Blog #55: Charitable IRA

blog-55-charitable-ira-contributions-are-deductible-scales-image

Editor’s Note: This Blog discusses planning options for an IRA; however, Bob’s remarks apply equally to a 401(k), 403(b), Keogh, etc.

We have always recommended that you ask this question of all clients with whom you have an active relationship: “Do you have a favorite charitable cause?” Lots of them do, and most of the time, you don’t know about it.  It’s a wonderful piece of information to keep in your back pocket because charitable solutions will often occur to you as you think through planning strategies, and one of the best is Charitable IRA.

An IRA has six stages; two are terrific, one is not so hot, and three are terrible:

Terrific #1:  Contributions are deductible.
Terrific #2:  The account grows without taxation.
Not So Hot:  Distributions are taxable as ordinary income.
Terrible #1:  Any balance in the account at death is taxed as ordinary income (unless the so-called “stretch” option is selected).
Terrible #2:  Even if the “stretch” option has been selected, an inherited IRA is subject to mandatory distributions taxable as ordinary income.
Terrible #3:  With large estates, values in the IRA can be subject to estate and inheritance taxes.

With Charitable IRA, your clients can avoid the three Terribles by naming a favorite charity as the ultimate beneficiary of an IRA.  Note that this transfer to the charity will not occur until the death of the account owner and a surviving spouse.  Prior to this, values in the IRA are freely available to the account owner or a surviving spouse without requiring permission from the charity.  This is because the charitable beneficiary is not an irrevocable designation and the charity is not involved as an owner of the account until the death of the account owner and a surviving spouse.

This also means a “change your mind” option is always available merely by designating family members — or anyone else (a different charity, for example) — as replacement beneficiaries.  One of the hallmarks of good estate planning is the ability to “change your mind”.

With this strategy, an irrevocable Wealth Replacement Family Trust is typically established to own a life insurance policy that provides the heirs with a replacement asset that, unlike an inherited IRA, is free of both income taxes and possible death taxes.

If a client has a strong charitable motivation, this variation gets lots of happy feedback; however, the concept is so powerful that, charitably motivated or not, it often makes sense whenever an IRA of at least six figures is present, and the bigger the retirement account the better it works.

This type of charitable planning requires some pre-death paperwork involving a trust, but using this strategy is significantly better than leaving the retirement plan “as is” where the IRS can confiscate up to 50% in income tax at death or on distributions made by heirs if the stretch option has been elected.  And if the estate is large enough, the IRA may also incur death taxes.

Case Study Featuring InsMark’s Wealthy and Wise®

Harold and Martha Fontaine, age 65 and 60, have a current net worth of a little over $5,500,000 which includes an IRA with a value of $1,000,000.  Based on their taking required minimum distributions (RMDs) beginning in five years, their IRA is expected to grow to almost $1,650,000 by their mid-80s and gradually reduce thereafter due to the accelerating RMDs.

Harold and Martha are both active in the Red Cross, and the idea of leaving a legacy to that special organization is very appealing to them.  They like the Charitable IRA approach with $1,000,000 of increasing death benefit second-to-die life insurance in a Wealth Replacement Trust funded by annual gifts of $14,000.

Check out the Table below comparing the IRA values for heirs in Strategy 1 vs. the death benefit of the life insurance policy for heirs in Strategy 2.

Age Strategy 1

Inherited Value
0f the IRA
(Fully Taxable)

Strategy 2

Inherited Value of
the ILIT-Owned
Life Insurance
(Non-Taxable)

65/60 1,064,250 1,005,778
70/65 1,365,269 1,069,571
75/70 1,526,471 1,176,624
80/75 1,635,032 1,312,540
85/80 1,649,225 1,475,619
90/85 1,524,327 1,640,380
93/88* 1,371,916 1,704,815
95/90 1,239,041 1,703,006

*Joint Life Expectancy: Age 93/88

Below is a Summary of the overall results at age 95/90.  Both Strategies include Harold and Martha with $150,000 of after tax retirement cash flow (indexed at 3.00%).  The gifts to the trust for the life insurance premiums of $14,000 in Strategy 2 are paid for via asset allocation, not from their retirement cash flow.

