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When It’s Gone, It’s Gone—Or Is It?Posted February 2023
Even for the wealthiest among us, the extent of our resources is finite. Many donors tell us one of the major factors they weigh in deciding whether or not to make a significant charitable gift is the impact the gift may have on their ability to fulfill other personal financial goals. Often, the goal they are most concerned about is leaving substantial assets to family members.
Some donors have been able to allay those concerns to some degree by using a strategy that allows them to restore some—or, in some cases, all—of the value of a charitable gift to their assets. Simply stated, those donors use the tax savings they generate by making a significant charitable gift to purchase life insurance on themselves. Here’s how that can work:
Example: Faithful supporters Bill and Linda have decided to make a $250,000 contribution to fund a new program important to our mission even though they intend for their children, Marie and Jason, to ultimately receive the bulk of their estate. They are comfortable doing this because, in their 37% federal income-tax bracket, the gift will save them $92,500 in taxes—and they plan to use those savings to purchase a life insurance policy. That policy will pay a death benefit of $200,000 to Marie and Jason when Bill and Linda have both passed, restoring most of the value of their gift to their estate.
The degree to which this strategy works for a specific donor or donors depends on a number of variables. For example, the tax savings realized depend on the donor’s federal income-tax bracket—and the amount of those savings determines how much insurance can be bought. And, of course, the younger the donor is, the more insurance that donor will be able to purchase with those savings. There are many different types of life insurance policies, and it is important to choose the one that best allows you to achieve your objectives.
This so-called “asset-replacement” strategy may be extremely useful to you in your planning. But, before jumping in, we urge you to consult your financial advisors on whether this is appropriate for you—and to direct you to the right insurance professional. We would be pleased to discuss the potential tax benefits of a gift with you and your advisors.
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