These slides are taken from the graduate financial planning course "Introduction to Charitable Planning" at Texas Tech University. Details at www.EncourageGenerosity.com

1. Using Life
Insurance in
Charitable
Planning

2. All slides are
taken from this
book which
includes
detailed
explanations of
all concepts.
Available from
Amazon.com
Full color version available at
www.createspace.com/4707238

3. 1.Wealth
replacement
2.Gifting existing
policies
3.Creating new
policies for the
charity
Common Uses

4. Using life
insurance as
wealth
replacement
in charitable
planning
Part I

5. Charitable planning
devices such as
Charitable Gift
Annuities, Gifts of
Remainder Interests in
Homes and Farms, and
Charitable Remainder
Trusts produce
amazing tax
advantages, reducing
income taxes, capital
gain taxes, and estate
taxes

6. But, they also reduce heirs’ inheritance
Heir
Charity Donor

7. Life insurance can diminish this concern

8. 1. Anything you own is
taxable at death unless it
goes to a spouse or charity
2. If your life insurance is
owned by another person
or an Irrevocable Life
Insurance Trust (ILIT) it is
not taxable at your death
(unless policy given in prior
3 years)
Estate tax law made simple

9. Parent
Money to Pay
Premiums
Insurance Inc.
Because the
parent does
not own the
policy, it is
not taxed in
his estate
Child
Policy on
Parent’s
Life
Premium
Payments
Estate Tax
Free Death
Benefit

10. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Policy on
Parent’s
Life
Because the
parent does
not own the
policy, it is
not taxed in
his estate
Insurance Inc.
Premium
Payments
Estate
Tax Free
Death
Benefit

11. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Policy on
Parent’s
Life
Insurance Inc.
The parent
can use the
tax benefit or
income from
a CGA or CRT
to pay for life
insurance
Premium
Payments
Estate
Tax Free
Death
Benefit

12. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Policy on
Parent’s
Life
Insurance Inc.
Charitable
Remainder
Trust (CRT)
Premium
Payments
Estate
Tax Free
Death
Benefit
Tax Deduction +
Ongoing Income

13. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Policy on
Parent’s
Life
Insurance Inc.
The child gets
a tax free
inheritance
instead of
losing up to
40% in estate
taxes
Premium
Payments
Estate
Tax Free
Death
Benefit

14. We give the taxable inheritance to charity,
and create income to purchase the non-
taxable inheritance to give to children

15. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Policy on
Parent’s
Life
Insurance Inc.
Premium
Payments
Gifts for premiums
can be gift tax free
if ≤ $14,000 X
beneficiaries X
donors annually.
(E.g., 2 parents to 2 children,
spouses, and 4 grandchildren: 2
X 8 X $14,000 = $224,000) Estate
Tax Free
Death
Benefit

16. Can it pay to be
charitable?
Priscilla wants to sell a
$1,000,000 non-income
producing zero-basis asset
then spend the interest
income of 5% while
leaving principal for heirs.
Her tax rates are:
capital gains (23.8%)
income (39.6%)
estate (40%)

17. Sale
$1,000,000 asset
-$238,000 capital gains tax
Client uses $38,100/year
($762,000 X 5% return)
Heirs receive $457,000
($762,000-$304,800 est. tax)
CRUT
$1,000,000 asset
$0 capital gains tax
$1,000,000 in 5% unitrust
pays $50,000 annually + a
charitable tax deduction of
$300,000 worth $118,000
+ ILIT
Client pays $118,000 initially
and $11,900 annually for a
$457,000 ILIT-owned policy
Client uses $38,100/year
Charity receives $1,000,000
remainder
Heirs receive $457,000
(tax free from ILIT)

18. John, age 59, at 39.6% income tax rate, owns
$100,000 of farmland which he would like to use for
the rest of his life then leave to charity, but he also
wants to benefit his heirs

19. Donor can use
tax deduction to
buy tax free life
insurance (ILIT)
for children’s
inheritance

20. Giving the remainder interest to charity creates a
deduction of $80,479 worth $32,869. Suppose this
will purchase a paid-up policy of about $50,000+. (Using
1% AFR, however policy costs and deduction size offset as interest rates change)
John keeps lifetime use of farm
Charity gets 100% of farm at death
Heirs get $50,000+ (estate tax free)

