annuity trust with stock having a cost basis of $40,000 but now worth $100,000. Using the benefits of his planning to offset premiums, he arranges $55,000 of life insurance. This replaces his daughter's potential inheritance (after a reduction for estate taxes). The stock yielded a dividend of only $2,000 each year, but now the trust will pay Frank $7,000 annually. He avoids up-front capital gains tax on his $60,000 capital gain, and he will get a sizable income tax deduction.

Please contact Mary Ludwig, Development Director at 712-732-5127, for more information.

The information on this site is not intended as legal, tax or investment advice. For such advice, please consult an attorney, tax professional or investment professional.

Copyright © The Stelter Company, All Right Reserved.

Essentials

Ways to Give

What to Give

Reading Room

Glossary of Terms

Q&A

Goals & Gifts

Bequest Language