Strategy 1:  Leave the IRA as is:

blog-55-strategy-1-IRA-in-estate-total-wealth-distributed-image

Strategy 2:  Include the Charitable IRA option:

blog-55-strategy-2-charitable-IRA-plus-wealth-replacement-trust-image

The transfer taxes in Strategy 1 are the amount of income tax due on the residual value of the IRA.  This is, of course, avoided in Strategy 2 as the charitable beneficiary designation eliminates any tax liability on the IRA.  Imagine trading $433,664 in income tax for a gift to charity of $1,239,041 while wealth to heirs remains virtually unchanged.  You likely have clients who need to know about this!

What is particularly revealing about this evaluation is that, thanks to the life insurance, wealth to heirs tracks almost identically in both Strategy 1 and Strategy 2 as shown in the graphic below:

Blog-55-wealth-to-heirs-IRA-in-the-estate-charitable-IRA-plus-wealth-replacement-trust-

Conclusion

The key takeaways for Strategy 2 are:

  1. The heirs are better off due to the favorable tax treatment of the life insurance in the trust compared to the IRA;
  2. The Red Cross ultimately benefits by more than $1.2 million;
  3. This is all accomplished with the Fontaines having the retirement cash flow they desire while also maintaining an increasing level of net worth as shown in the graphic below.

blog-55-maintaining-an-increasing-level-of-net-worth-wealthy-and-wise-by-insmark

Most people resist wealth planning decisions unless they are convinced that their retirement lifestyle won’t be affected both as to cash flow and retained net worth.  This Wealthy and Wise analysis has accomplished this for the Fontaines.

Licensing

To license Wealthy and Wise, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or 925-543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

Digital Workbook Files For This Blog

Blog55.zip

Download all workbook files for all blogs

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Referral Resources

If you would like assistance with an InsMark illustration, contact any of the Referral Resources listed below.  They are all highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers.

Joint Interviews

If you want or need help from a qualified producer for joint interviews with any InsMark illustration and are willing to share the case, email us at bob@robert-b-ritter-jr.com, and we will provide you with recommendations.

Testimonials:

"If you don’t get the client to distinguish cash flow from net worth, you won’t make the case sale.  In my experience, Wealthy and Wise is the only system that recognizes this important estate planning component."
Stephen Rothschild, CLU, ChFC, CRC, RFC, International Forum Member, Saint Louis, MO

"InsMark helps us help our clients understand their money and their choices.  I am always learning something new that changes what we do and how we can do it more efficiently.  That translates to a better bottom line for us and for our clients.  It’s making more money for everyone — just by pushing InsMark buttons on the computer.  How great is that?!"
Kay Corbin, CLU, ChFC InsMark Power Producer® Phoenix, AZ

"I am writing to give you a ringing endorsement for the Wealthy and Wise System.  As you know, I am a LEAP practitioner.  The Wealthy and Wise software has helped me supplement my LEAP skills in the over age 60 client base.  I have been paid for many cases using Wealthy and Wise as support, the smallest of which was $27,000, the largest was $363,000.  With those type of commissions, you would have to be nuts not to buy it."
Vincent M. D’Addona, CLU, ChFC, MSFS, AEP, InsMark Power Producer®

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More Recent Blogs:

Blog #54: Dollars to Charity for Pennies of Cost

Blog #53: “There Wasn’t Nigh As Many As There Was A While Ago”

Blog #52: Participating Loans vs. Fixed Loans

Blog #51: Avoiding the Tax Bomb in Life Insurance

Blog #50: The Cost of Waiting

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Robert B. Ritter, Jr. Blog Archive

 

Blog #54: Dollars to Charity for Pennies of Cost

Blog 54 Dollars to Charity for Pennies of Cost image

Editor’s Note:  This Blog begins a series of three involving gifts to charity that are so efficient as to make them almost irresistible.  We hope the information will be useful to you in your practice as you interact with clients who are charitably motivated.