21. Wealth replacement through ILIT life
insurance creates estate tax free
inheritance for family members and
allows for charitable giving

22. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
Donorkids
Payments
after Donor’s
Death, During
Kids Lives

23. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
Donorkids
Payments
after Donor’s
Death, During
Kids Lives

24. Donor CRT Charity
Initial
Transfer
Anything Left
at Death
Payments
During Life

25. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Spouse
Payments
During
Donor Life
Donor’s spouse
Payments
after Donor’s
Death for
Spouse’s Life

26. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
Payments
after Donor’s
Death for Kid’s
Lives
Donorkids

27. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
Donorkids
Payments
after Donor’s
Death, During
Kids Lives

28. Payments
after Donor’s
Death, During
Kids Lives
Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
DonorkidsILIT
At donor death,
pays annuity

29. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
DonorkidsILIT
At donor death,
pays annuity

30. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
DonorkidsILIT
At donor death,
pays annuity

31. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
DonorkidsILIT
At donor death,
pays annuity

32. Donor CRT Charity
Initial
Transfer
Anything Left
after Death of
Donor and Kids
Payments
During
Donor Life
DonorkidsILIT
At donor death,
pays annuity

33. Structure of the
ILIT

34. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Premium
Payments Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Donor cannot be
ILIT trustee,
otherwise in
donor’s estate

35. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Premium
Payments Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Gifts to the ILIT are
taxable, thus can
reduce the
available credit for
estate tax
purposes

36. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Premium
Payments Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Gifts to the ILIT are
not “present
interest” gifts,
because recipients
have to wait to
receive benefit

37. Irrevocable Life
Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Premium
Payments Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
We turn the gifts
into “present
interest” gifts by
giving beneficiaries
the temporary
right to get the gift
in cash

38. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
We turn the gifts
into “present
interest” gifts by
giving beneficiaries
the temporary
right to get the gift
in cash

39. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
This temporary
right to get the gift
in cash is called a
“Crummey” power

40. Of course, we explain
to the beneficiary it is
best not to take the
cash and destroy the
planning
I don’t feel like
using my
“Crummey”
power to take
the cash
immediately

41. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
Gifts for premiums
can be gift tax free
if ≤ $14,000 X
beneficiaries X
donors annually

42. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
2 parents to 2
children, spouses,
and 4 grandchildren
2 X 8 X $14,000 =
$224,000 per year
using “Crummey”
powers

43. $224,000 per
year can pay
for a lot of
estate tax free
life insurance

44. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
The “Crummey”
power creates
another problem

45. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
When the
beneficiary chooses
not to take the
cash, he makes a
gift to the other
trust beneficiaries

46. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
This gift is not a
“present interest”
gift, and will reduce
the beneficiary’s
available estate tax
credit

47. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
But, beneficiary can
release greater of
$5,000 or 5% of
trust amount tax
free

48. Irrevocable Life
Insurance Trust
(ILIT)
Parent Child
Money to
Pay
Premiums
Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Premium
Payments
30 day
right to
take gift
as cash
One solution:
beneficiary retains
right to demand
cash, except for
$5,000/5% annual
release (a.k.a.
“hanging power”)

49. Irrevocable Life
Insurance Trust
(ILIT)Parent
Money to Pay
Premiums
Premium
Payments Estate Tax
Free Death
BenefitPolicy on
Parent’s
Life
Insurance Inc.
Grandchildren
Not generation
skipping transfer
tax free unless
separate ILIT for
each grandchild
(included in each
grandchild’s estate)

50. ILIT-CRT planning creates flexibility
CRT reduces
inheritance
Use part of CRT
payments or tax
deduction for ILIT
CRT can pay
to children
but creates
estate taxes
Remove children
CRT beneficiaries,
increase CRT
payments to pay for
tax free ILIT owned
life insurance for
children

