Gifting a life insurance policy creates immediate tax savings, legacy

Individuals looking to make a lasting impact on their favorite charity should consider donating their life insurance policy. The value of these policies often exceeds what could be given through cash or stocks while creating an immediate tax benefit for the donor.

“This is a strong strategy for donors who don’t want to part with liquid assets in the short term,” says Michael Zeleznik, director at GDK & Co.

Smart Business spoke with Zeleznik to learn more.

How can one gift a life insurance policy? What are the options?

When donating a life insurance policy to charity, a great method is a transfer of ownership. Some policy owners name a charity as a beneficiary, but that’s less beneficial to both parties.

To donate a policy, the owner completes a form to transfer ownership to a charitable organization. The charity will then issue a receipt for that gift.

If the value of the policy exceeds $5,000 and the donor wants to claim a charitable income tax deduction, the donor must have the insurance policy appraised. The charity and the appraiser must then sign IRS Form 8283, which the donor attaches to his or her income tax return for the year in which the donation was made.

It’s best to donate permanent life policies. Some permanent policies have significant cash value, so much so that there are no more premium payments needed. That is the ideal policy to donate. Policies of modest cash value can also be donated, and then the donor makes annual tax-deductible contributions to the charity to pay the premium.

In what circumstances does gifting a life insurance policy to charity make sense? Why not gift cash or stock?

Policy owners sometimes find that their policy’s death benefit isn’t as valuable to their family as it once was. Or, they may have enough retirement income to live comfortably. In such cases, donating their policy to charity may make sense.

Cash and stocks are great donations, but the proceeds from a life insurance policy typically have a bigger charitable impact.

What are the benefits for the policy owner?

The policy owner gets an immediate income tax deduction for the year in which the donation was made. Depending on how the policy was structured within the donor’s estate, removing that asset might also offer some relief on the amount of estate tax due.

In the case that the donation is large enough that it exceeds the amount one is permitted to claim as a charitable deduction in a given tax year, the excess can be carried forward and used for a total of up to six years.

What misconceptions do donors hold when it comes to gifting an insurance policy?

Some donors mistakenly believe that the amount of the death benefit of their policy is guaranteed, not realizing that the cash value can go up or down.

The amount of the charitable deduction is another aspect many people misunderstand. Let’s suppose a policy has a $100,000 death benefit, its fair market value is $80,000, cash surrender value is $78,000, total premiums paid were $64,000, cost of insurance charges were $10,000 and tax basis is $54,000. It’s not obvious, but the charitable contribution deduction is $66,000.

Also, many donors don’t realize their full range of charitable options. Most donate their life insurance policy to a single charity. That’s a good thing, but those donors who wish to leave a legacy or support multiple nonprofits should consider gifting their policy to start their own charitable fund. Community foundations offer a range of charitable fund options, including scholarship funds and funds designated to one or more specific charities, a community or field of interest. Donors can then support the causes or charities they love year after year, forever.

Though donating a life insurance policy involves some complexity, it’s not anything insurmountable. With a good adviser and the help of a good development department, it can be done efficiently and effectively.

Insights Philanthropy is brought to you by Akron Community Foundation


Tips to help families retain business, charitable values during transition

There is an impending transfer of wealth that is expected to have a significant impact on Ohio.

In 2005, the Rural Policy Research Institute estimated that $1.07 trillion would change hands during the following 50 years, with $55.93 billion being transferred in Summit County alone. Ten years into that shift, an equally significant transfer has emerged — the transfer of leadership and philanthropic legacy.

Smart Business spoke with Thomas Venarge, president of APV Engineered Coatings, to discuss how he and his father conducted a successful leadership transfer that involved both their family business and philanthropy.

What was essential to the successful transfer of leadership from your father to you?

Part of our formula for a successful transfer has been time and patience. I’ve been working in the company for 25 years, more than half my life, and have been taught how the company operates by my father, who still remains active in the business.

Another aspect is mutual trust and respect.

My father and I both trust each other. We may not always agree, but we respect each other and know that when it comes down to it the goal is always the success of our business.

The last component is preparation and constant communication. He and I have talked and prepared for the transition for many years.

It’s important to start planning early, stay in the game and work on your plan.

Many business executives haven’t thought about how their legacy will endure. It’s important to think about that and visualize what your company might look like 10 to 20 years down the road. Part of that is considering what happens when you’re no longer involved in the business day to day.

How does that planning extend your family’s philanthropic legacy?

Our primary concern is that the family’s philanthropic legacy continues and that it gets ingrained in me and my children and my sister’s children.

Our family’s legacy is something we’re proud of and we want to protect it. We want it to continue, thrive and grow, and become a part of who we are as individuals and as businesspeople.

