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A Powerful Tool to Enable Giving Now

A Powerful Tool to Enable Giving Now

| December 21, 2020

A Powerful Tool to Enable Giving Now


You could be someone who would like to initiate a giving program so that you could see the benefit and experience the joy of giving now. Certainly, in many instances, the recipient of your generosity would benefit more now than later. However, you have reservations because you would also like to leave a legacy to your children and grandchildren.

A possible catalyst and a powerful planning tool that could accomplish both goals is life insurance.

For an example of how this could work, let’s assume that Mr. & Mrs. Donor, both are 60 years old and have large balances in their IRAs and retirement plans. They would like to establish a scholarship fund at their alma mater in memory of their deceased daughter who was a special education teacher. The scholarship would help pay for the education of a student needing financial assistance and who was also pursuing a career in special education. Mr. & Mrs. Donor have two other children that they would like to benefit from their estate upon their passing.

Qualified and non-qualified retirement plans as well as IRAs are exceptionally inefficient in passing wealth to heirs. This is due to the fact that they face income and, potentially, estate taxes. Depending upon the specific circumstances, a greatly reduced after-tax amount would be left for the remaining family.

Another option would be taking a distribution or distributions over time from the IRAs to fund a second-to-die life insurance policy in an irrevocable life insurance trust (ILIT). The Donors could then give the remaining plan assets, or a portion thereof, to fund their scholarship fund. As a result, Mr. & Mrs. Donor get to honor their daughter, benefit qualified students and potentially enable their two children to receive more than they would have if they attempted to pass the retirement plan assets directly to them. In this example the life insurance proceeds would pass to the children income and estate tax free. Note that second-to-die life policies are sometimes used in charitable planning because premiums are less when the death benefit is based upon two lives as opposed to one. Also, underwriting can be more accommodating since it takes two lives to trigger the death benefit.

This is just a hypothetical example. Actual circumstances would depend upon the overall financial scenario of the parents and children. It also assumes that the parents are insurable. There are also certain requirements that must be met to establish the scholarship.

Finally, this is just one of many other possible scenarios. Give us a call and we can discuss your circumstances.