51. Part II
Giving
existing life
insurance
policies to
charity

52. •Bought too much insurance
for actual or current needs
•Bought for children who are
no longer dependent
•Bought for an outdated
business buy-sell
agreement
•Doesn’t need
the cash value

53. Giving a life insurance policy means
giving all rights to the charity
• No incidents
of ownership
• No ability to
borrow or
change
beneficiaries
• No indirect
benefit to
donor

54. Typical policy gift valued
at lower of these
How do we
calculate fair
market value or
donor’s basis?

55. Uncertainty in Basis Valuation
For payments from
insurance company
Basis =
+ premiums paid
– refunds
– loans
For sales to others
Basis =
+ premiums paid
– refunds
– loans
–“Cost of insurance”
(term portion of policy)
Uncertain for charitable gifts
Will “cost of insurance”
reduction fail in court review?
Will it apply to gifts?

56. For universal life
policies, “Cost of
Insurance” is
reported to the
policyholder.
For traditional
whole life policies,
“Cost of Insurance”
may not be
reported or easily
determined.
For term insurance,
“Cost of Insurance”
is the premium.

57. Typical fair market
value
Premiums due policy:
≈ cash surrender value,
greater of ITR (n/a variable
or universal life) + or PERC
Newly issued policy: use
first premium paid for
fair market value
Paid-up policy:
replacement policy for
insured of that age

58. Because of the “life
settlement” market,
policies may have
value far beyond
traditional
calculations

59. Life settlement
value above cash
surrender value is
probably deductible
as long-term capital
gain
Life settlement
value up to cash
surrender value is
ordinary income and
deductible only at
basis
$150,000 life
settlement
value
$50,000 cash
surrender
value
$20,000 basis
Deduction
would likely be
$20,000 +
$100,000

60. Summary of
qualified appraisal
attached to
tax return
Notefromcharitybeforetaxes
filedordue
(1) Date,location,and
descriptionofproperty
(2) “Nogoodsorserviceswere
providedinexchangefor
thesegifts.”[ordescribe
andvalueitemsprovided]
Donor’s reliable
recordsofgift,charity,
date,place,FMV(and
costbasisifrelevant)

61. Neither the
insurance agent
who sold the policy
nor the insurance
company may
prepare the
appraisal because
they are parties to
the transaction

62. Donating a policy with
outstanding loans is
bad planning!
• Under charitable
split-dollar rules the
deduction (for gift or
future premiums)
will be entirely lost
• Donor is taxed on ordinary
income in the amount of loan
less the applicable basis, which
is loan amount X (policy
basis/policy FMV)

63. Don’t give life insurance with
outstanding loans!

64. After getting a policy the charity may
• Ask donor to continue to pay premiums
• Surrender for cash value
• Pay premiums from
charity’s funds
• Sell in the life
settlement
market

65. Annuity
contracts may
be poor gifts
• Donor will immediately
recognize all gain in
contract as ordinary
income
• If issued pre-1/23/87
and not matured
deduction limited to
cost basis
• Gifting at death is not a
problem

66. Part III
Creating new
policies for
the charity

67. Insurance Inc.
Creation or
Transfer of
New Policy
2014
Gifts to be used for premiums
Death
Benefit
to
Charity
Option 1: Donor
makes gifts to be used
as premium payments
Gifts are
deductible if
donor keeps
no rights in
the policy
2015 2016 2017 2018 … Death

68. Insurance Inc.
Creation or
Transfer of
New Policy
Premium Payments
Death
Benefit
to
Charity
Option 2: Donor pays
premiums on charity-
owned policy
Gifts are
deductible if
donor keeps
no rights in
the policy
2014
2015 2016 2017 2018 … Death

69. Insurance Inc.
Creation or
Transfer of
New Policy
Gifts to be used for premiums
Death
Benefit
to
Charity
1. Deductible so long
as donor retains no
rights in the policy
2014
2015 2016 2017 2018 … Death

70. Insurance Inc.
Creation or
Transfer of
New Policy
Premium Payments
Death
Benefit
to
Charity
2. Deductible so long
as donor retains no
rights in the policy
2014
2015 2016 2017 2018 … Death