How is your family working to ensure its philanthropic efforts will continue?

It’s a constant work in progress.

What we’re doing now to help ensure our success through leadership and charity is getting my children and my sister’s children involved so early that it’s practically part of their DNA.

Two of my three daughters, all of whom are not yet teenagers, have learned about philanthropy and have worked successfully to provide real money for real people for real problems before they learned to ride a bicycle. It’s never too early to get started.

Having a donor-advised fund at our local community foundation has made philanthropy very easy for me and fun for the girls.

The community foundation outlines funding opportunities in our areas of interest and provides us with all the research. They comb their database for programs that may appeal to my daughters because they affect children their age.

The girls get a warm feeling from helping kids in general, but it’s much more special when they’re helping kids they know, who ride on their school bus and who are in their classrooms.

Much like he did with the business, my father also uses the fund to show us the causes that are important to him, preparing us for when it’s our time to manage the donor-advised fund.

What advice would you offer other families that are preparing for similar transfers?

Many families see their business and charitable legacies falter because of a difference of opinion. The best advice I can give is to communicate constantly.

My father and I share everything: good news, bad news and the worst news. I can’t be afraid to tell him anything. The lines of communication must be open and used all the time to talk about everything and anything, regardless of how tough the subject is.

Some conversations aren’t fun, but they are critical. He and I may disagree on something, but at the end the of the day, I’m his son and he loves me. I’m not worried that I’ll be disowned or fired. I can tell him whatever, whenever — and that’s critical. ●

Insights Philanthropy is brought to you by Akron Community Foundation

Planned giving strategies offer a way to make money while giving it away

Many people wish they were doing more to support their favorite charities. Often, they believe they don’t have enough assets to give, or that those they can give would have little impact.

“If someone thinks they need every penny they have, few people, even those who are philanthropically minded, will give money away,” says Daniel L. Bonder, JD, MBA, CFP, founding partner of Beacon Financial Partners.

“What they don’t realize is that a well-crafted planned giving strategy will give them more money in their pockets to meet their financial goals while allowing them to support their favorite causes and charities now and in the future.”

Smart Business spoke with Bonder about planned giving strategies that benefit charities and donors.

What are the major benefits of a strong planned giving strategy?

A good planned giving strategy helps clients achieve their charitable endeavors while helping them meet their personal financial goals. Maybe it’s creating income now or money to live on in the future. Perhaps it’s protecting their family or business. With planned giving, they can do both.

What donation strategies exist within planned giving?

Donors may be surprised by the variety of assets they can give to charity, such as retirement plans and even active life insurance policies. For example, a life insurance policy gets donors an immediate tax deduction when they donate and future deductions when they make charitable contributions that pay the premium.

The strategies that get more publicity, though, are charitable trusts.

Charitable trusts offer donors fixed income now or in the future. A charitable remainder trust gives a designated charity the trust’s remaining funds at a certain point in time, or when the donor or his or her spouse passes away. The donor can earn income by taking a percentage of the trust balance, or elect to take a specified amount at specified times. They also receive a current tax reduction and can diversify large holdings. One of my clients inherited a few low cost basis stocks through a living trust. A charitable remainder trust allowed her to diversify the investments and draw an income for life. She also received a large tax deduction and helped her favorite charities.

Sometimes protecting a client’s family, business or property is more important to them than creating income. With a charitable lead trust, the donor forgoes taking an income and instead designates that a percentage of the trust balance goes to the donor’s charity of choice. This assures the donor that the charity gets a specified dollar amount or percentage each year. Upon the donor’s death, the remaining principal usually goes to the donor’s heirs.

Trust assets often grow faster than the distribution allocated to charity. Take, for example, stock of a closely held company. If that asset were held outside of the trust, a family could end up paying estate taxes on that growth. With a charitable remainder trust, a donor can pass the value of that stock through the trust by freezing the base value used to determine the taxable amount on that principal, reducing the donor’s tax burden while improving income streams.

How can one get the most impact out of a planned giving strategy?

It comes down to working with the proper professionals who understand the context of the planned giving strategy — why it is being created, and how it will help the donor and his or her family. If you’re looking at creating income streams or selling assets for tax purposes, professionals can translate your personal goals into the right strategies. Contact your legal or financial professional for expertise in this area.

You can also contact your local community foundation. They can help you use your planned gift to create a permanent charitable legacy so you can support your favorite charities forever. There is no cost to meet with community foundation staff. They will work with you and/or your advisers to implement a strategy that works for you.

Ultimately, your money can only go three places after you’ve passed: to family, to a charity or to taxes. You get to decide, but you have to plan for it. Otherwise, the law dictates what happens to your money.

