Lets face it…everyone has to die some day. No way around it. Most of us, when we go, want to leave as much of a Legacy for our families as we can. Much of my work with clients focuses on that idea. But no matter what we do there is always some sort of tax. Money that Uncle Sam takes and uses as he sees fit. I call that “involuntary philanthropy”. That is because there are other ways we can take control of taxes and minimize them and we can do that best by incorporating the use of a charity. Rather than letting Uncle Sam decide what to do with the money, why not voluntarily set up a program so that money will go to the charity of our choice? Voluntary Philanthropy.

Life insurance can be an excellent tool for that type of charitable giving. Not only does life insurance allow you to make a substantial gift to charity at relatively little cost to you, but you may also benefit from tax rules that apply to gifts of life insurance.

Why use life insurance for charitable giving?

Life insurance allows you to make a much larger gift to charity than you might otherwise be able to afford. Although the cost to you (your premiums) is relatively small, the amount the charity will receive (the death benefit) can be quite substantial. As long as you continue to pay the premiums on the life insurance policy, the charity is guaranteed to receive the proceeds of the policy when you die. Since life insurance proceeds paid to a charity are not subject to income and estate taxes, probate costs, and other expenses, the charity can count on receiving 100 percent of your gift. Giving life insurance to charity also has certain income tax benefits. Depending on how you structure your gift, you may be able to take an income tax deduction equal to your basis in the policy or its fair market value (FMV), and you may be able to deduct the premiums you pay for the policy on your annual income tax return. When an insurance contract is transferred to a charity, the donor’s income tax charitable deduction is based on the lesser of FMV or adjusted cost basis.

What are the disadvantages of using life insurance for charitable giving?

Donating a life insurance policy to charity (or naming the charity as beneficiary on the policy) means that you have less wealth to distribute among your heirs when you die. This may discourage you from making gifts to charity. However, this problem is relatively simple to solve. Buy another life insurance policy that will benefit your heirs instead of a charity.

Ways to give life insurance to charity

The simplest way to use life insurance to give to a charity is to name a charity to receive the benefits of your life insurance policy. You, as owner of the policy, simply designate the charity as beneficiary. Designating the charity as beneficiary may allow you to make a larger gift than you could otherwise afford. If the policy is a form of cash value life insurance, you still have access to the cash value of the policy during your lifetime. However, this type of charitable gift does not provide many of the income tax benefits of charitable giving, because you retain control of the policy during your life. When you die, the proceeds are included in your gross estate, although the full amount of the proceeds payable to the charity can be deducted from your gross estate. Another alternative is to donate an existing life insurance policy to charity. To do this, you must assign all rights in the policy to the charity. You must also deliver the policy itself to the charity. By doing this, you give up all control of the life insurance policy forever. This strategy provides the full tax advantages of charitable giving because the transfer of ownership is irrevocable. You may be able to take an income tax deduction equal to the lesser of your adjusted cost basis or FMV. The policy is not included in your gross estate when you die, unless you die within three years of the transfer. In this case, your estate would get an offsetting charitable deduction. A creative way to use life insurance to donate to a charity is simply for the charity to insure you. To use this strategy, you would allow the charity to purchase an insurance policy on your life. You would make annual tax-deductible gifts to the charity in an amount equal to the premium, and the charity would pay the premium to the insurance company. One final method is to use a life insurance policy in conjunction with a charitable remainder trust. This strategy is relatively complex (it will require an attorney to set up), but it provides greater advantages than other, simpler methods. You set up a charitable remainder trust and transfer ownership of other, income-producing assets to the trust. The income beneficiary of the trust (you or whomever you designate) will get the income from the assets in the trust. At the end of the trust term (which might be a certain number of years or upon the occurrence of a certain event, such as your death), the property in the trust would pass to the charity. You’ll receive a current tax deduction when you establish the trust for the FMV of the gifted assets, reduced according to a formula determined by the IRS. Life insurance can then be purchased (usually inside an irrevocable life insurance trust to keep the proceeds out of your estate) to replace the assets that went to the charity instead of to your heirs.

Having a big pipeline of “prospects” is typically seen as desirable. The more prospects you put into the pipeline, the more will eventually emerge as clients. At least that’s the theory!

And in principle, the theory is valid. Some of the people you put in the pipeline will become clients. But we always need to ask ourselves two important questions about our pipeline:

• How many of these opportunities do I expect to turn into clients?
• How long will it take for them to emerge from the other end of the pipe?”

THE TIME FACTOR

Taking so long to close-out a non-winning opportunity wouldn’t be so bad if we were investing very little of our time and energy on those dead ends. But that typically isn’t what  happens. We typically make major time investments in creating multiple proposals and following up with phone calls, texts, and e-mails.

Why do so many reps cling to opportunities that drag on or become stalled?

Part of the answer is culture. In many organizations, a packed pipeline is considered a sign of success—tangible evidence that the rep is working. The association may not always be accurate, but it exists nonetheless.