71. Insurance Inc.
Creation or
Transfer of
New Policy
Gifts to be used for premiums
Death
Benefit
to
Charity
1. Standard gift
receipt
2014
2015 2016 2017 2018 … Death

72. Insurance Inc.
Creation or
Transfer of
New Policy
Premium Payments
Death
Benefit
to
Charity
2. Gift receipting practice
depends on charity
2014
2015 2016 2017 2018 … Death

73. Insurance Inc.
Creation or
Transfer of
New Policy
Gifts to be used for premiums
Death
Benefit
to
Charity
1. Donor can give
appreciated property
2014
2015 2016 2017 2018 … Death

74. Insurance Inc.
Creation or
Transfer of
New Policy
Premium Payments
Death
Benefit
to
Charity
2. Donor must give cash
2014
2015 2016 2017 2018 … Death

75. Insurance Inc.
Creation or
Transfer of
New Policy
Gifts to be used for premiums
Death
Benefit
to
Charity
1. Income limitation of
50% for cash gifts
2014
2015 2016 2017 2018 … Death

76. Insurance Inc.
Creation or
Transfer of
New Policy
Premium Payments
Death
Benefit
to
Charity
2. Income limitation of 30%
“for the use of” charity
2015 2016 2017 2018 … Death
2014

77. Insurance Inc.
Creation or
Transfer of
New Policy
Gifts to be used for premiums
Death
Benefit
to
Charity
• Standard giftreceipt
• Cangiveappreciated property
• 50%incomelimitation forcash
2014
2015 2016 2017 2018 … Death

78. Insurance Inc.
Creation or
Transfer of
New Policy
Premium Payments
Death
Benefit
to
Charity
2015 2016 2017 2018 … Death
2014
• Giftreceipting depends oncharity
• Must givecash
• 30%incomelimitation forcash

79. Potential advantages and problems
for charities and donors

80. Donor with small
income can fund a
large posthumous
project
Potential
advantages

81. Donor receives a
bill from the life
insurance
company instead
of ongoing
donation requests
from charity
Potential
advantages

82. Insurance agents
may help to “sell”
the idea instead of
requiring charity
fundraiser time
Potential
advantages

83. Insurance agents may
“oversell” risking long-
term donor relationships
Potential
problems

84. Depending on policy
structure, donor may
give for years, and
charity receives nothing
due to later policy lapse
Potential
problems

85. Some policies
may benefit
insurance
companies and
agents
more
than
charity
Potential problems

86. Potential problems:
Insurable interest
(i.e., you can’t take out a life insurance policy on a stranger)
Has now mostly been fixed by legislation

87. The charity may prefer funds today
Potential problems

88. The donor never sees
the impact of the gift
Potential
problems

89. Donors cannibalize giving to pay premiums
Regular giving
to charity
Premium
Payments
Potential problems

90. A charity can prevent
problems by refusing to
accept policy gifts that
don’t meet its guidelines.
Assume cannibalization of
gift income and require
• Short-term (e.g., 10
year) to projected
paid up status to age
100
• Top companies
• Reasonable interest
rate projections

91. Otherwise, just say “No!”
It isn’t “free” if the donors will
be paying premiums instead of
giving to your organization

92. 1.Wealth
replacement
2.Gifting existing
policies
3.Creating new
policies for the
charity
Common Uses

93. Using Life
Insurance in
Charitable
Planning

94. Help me
HERE
convince my bosses that continuing to build and
post these slide sets is not a waste of time. If
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you reviewed these slides, please let me know
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95. If you clicked on
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Thank
You!

96. This slide set is from the curriculum for
the Graduate Certificate in Charitable
Financial Planning at Texas Tech
University, home to the nation’s largest
graduate program in personal financial
planning.
To find out more about the online
Graduate Certificate in Charitable
Financial Planning go to
www.EncourageGenerosity.com
To find out more about the M.S. or
Ph.D. in personal financial planning at
Texas Tech University, go to
www.depts.ttu.edu/pfp/
Graduate Studies in
Charitable Financial Planning
at Texas Tech University