Insights Philanthropy is brought to you by Akron Community Foundation

There’s still time to make a lasting impact with your charitable donation

The end of each year is a notable time for making charitable donations because it’s the last opportunity to glean an income tax benefit before year’s end. That compels some to make last-minute decisions with their gifts. While many charities can benefit from a one-time gift, donating through a community foundation can extend the impact of a donation and meet year-end tax deadlines.

“These foundations are a means through which donors can ensure the gifts they’re giving and the associated tax benefits are advantageous to everyone involved,” says Margaret Medzie, vice president of development and donor engagement at Akron Community Foundation.

Smart Business spoke with Medzie about tips for year-end giving.

What options do donors have when it comes to giving?

Donations can be made directly to a charity, which is fairly easy to do — just pick an organization and write a check. But, with tax year-end closing in, time is of the essence. Some individuals have a complex gift to give, like appreciated stock, which isn’t always easy for nonprofits to turn around quickly.

Others may not be in a position to decide before year’s end which nonprofits to support with their gift. Community foundations can offer both types of donors an alternative.

What common misconceptions may lead to a less effective donation strategy?

One common misconception is that cash is always the best to donate. Appreciated securities actually equate to a larger dollar–for-dollar donation and enable the donor to avoid capital gains taxes. Community foundations can also accept other types of gifts, such as real estate, life insurance and annuities. Depending on how gifts are structured, the tax benefits can be more compounding than cash.

There’s also the false belief that donors need to pick a cause to support when they make the contribution in order to get a tax break. Through a community foundation, donors can donate as much as they wish now, then identify organizations to support over time. This is possible through what’s called a donor-advised fund, and it can be set up in as little as a day. With a donor-advised fund, donors get the impact of the gift on current year taxes and can spread donations to one or several organizations later. This is a great option to offset a taxable event when a donor can’t decide where to give.

How much work do donors need to put into managing charitable contributions made to a community foundation?

Fairly little work is needed by the donor when they start a charitable fund at a community foundation. Donors and their accountants need only track their contributions to the fund, and the community foundation does the rest of the work. They process the donation, vet charities to ensure they’re in good standing with the IRS, provide quarterly accounting, and send the grant checks to nonprofits both locally and across the U.S. — they wholly support donors’ grant-making objectives. They can also offer insight into local community needs, should the donor desire it.

What is important to consider before making a year-end charitable donation?

The first consideration is to determine how much to give and the most tax-beneficial asset to donate — cash, real estate, annuities, etc. That conversation is best had between the donor and his or her professional adviser. They can work with a community foundation to identify the best fund option for their giving style.

What is the timeline for making a year-end donation?

Most organizations are open on Dec. 31 so they can be available to accept last-minute cash donations. Those who wish to transfer securities or mutual funds before year’s end need to act sooner. Stock gifts to a community foundation should be initiated by Dec. 22 and can sometimes be processed in as little as a day, whereas mutual fund shares can take three to five days.

Call your broker directly and follow up to make sure he or she handles your request promptly. That way, you can be sure to get the contribution completed during this tax year.

Insights Philanthropy is brought to you by Akron Community Foundation

Donating appreciated securities offers more lasting benefits to you, charity

After several years of a bull investment market, appreciated securities are at their highest market value in recent times. With year-end giving season approaching, savvy investors are finding that now is the perfect time to leverage their long-term appreciated securities for making charitable gifts.

Securities can be much more tax-beneficial than donating cash and can be processed as quickly and easily if given to the right charity.

Smart Business spoke with Dale Koblenzer, a financial consultant at Merrill Lynch, to learn about options for charitable giving.

What is the investing climate like today?

Investment for stocks has not been better in 30 years. Investors are working in an environment with low interest rates, low inflation and strong corporate earnings.

Corporations in this country have never been stronger — they’re in the best position in decades. They’re highly productive, their workers are productive and their profit margins are high.

Why donate appreciated securities?

A gift of an appreciated security is very cost efficient. Also, by giving away noncash assets, donors won’t hurt their cash position. They’re giving away gains and avoiding the subsequent tax. Simply put, it costs little to give away and has a value that’s very high.

When it comes to big gifts of securities with substantial gains, donors can carry over the tax benefit up to five consecutive years. This often makes sense for executives who are compensated with stock. They can sell their older holdings to take advantage of greater gains.

It also makes sense for executives with personal investments. By donating stock, they can use their cash to reinvest in their business.

Who should consider this type of donation?

Individuals who have owned or purchased stocks that have achieved gains, those who own stocks that have gone through legacy change, or those who have received stocks after the sale or acquisition of a company — really anyone who has securities will have very high gains after a bull market and should consider donating stocks. Some company executives have concentrated holdings that tie up a high percentage of their net worth in securities. Gifting all or some of those holdings helps them do good for their community while diversifying their portfolio.

