FEATURED ARTICLE

Give It Away Twice: Once to Charity, Once to Family—Part Two
Posted January 2008

Estate-Tax Savings Possible

With good planning, an asset-replacement plan (replacing an asset given to charity with a life insurance policy—see part one) can result in federal estate-tax savings as well. For instance, a donor who uses such tax savings to purchase a policy can give that policy to the beneficiaries. If the donor survives by more than three years, the insurance proceeds will not be included in his or her estate.

This can result in substantial estate-tax savings. If an estate is subject to federal estate tax, the tax bite is substantial. Under current law, federal estate-tax exemptions and rates will undergo changes over the next few years—including one year in which the tax is actually repealed—but higher rates and lower exemptions are set to return unless Congress takes action.

Percentage of Estate Assets
That Can Be Lost to the Estate Tax:

Calendar Year	Exemption Amount	Maximum Tax Rate
2008	$2,000,000	45%
2009	$3,500,000	45%
2010	Tax Repealed	- 0 -
2011	$1,000,000	55%

By removing assets from your taxable estate, you can realize substantial tax savings.

EXAMPLE—Helen B makes a $500,000 gift to in 2008 and uses the tax savings to purchase a life insurance policy with a death benefit of $500,000. She gives the policy to her son, Mark, shortly after she purchases it.

Helen dies in 2011 with an estate worth $5,000,000. The life insurance policy, however, is not included in her estate since she gave it to Mark more than three years before.

If Helen had kept her policy and simply allowed the $500,000 death benefit to be paid to Mark as the beneficiary of the policy, her estate would have increased by $500,000 and the inclusion of the death benefit in her estate would have resulted in an additional $275,000 of federal estate tax (55% of $500,000).

Alternative: Create a Life Insurance Trust. It is possible to avoid estate tax on life insurance proceeds without having to survive three years by using an irrevocable life insurance trust. If the policy is purchased by the trust rather than by the insured, a taxpayer can typically avoid the three-year survival requirement.

Gift-Tax Considerations. Gifts of life insurance policies are subject to gift tax. Amounts transferred beyond the annual amount excluded from gift tax (currently $12,000 per person) will be subject to gift tax. Keep in mind, though, that you will not owe any tax until you exceed your lifetime gift-tax exemption (currently $1,000,000).

If you give a policy to a family member or if you create a life insurance trust, it may be possible to avoid or minimize gift-tax implications by making annual premium payments rather than paying a single premium up front. Each year, you can give the premium payment to the family member or to the trust. Properly planned, such transfers will be subject to gift tax only to the extent they exceed the gift-tax annual exclusion.

Note: The issues surrounding estate- and charitable-gift planning with life insurance—particularly when trusts are involved—require the counsel of experienced professionals. Be sure to consult with competent advisors as you create your own plan.

Call On for Assistance
There are many exciting and creative ways you can use life insurance in your own charitable planning. If you would like to learn more about asset-replacement planning or other ways to plan using a life insurance policy, please contact us. We welcome the opportunity to assist you.