If you are receiving required minimum distributions (RMD) from an Individual Retirement Account (IRA) or other distributions from retirement plans, please consider contributing any excess funds above your necessary expenses to Tyler’s Hope. This strategy allows you to forgo the income tax on those funds. 

Examples

• I need income now: A 60-year old nearing retirement, John, is charitably inclined but will need income throughout retirement. John has $500,000 in Apple stock that he purchased 10 years ago for $100,000 ($400,000 of capital gains). John gifts the stock to a charitable remainder annuity trust (CRAT). The CRAT can sell the Apple stock and diversify the risk without paying capital gains tax on the $400,000 gain. John can receive a 5% ($25,000) annuity payout for the rest of his life and also creates a $423,787 tax deduction. At John’s death, the charitable beneficiary will receive the remainder of the trust ($423,787). This example assumes a 6% rate of return for the CRAT.
• I don’t need income now, but I want to pass on wealth to my children: Now pretend John has plenty of current income, wants to gift to charity, and pass the remainder on to his children. John could gift the highly appreciated Apple stock to a Charitable Lead Annuity Trust (CLAT). The CLAT could realize the capital gain ($400,000), diversify the asset, provide an annual income stream to a charity ($25,000), and pass on the remainder of the trust ($423,787) to John’s children at his death. John’s tax deduction would be $76,212. This example assumes a 6% rate of return for the CLAT.
• I want to make a big impact down the road: A 50-year old committed to giving $5,000 annually for 10 years could leverage the $50,000 gift into a $360,000 gift using life insurance.  The life insurance premiums will be deducted against regular income.  

There are numerous creative ways that donors can use life insurance for charitable giving, here are a few more: 

• Make an absolute assignment (gift) of a life insurance policy currently owned, donate a new life insurance policy, or have the charity purchase life insurance on the donor's life and pay the annual premiums (assuming insurable interest and state law permits). Each of these allows a current income tax deduction.
• Name a charity as the primary or contingent beneficiary of an existing or new life insurance policy. Although this will not yield a current income tax deduction, it will result in a federal estate tax deduction for the full amount of the proceeds payable to the charity, regardless of policy size. This can be particularly applicable in situations where there is only one logical beneficiary, or where insurance is used to fund a supplemental retirement benefit and the death benefit is of little importance to the insured.
• Most estate planning techniques become even more effective when coupled with other techniques. By giving appreciated long-term capital gain property to the charity (e.g., stocks, real estate, mutual funds, etc.), the donor avoids capital gains tax and receives a deduction for full-market value (with notable exceptions). Using this cash to then fund a life insurance policy provides even more leverage, creating an even larger gift.
• Perhaps one of the most popular ways to utilize life insurance in charitable planning more indirectly is through "wealth replacement." In this situation, life insurance makes it possible for a donor to make an immediate or deferred gift of land, stock, or other property while still providing an acceptable family inheritance.
  
  Qualified and non-qualified retirement plans are one of the best assets to give to charity because they are exceptionally inefficient in passing wealth to heirs. This is due to the fact that they face both income and estate tax, in some cases leaving only about 20% to 30% of the asset for the remaining family. Many families choose to leave the retirement plans directly to charity and then use life insurance as a way to "replace" the wealth contributed. Another option that may be considered is taking a distribution from the qualified or non-qualified plan and using it to purchase a life insurance policy in an irrevocable life insurance trust (ILIT); the donor can then give the remaining plan assets to charity. Not only does the charity receive a gift, but also the donor's heirs may receive more than they would have if the donor attempted to pass the retirement plan assets directly to them.
  
  A charitable remainder trust (CRT) is especially powerful for those who have highly-appreciated assets and a desire for increased income. These assets are often non-income generating and property tax-draining land or low-yielding stocks.
  
  A life insurance policy equal to the original gift, but owned in trust, allows the heirs to receive the full value of the assets without paying estate taxes. Properly structured, the premium can often be paid with the income generated from the tax deduction and/or a portion of the excess income, which results from the avoidance of capital gains tax.
  
  Bequests should also prompt one to consider using insurance to replace the assets. The donor may want to leave a gift by will to charity, but he/she may be concerned about disinheriting heirs. Since life insurance benefits can be received income and estate tax free if structured properly, the donor might choose to provide a death benefit equal to the charitable gift, or the amount the heirs would have received from the bequest after taxes.

• While life insurance is most commonly thought of only as a wealth replacement vehicle for CRTs, it can also be used as a funding asset inside the CRT in certain situations where it serves the following purposes.
  • The life insurance death benefit can substantially increase the remainder value of the trust, thus providing a larger gift to the donor's selected charities when the trust terminates.
  • In a two-life unitrust scenario, life insurance proceeds can "balloon" trust corpus when the first income beneficiary dies, creating a much larger income payout for the surviving income beneficiary.
  • The donor is able to make partially tax-deductible premium payments for a personal insurance need.
• Purchasing life insurance for estate liquidity has been a standard life insurance technique for many years. Another option, however, has been gaining increased attention in recent years as a more exciting way to control assets your clients will not be able to keep: The "Zero-Tax Estate Plan." Properly structured, this can also allow the donor to assure that his or her heirs will become actively involved in philanthropy, and thus pass on family values as well as family wealth. Below are some simplified calculations to illustrate the concept.

These are a few of the more popular techniques used to donate to charities like Tyler’s Hope. We understand each personal financial situation is unique and should be reviewed individually. If you are interested in learning more about Planned Giving strategies, let Tyler’s Hope help. Our executive board consists of some of the area’s top CPAs and financial planners who specialize in Planned Giving.