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[In the last several articles, we have been concentrating on deferred charitable giving techniques, e.g., we have examined the Charitable IRA technique, analyzed the Zero Estate Tax Plan, and reviewed Charitable Remainder Trusts. In this article, we will study a current giving technique designed to help both charity and the family.] Testing Financial Tolerance For Living Gifts to Charity For consistency, we will continue to study the case of Nathan and Greta Baier. Although the details of their wealth may have become "old hat" to you, it is instructive to use the same case data as we move through these various charitable studies. Case Study Background: Nathan and Greta are age 65 and 60 respectively. If they were both to die today, their estate would total almost $12,000,000 (plus $1,000,000 of paid-up, irrevocable trust-owned life insurance). Please take a moment to examine their assets on the Client Information Summary [Click here]. Consistent with the prior studies we have done for Nathan and Greta, they want $200,000 a year in spendable cash flow in their retirement years -- increasing by 3% a year as an inflation offset. The analysis runs until their ages 95/90 and, over this term, they will require cumulative after tax cash flow of $9,515,084. They also want to be certain to maintain a growing cushion of net worth in case unforeseen emergencies occur. Their assets are more than enough to sustain these expectations, and we will call this scenario Plan 1. Both Nathan and Greta's parents died of heart disease; consequently, they have a strong interest in funding heart research projects. In order to create an endowment for this purpose, they are considering adding a $1,000,000 charitable bequest to their Wills to be directed to a donor-advised account at a national public charity. We will call this scenario Plan 2. In an alternative scenario called Plan 3, they are analyzing making charitable cash gifts of $100,000 a year for 10 years from their asset base which will be accrued in a donor-advised account until their deaths. They are assuming these funds will be managed to produce a 10% rate of return inside the donor-advised account. To offset the wealth reduction to their heirs, their financial adviser has recommended the acquisition of $1,000,000 in second-to-die life insurance placed in a wealth replacement trust. The policy will be funded by the cash flow created by the charitable income tax deductions associated with the ten $100,000 cash gifts to charity. In the Baiers' 39.6% income tax bracket, this deduction throws off $39,600 a year in income tax savings for ten years -- the exact pattern of premiums on the life policy. To examine the illustration of the policy they are considering, click here. The Baiers would like to compare the consequences of Plans 1, 2, and 3 on their long-range net worth and the wealth their children will inherit. Analysis: In the InsGift graphic below, Plan 1 reflects no charitable activity. Plan 2 shows the effect of a $1,000,000 charitable bequest at death, and Plan 3 illustrates the cash gifts of $100,000 a year for ten years plus the $1,000,000 face amount life insurance policy owned by the wealth replacement trust. 
The results are powerful. In the upper left graphic, notice that the rising net worth associated with Plans 1 and 2 is identical. Plan 3, due to the current cash gifts, produces a dent in net worth; however, it still meets the Baiers' requirement of increasing net worth throughout their lifetime. The lower right graphic shows that, in almost all years, the heirs are favorably impacted by Plan 3. The impact on charity is displayed in the lower left graphic showing Plan 3 with incomparable charitable results. Essentially, Plan 3 allows the Baiers to trade $9,000,000+ of long-range net worth (taxable in their estate) for almost $12,000,000 in long-term value for their charitable cause without damaging their children's inheritance. Given their charitable motivation, Plan 3 is almost surely the plan the Baiers will implement. National Public Charities: One of the features that allows the Baiers' charitable strategy to work based upon their own criteria is the selection of a national public charity which offers donor-advised funds. There are several that do: Fidelity Gift Fund, Vanguard Gift Fund, Schwab Gift Fund, and National Heritage Foundation to name a few. A new player in this field is the Global Gift Fund (GGF), a donor-advised service of the Million Dollar Roundtable Foundation. The GGF offers classic donor-advised capacity with the added benefit that appropriately licensed financial professionals can manage the assets in the fund so long as the general investment guidelines of the GGF are followed. Since these funds are often established in perpetuity, money management offers a generational annuity to the professional advisor handling such accounts either through successor family management or, in the case of a practice disposed of through a sale, the capitalized value of future fees. The GGF is a new service of the MDRT Foundation, and you do not have to be a member of MDRT to take advantage of it. For more information, contact Nick Falco, Executive Director of the MDRT Foundation, in Park Ridge, IL, at 1-847-692-6378. Be sure to mention that InsMark recommended that you call. Conclusion: This evaluation has been designed to produce a tolerable reduction in Nathan and Greta's net worth (only they can say for sure) and a major endowment for favored charitable causes -- without diminishing the wealth passed to heirs. Like other InsGift studies, the power of the analysis lies in the fact that Nathan and Greta can make informed decisions in the context of their own needs and desires as well as those of their children and charity. This is by no means the end of the evaluation process for the Baiers. Obviously, their wealth preservation plans need further tax mitigation recommendations as their wealth transfer taxes are still projected to be considerable; however, the procedure outlined in this Marketing Alert has allowed you to gather all the data necessary to calculate additional strategies for their consideration. Working With Charities: Most charitable organizations are used to financial professionals offering assistance in securing deferred gifts in conjunction with wealth replacement trusts. (As mentioned at the beginning of this report, we have recently written about three such strategies.) Using the techniques outlined in this article, you can also assist these organizations in obtaining current gifts in place of testamentary charitable bequests. Current giving strategies will always trump deferred giving techniques - at least in a charity's eyes - and to my knowledge, few professional advisors are using this powerful approach. Downloading Data: Space prevents the inclusion of the various backup reports from InsGift that support the accompanying graphs; however, InsGift 4.0 users can review all reports and related menu inputs we used to create the analysis in this issue by downloading the InsGift Workbook named MA114.!ww from the Workbook Download section of our website at www.insmark.com. On our main webpage, click on Producer's Center, then click on the Workbook Download icon at the top of the next page. After downloading the Workbook, you can import it into your InsGift 4.0 System by clicking on Client Workbook/Import Workbook on the Main Toolbar of Version 4.0 of your InsGift System. To download the workbook now, click here. If you are not licensed for the InsGift System and would like more information, please contact an InsMark Account Executive at 1-888-InsMark (467-6275), or click here. |