Another issue is fear. Some reps hang on to an opportunity too long out of fear that they won’t be able to find another opportunity with which to replace it. They possess a scarcity mentality—the notion that there are not enough good opportunities to go around. They believe that, in order for one person to win, another must lose. If they let go of an opportunity (they reason), someone else will capitalize on it and win, and they will have lost. So they hang on to stalled opportunities just a little longer … and then just a little longer after that.

THE “SELL-BY” DATE

While prospective opportunities don’t come stamped with an expiration date, we need to strive for the next best thing. The idea of “sell-by” dates is one that can be used to help alleviate this back log problem. It can be based on the average length of the selling cycle. If the sale wasn’t closed by that date, you would need compelling evidence that the opportunity deserved to keep its place in the pipeline. Otherwise, it comes out.

With this new approach, agents can spend less time managing their pipeline … and more time identifying new opportunities and moving them forward! As a result, closing numbers will improve.

Three insurance agents and three attorneys are going to the same conference in NY City. They all decided to take the train. The three attorneys got in line and each bought a ticket. The insurance agents only bought one ticket for the three of them.

Attorney: “Why did you only buy one ticket?”

Insurance Agent: “Watch and learn.”

They all get on the train. When the conductor starts coming around and asking for tickets, the three insurance agents all go into the bathroom together. The conductor, seeing that someone is in the bathroom, knocks on the door and asks for a ticket. The insurance agents hand out the one ticket and ride onto NY for the conference.

On the way home they all need to buy tickets again. This time the attorneys have learned so they buy just one ticket. But, the insurance agents do not buy any tickets.

Attorney: “Why didn’t you buy a ticket this time?”

Insurance Agent: “Watch and learn.”

As the conductor makes his rounds the three attorneys jump into the bathroom and wait. But this time instead of the conductor knocking on the door, the insurance agent knocks on his door.

Insurance Agent: ” Ticket please.”

The rest as they say is history. Watch and learn.

HAVE A HAPPY THANKSGIVING!

Advisors are less aware of the Securities and Exchange Commission’s best-interest proposals now than they were of the Labor Department’s fiduciary rule proposal in 2016.

So says Fidelity research, which also finds that not only do 40% of advisors aware of the proposals not plan on acting until there is further clarification, some 78% of advisors say they’ll need at least some help assessing and evaluating the proposals.

Opinion is pretty evenly divided on whether the proposals will have a positive or negative impact, with a third of advisors on either side and the remaining third in the middle on the matter. And while 62% of advisors expect that a new SEC rule for standards of conduct will be put in place, their efforts to prepare for the now-defunct Labor rule have put them at an advantage.

In fact, advisors are likely to leverage a number of the steps they already took to work toward compliance with the Labor rule, and they expect to be able to use several of them to better prepare for future SEC regs.

The top five solutions likely to prove useful in complying with the SEC’s standards, Fidelity found, included tools and technology to ensure the firm’s compliance and control. Investment products based on the standard of care will also make it easier to stay within the straight and narrow, as will custom forms or disclosures to demonstrate the firm’s, and advisors’, standard of care of the client.

Tools and technology that can ensure the firm’s pursuit of the client’s best interest and account identifiers that indicate the standard of care for investor accounts will also make it easier to comply with new SEC requirements.

Fidelity points out that there’s still quite a bit of ambiguity in the SEC’s proposals, which provides “an opportunity to stay actively informed and engaged,” and suggests that as firms evaluate just where they fit in within a still-evolving industry, they take a look at areas that present a high risk of noncompliance to see how technology could mitigate those risks.

What is Loan-Based Split Dollar?

In loan-based split dollar, the corporation pays the premiums on a policy owned by the business owner or key person (the “insured”). Generally, this would be treated as a distribution from the corporation and income taxable. However, in this case the premiums payments are structured as individual loans from the corporation to the insured/policy owner that are collateralized by the cash value and death benefit of the life insurance policy. The principal of the loan is payable at the end of the loan period, with the insured being responsible only for payment of loan interest on an annual basis. If loan interest is not paid, it is treated as taxable distribution to the insured.

How Does Loan-Based Split Dollar Work?

Corporate funds are loaned to the insured to purchase a life insurance policy, and are not income taxable to the insured/owner at this point. If a cash value permanent life insurance policy is purchased, there is the possibility to accumulate cash values on a tax deferred basis. At some point, when cash values have accumulated safely beyond the outstanding principal of the loan (generally, premiums paid), funds can be taken out of the life policy on a tax advantaged basis to pay back the loan. The resulting policy, along with tax deferred cash value, will be owned free and clear by the insured. The policy cash values – net of loaned amounts used to repay split dollar loan – can then be borrowed out of the policy income tax free (as long as the policy remains in force) as needed.

Interested in learning more about loan-based split dollar ? ISN Network is here to help! For further training, review or illustration support, please contact ISN at 1.800.338.1892, Option 1 or email us at marketing@teamisn.com