What options exist for donating stocks?

One option is to give directly to a favorite charity to gain an immediate tax benefit. However, not all charities can easily or readily accept appreciated securities. Recent financial regulations have made it harder for them to maintain contribution accounts with banks and brokerages, especially if they don’t have frequent transactions.

In lieu of donating to one specific charity, some choose to give shares to a community foundation. These organizations keep donors’ options open, allowing donors to make a gift to start their own charitable vehicle like a donor-advised fund, get a tax deduction for themselves now, and have time to allocate money to charities later. This can lead to a legacy of giving, something that involves the input of their families and children, and keeps their gifting options open.

Comparatively, a donation to a single charity is done once and it’s over. By donating to a community foundation, a donor can create a fund that pays out to multiple charities over many years.

Some people with significant wealth desire to own a charitable foundation. But the IRS casts a critical eye on those, meaning reporting can be difficult, expensive and time consuming. Donor-advised funds offer all the tax benefits of a charitable foundation without the heightened government scrutiny. They are relatively inexpensive, more flexible and simple, and confer a legacy onto the next generation.

Is now a good time to donate stock?

It’s always a good time to be philanthropic. But more specifically, valuations today are high in relation to where they’ve been. The wealth effect that’s been created during the past five years is significant. Further, tax laws are still beneficial for giving and creating charitable funds. There’s always a chance that could change in the future depending on the mood of the federal government.

Insights Philanthropy is brought to you by Akron Community Foundation

Charitable giving when selling your business offers benefits for everyone

Good business owners are known for their ability to capitalize on opportunity. This is especially true when they decide to sell their business. More and more, business owners are using what is likely their largest influx of income as the charitable opportunity of a lifetime.

“Business owners are faced with what to do after the sale and also how to cope with one of the biggest expenses in their lifetime, which is the income tax on gains from the sale,” says Thomas A. Kotick, CPA, CFP®, director at SS&G. “That gets a lot of people talking about what to do to minimize the impact of those taxes. It’s a good time for business owners to reflect.”

Smart Business spoke with Kotick about how charitable contributions can be used to reduce income tax burden and leave a legacy of goodwill in a business owner’s community.

Why do so many business owners include charity as part of their exit strategy?

The community in which a business operates is a big reason for its success, so charitable giving is most often a token of gratitude for the community’s support. As a financial strategy, making a charitable contribution as part of a sale event can significantly reduce the income tax burden.

Depending on how much the business is worth, selling a business could boost the owner’s net worth to a point at which he or she is subject to estate tax. Anyone with more than $5.34 million in assets is subject to a 40 percent estate tax. By giving away part of the income from a sale, the owner has less estate tax exposure.

What options do business owners have when donating their closely held shares?

One option is for an owner to donate a portion to charity. If a charity sells those shares, it isn’t required to pay income tax on the sale. When the donation is in this form, a decision regarding the amount needs to be made prior to the sale.

Business owners can also take the cash from the sale, pay tax on the income and give a portion to charity, which is tax deductible. A direct gift to a public charity gives a business owner a favorable tax benefit, but the decision on where the gifts go must be made that same calendar tax year.

Another option is to create a private foundation. The foundation can bear the family name and allow the delay of charitable decisions, but it can be a lot of work. This legal entity requires family management, the filing of tax returns and distribution of 5 percent of assets annually. In addition to a smaller tax break on contributions, private foundations also pay an excise tax. It is one option for carrying on a person’s legacy, but it requires a willingness to manage and file tax returns.

Are there any less complicated options?

You can create a donor-advised fund by giving an irrevocable gift to an administrating public charity. The donor earns the same tax deduction as a direct gift — the most favorable allowed by the IRS — and can later recommend charitable distributions from it. That fund can bear the family name, but the family doesn’t have to manage it. Instead, the administering organization processes all gifts into the fund and invests them. The business owner then advises on where distributions go. There is no excise tax on earnings and no 5 percent distribution requirement. It’s also possible to take time before deciding where to send the money, which allows time for the money to grow, giving the donor’s charities more dollars in the end.

Donor-advised funds are also a better choice for those who want to remain quiet in their giving. Since the assets are held by an administering organization, the distributions made from donor-advised funds can be kept anonymous, both publicly and to the nonprofits they support, if preferred.

What types of organizations administer donor-advised funds?

Commercial entities are great if someone wants little personal contact and doesn’t mind their money residing in New York or Chicago. Community foundations are a better option for keeping charitable assets local while still having the option of supporting charities anywhere in the U.S. Fees are low and starting a fund is a quick, efficient process that can take as little as a day.

Insights Philanthropy is brought to you by Akron Community Foundation