By Palmer Williams
Many people are faced with the challenge of leaving their estate to their heirs while still helping the charitable and community organizations they have supported during their lifetime. This can be a difficult topic for clients to discuss. They may worry they’re “disinheriting” their families by leaving something to charity, or they may fear they don’t have enough money to make a significant charitable gift. As a result, this important discussion frequently gets sidestepped.
Adding to the confusion is that advisors may be reluctant to provide detailed guidance on this issue, believing that the topic of how to apportion an estate is sensitive because it reflects the client’s values. Some advisors may steer clear of the conversation due to the complex tax landscape.
For clients to accomplish their goals for their estate, it’s important that advisors guide them with the right strategy and financial tools. Life insurance is one underused tool that can go a long way in helping clients balance their desire to leave a legacy for their heirs with their desire to support a favorite cause.
Even wealthy households may use simple strategies and underuse life insurance as a way to achieve their goals. Nearly three quarters of wealthy households (72 percent) are aware of, but do not currently use, other tools outside of traditional donations, according to the 2014 U.S. Trust Study of High Net Worth Philanthropy.
It is clear there can be a lack of awareness among clients and advisors on how to use life insurance in charitable giving. In order to bridge this gap, it is critical for advisors to be armed with the knowledge and tools to open a discussion.
Identify the Right Clients
The first step to having a meaningful conversation about the role of life insurance in charitable giving is to identify the right clients. Ideal candidates have: the desire to leave an enhanced legacy to a charitable organization, educational institution, or the community; available assets that aren't earmarked or needed for retirement income and expenses, and are healthy enough to qualify for the life insurance at an age where it still makes financial sense.
Every client may not meet all the criteria but it’s still helpful to raise the topic with clients who are approaching or in retirement, or who have significant charitable contributions on their tax returns.
Ask meaningful questions
Once a candidate has been identified based on their values and past charitable giving, a financial advisor can ask questions that will drive the conversation. Some questions to get this conversation started are:
- Are you currently involved, from either a time or a financial perspective, with any charitable causes?
- Do you have a vision of your personal philanthropy and what you want it to accomplish?
- Would you have more of an interest in supporting the causes most important to you if we still can create a plan to leave a substantial estate to your family?
- Would you be interested reviewing strategies that could increase the magnitude of your charitable contributions?
- Would you like your family to be involved in your philanthropy or would you rather have it be private? Would you want that to change after your death?
Select a policy that makes sense
Selecting the life insurance policy and structure is critical to ensure the right people get the right assets at the right time. Some policy options to consider include:
- Gift an existing policy - Designate a charity as the owner and beneficiary of existing coverage that is no longer needed. This approach may allow owners to receive a tax deduction for gifting a policy that does not have outstanding loans against it.
- Make a charity the beneficiary of an existing policy - With this structure, there is no income tax deduction, but the client maintains control of the policy and can elect to change the beneficiary at any time.
- Consider new coverage - Before proceeding, it is important to review the charitable underwriting guidelines of the life insurance companies to consider for a client. When eligible, a new policy may offer a client greater leverage for their gift than existing assets or even existing life insurance. For married couples, consider second to die life insurance for an even greater impact.
Using life insurance for charitable giving is attractive for clients who want to give back to the community while providing for their families. Asking the right questions, in the right way can make the difference in helping a client create a legacy that meets their most important goals.
Palmer Williams, CFP, CLU, ChFC, is national sales director with Saybrus Partners. Palmer may be contacted at [email protected].