The Accidental Philanthropist® – Mark Halpern
By Mark Halpern, CFP, TEP, MFA-P
When people think about Life Insurance, they generally focus on the death benefit — the large lump sum that goes to beneficiaries after an insured person passes away. But what they don’t know is that Life insurance can be owned and paid for by a Foundation/DAF, and that participating whole Life Insurance is an extremely flexible financial solution that Foundations/DAFs can use strategically to benefit from during the insured person’s lifetime, as well as providing a large legacy sum on death.
As part of our work with generous families, we’re always looking for ways to maximize the impact of philanthropic gifts. We also work directly with leadership teams at charitable organizations, advising them on strategies to attract gifts and how to create them in the most cost and tax-effective manner. We’re keenly aware of more than 20 ways to be generous, all better than using cash, cheques and credit cards, with advantages for both donors and recipients. Contact us to obtain a copy of our report.
Sadly, very few professionals, charities and donors are fully aware of what can be done. What we’ve discovered over the years is that Life Insurance has enormous potential to meet the needs on both sides of the philanthropic equation.
One family we advise has a Private Foundation with over $100 million in assets. We showed them that Life Insurance owned by their Foundation can enable them to create even more charity without contributing any additional funds to the Foundation. Think of it as moving existing furniture around, without buying any new furniture, to build more capacity to disburse money to charities now and in the future.
In their case, we used $1 million of funds already in the Foundation/DAF, every year for 10 years, to acquire a Life Insurance policy owned by the Foundation/DAF. The joint last-to-die policy insured the couple in their late 50s with an initial $16 million death benefit. Just like that, we turned a total $1 million investment from their Foundation into $16 million more of charity, if G-d forbid the insured couple passed away. Of course, we hope that they will live to a life expectancy of age 90, when the death benefit grows to almost $60 million!
The policy we recommended also provides the Foundation/DAF with additional “living” benefits that can access the cash value for charity during the lifetime of the insureds. That means the Foundation/DAF doesn’t have to wait until the insured couple dies before it starts distributing some of those funds to charity. There are several ways to make this happen.
Over time, participating whole Life Insurance accumulates a cash value (CSV) that can be withdrawn and used. After one year, the policy this Foundation/DAF acquired has a cash value of more than $450,000. After five years, the cash value is $3.7 million. After 10 years, it’s almost $8 million and at year 14 (even though payments were only made for ten years), it’s $10 million which means the Foundation is completely “cash on cash” with what was deposited. This money can be withdrawn at anytime and disbursed to important causes without any taxation. And there’s no need to pay the withdrawn money back into the policy as it is simply subtracted from the death benefit at death, which enables charities to do more of their important work today.
Additionally, the Life Insurance policies we use for this purpose pay dividends every year. Most individuals with Life Insurance policies apply these dividends back to the policy, increasing the death benefit and cash value. But there’s also the option to take the dividends as cash. Because the policy is owned by the Foundation, the Foundation can take the cash dividends each year and give it away to any registered charities in Canada as an annual gift. By the time the death benefit is eventually paid, this Foundation’s policy would have paid out a total of $11.5 million in dividends, with more than $350,000 available each year starting in year 11 once the policy has been fully paid for.
Solutions like this are fully scalable, up, and down. If a Foundation doesn’t want to allocate $1 million a year for 10 years towards premiums, it can allocate a lesser or larger sum that works alongside its other philanthropic strategies. Note that these policies can have other family members insured, not just the founders, something we are doing now with a fourth-generation foundation by placing policies on the adult children, children and grandchildren. It’s important to note also that insurance is not included in the 5 percent disbursement requirements which makes it even more efficient for gifting. The key is to work closely with clients, charities, and Foundations to determine the best approach for each donor and the charities they support.
We’re happy to share our long history and expertise in this area with professionals, charities and donors. Helping people understand the “secret sauce” of how to put Life Insurance to work to achieve philanthropic goals is our passion. While it may seem like we’re giving away some kind of competitive edge, we’re deeply committed to tzedakah, a Hebrew word that is often mistranslated as charity. The actual meaning of Tzedakah goes much deeper as it means righteousness or justice. The way we see it, we all have an obligation to give back. We can do that by writing cheques ourselves — but for even greater impact, we can teach others how to implement philanthropic strategies and hopefully merit the reward.
The only thing we ask of you is please consider collaborating together or at a minimum share your success stories. When we hear what you’ve accomplished, we can share that with others to encourage them to join in our efforts. We’re developing a national community of allied professionals (accountants, lawyers, insurance advisors, investment advisors, bankers, estate planners), and charities to create $1 Billion a year in new legacy gifts to charity. We’ve set a goal of $100 million annually for our own professional practice. Please visit https://wealthinsurance.com/billion.php for details and to join our community. We want to provide you with the wisdom and knowledge you need to be successful together.
The bottom line is that leveraging Life Insurance within Foundations/DAFs is a win-win for donors and charities. It can amplify the charitable intentions of generous families and provide flexibility by providing extra cash to flow out to charities in the short term. And, of course, it can play a vital role in tax and estate planning for affluent families. It is critical to carefully evaluate the various products available to determine the one with the best mix of features to meet your specific short-term and long-term objectives.
MARK HALPERN is a well-known CFP, TEP, MFA-P (Certified Financial Planner, Trust & Estate Practitioner, Master Financial Advisor – Philanthropy). He writes this column exclusively for each issue of Foundation Magazine.
Related Posts
