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Maximizing Charitable Giving Through Universal Life Insurance
Avoiding the complications of estate taxation and the U.S. probate system may be the key reasons to allow high net worth foreign clients to include sizable charitable donations in their estate planning. Like all clients, these wealthy foreign clients are looking for strategies to help them avoid the potential for significant increases in the estate and gift tax rates in 2013 and beyond. A universal life insurance policy can provide a unique solution to help foreign nationals meet their estate planning, business succession and charitable goals.
The Universal Life Insurance Charitable Donation
Donating the proceeds of a universal life insurance policy to charity requires that the donor purchase a life insurance policy naming the charity of his choice as beneficiary. When the donor dies, the proceeds of the policy are simply paid to the charity, rather than to his estate. Importantly, the funds will not be subject to estate tax and will not be required to go through probate, which provides the client with a degree of privacy that they might not achieve with traditional estate planning vehicles.
Using a universal life insurance policy to make a charitable donation in this manner can allow your clients to make larger donations. For example, a client who wishes to donate $10,000 annually can instead use that $10,000 to pay the premiums on a universal life insurance policy worth $1 million upon his death. If the client lives for an additional 20 years, the life insurance policy would pay $800,000 above and beyond the $200,000 in direct charitable donations that he would have made through the annual contributions.
Further, if the client retains ownership of the policy, he or she will be able to access the cash value built inside the policy if the funds should become necessary. This provides a degree of flexibility that may not be possible with estate planning vehicles such as trusts or private foundations.
Important Considerations
While using a universal life insurance policy as a vehicle for transferring funds to charity allows a donor to avoid estate taxes and the probate system, it also contains several unknowns. Because the exact lifespan of the donor cannot be known, it is impossible to know exactly how much the charitable donation will cost your client. A $1 million policy could cost $200,000 if the client lives for 20 years or it could cost $400,000 if he lives for 40 years after the policy is purchased.
Similarly, not knowing the client’s exact lifespan prevents the donor from knowing exactly when the charity will receive the funds. It is therefore important to periodically reassess the policy terms to ensure that the client continues to want to make the donation. Because charities can change their charitable goals, it is also important that the client remain familiar with the charitable beneficiary to ensure that his or her goals continue to be met.
Conclusion
A universal life insurance policy can provide high-net-worth clients with an effective vehicle for transferring assets to charity post-mortem while retaining control over the assets during life. For clients interested in making sizable charitable donations, this technique allows the client to avoid the U.S. probate system while simultaneously reducing their estate tax liability.
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About the Author
William H. Byrnes, Esq.
Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow
Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow, is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of 10 books and treatises and 17 chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.
He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.
Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).
Email: wbyrnes@nationalunderwriteradvancedmarkets.com
About the Author
Robert Bloink, Esq., LL.M.
Robert Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law.
Previously, he served as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers, and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country.
Mr. Bloink's insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures.
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