Case Study: Charitable Giving via Life Insurance
Client Profile
Barbara, a 65-year-old philanthropist, is deeply committed to supporting her favorite charity, an organization that aligns with her lifelong values. She also has a strong desire to leave a lasting legacy for her family. Barbara has built significant wealth over the years, with her estate consisting primarily of non-liquid assets such as artwork, real estate, and a diversified portfolio of stocks. While she wants to make a substantial charitable donation, she is equally committed to ensuring her children receive their fair share of her estate.
The Challenge
Barbara faces a common estate planning problem: balancing her charitable aspirations with her responsibility toward her family. A large charitable bequest would reduce the value of the estate passed on to her children, as it would require liquidating assets to provide for the donation. This is particularly concerning because the majority of her estate is tied up in illiquid assets, making it difficult to divide fairly without compromising value. Additionally, selling these assets could trigger capital gains taxes, further reducing the overall estate value.
Barbara’s primary challenges included:
Ensuring equitable inheritance: She wanted her children to inherit the full value of her estate without being negatively impacted by her charitable goals.
Avoiding asset liquidation: Selling non-liquid assets like artwork or real estate would be cumbersome and could lead to unnecessary tax liabilities.
Achieving tax efficiency: Barbara wanted to minimize estate taxes while maximizing the impact of her charitable contribution.
The Solution
To address these challenges, Barbara’s financial advisor suggested using a life insurance policy as a tool for charitable giving. Here’s how the plan was structured:
Purchasing a Life Insurance Policy: Barbara purchased a life insurance policy with her chosen charity named as the beneficiary. This ensured that the charity would receive a predetermined, significant donation upon her death, allowing her to achieve her philanthropic goal.
Funding the Premiums Strategically: Barbara used a portion of her annual income to pay the premiums for the life insurance policy. This approach allowed her to fund the policy without depleting her estate or affecting the inheritance for her children. Additionally, the premiums could potentially qualify as a charitable tax deduction.
Preserving Family Inheritance: Since the life insurance policy was specifically designated for the charity, the rest of Barbara’s estate such as her artwork, real estate, and stocks remained intact and available for her children to inherit.
Tax Efficiency: The proceeds from the life insurance policy passed directly to the charity, bypassing probate and estate taxes. This provided Barbara with an efficient way to achieve her charitable goals while reducing the taxable value of her estate.
The Outcome
This strategic approach yielded a win-win outcome:
Charity Receives a Significant Gift: Upon Barbara’s passing, the life insurance policy provided a substantial donation to her favorite charity, fulfilling her philanthropic vision and ensuring her legacy lived on in the community she cared deeply about.
Children Inherit the Full Estate: Barbara’s children were able to inherit the entirety of her estate without any reduction or the need to sell valuable assets. They could keep the family’s artwork, retain real estate holdings, and manage the stock portfolio without disruption.
Tax Savings: By leveraging the life insurance policy for charitable giving, Barbara reduced the overall estate taxes, creating an efficient transfer of wealth to both her family and the charity.
Peace of Mind: This solution gave Barbara the assurance that she could support the causes she was passionate about while providing her children with financial security.
Key Takeaways
Barbara’s case highlights the flexibility and benefits of integrating life insurance into estate and charitable planning. By using life insurance:
Philanthropic goals can be achieved without sacrificing family inheritance.
Estate liquidity challenges can be mitigated.
Tax efficiency can be maximized.
This approach is particularly effective for individuals with significant non-liquid assets who wish to balance charitable giving with family wealth transfer.