You all have clients who are charitably motivated to one degree or another.  Some of them are not yet willing to consider one of the big three capital gifts:

  • Charitable Gift Annuity
  • Charitable Remainder Trust
  • Charitable Lead Trust

I’ll deal with these three occasionally in later Blogs, but for now, let’s look at a simple way to set up a deferred capital contribution using a life insurance policy.

Art and Janie Bennett (not their real names) are ages 45 and 40.  They are mid-five figure annual donors to a major U.S. Zoo and are interested in creating an endowment for the Zoo upon their death that will perpetuate their gift.  They are considering acquiring a $1,000,000 life insurance policy assuming the Zoo can earn 5% ($50,000) annually on the policy death benefit.

They have considered insuring Art or Janie or, perhaps, both of them using a second-to-die survivor policy; however, since Janie is the incoming President of the Zoo’s governing board, they have decided to insure Janie for the $1,000,000 at a premium of $20,000 paid for five years.  The Zoo, a 501(c)(3) organization, will be named owner and beneficiary, and the premium will be deductible by the Bennetts as a charitable contribution.

What is the best way to illustrate this plan?  I like the discounted dollars approach that is present throughout the InsMark Illustration System, and we have one for charitable giving called "Dollars to Charity for Pennies of Cost" on the Personal Insurance tab in that System.  I’ll use that illustration module in the following analysis.

Janie and Art are (obviously) wealthy, and they are in a marginal federal and state income tax bracket of 50%.  The income tax deduction reduces the annual cost of the gift of the policy’s $20,000 premiums to $10,000 a year for five years.  Below is a graphic showing the year-by-year cumulative cost to Janie and Art for each $1.00 of potential death benefit to the Zoo.  It never exceeds 5 cents.

blog 54 cost of funding each $1.00 of life insurance for the zoo image

Note:  Although the policy is issued with a level $1,000,000 death benefit, the cash values that develop force the face amount to increase beginning in year 46.  This causes the cost per $1.00 of death benefit to decrease thereafter (to the low of 1.8 cents at the end of the analysis).

Below is a more comprehensive graphic:

blog 54 cumulative after tax cost of donors gift image

Click here to view the full illustration on Janie Bennett.

Wealthy Clients Only?

Is this a plan for wealthy clients only?  Not at all — in a 25% tax bracket, the costs for Janie’s policy never exceed 7.5 cents for each $1.00 of death benefit for the Zoo.  You likely wouldn’t utilize as large a policy for someone in a 25% bracket, but the discounted dollars valuation would work out similarly for someone the same age as Janie — and it is favorable at any age, even very advanced ones.

Type of Policy

Dollars to Charity for Pennies of Cost works with any permanent policy form: whole life, universal life, indexed universal life, and variable universal life.

Conclusion

The planned giving representatives from charitable organizations typically welcome gifts of life insurance, and the discounted dollars approach to evaluating such gifts is an effective way to analyze them.  Be aware, however, that those in charge of current gifts would rather have the gifts associated with these plans donated in cash instead.

Note:  Due to mid-stream lapses, lifelong premiums for a charitable benefit are not a particularly favorable design feature for donors or recipients.  This is why I illustrated a 5-pay premium structure for the Bennetts.  In some cases, a single premium would be appropriate to consider even if the policy is classified as a modified endowment contract (“MEC”) as status as a MEC is irrelevant for a policy owned by a tax exempt organization like the Zoo.

Licensing

To license the InsMark Illustration System, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or 925-543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

Digital Workbook Files For This Blog

Blog54.zip

Download all workbook files for all blogs

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

Referral Resources

If you would like assistance with an InsMark illustration, contact any of the Referral Resources listed below.  They are all highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers.

Joint Interviews

If you want or need help from a qualified producer for joint interviews with any InsMark illustration and are willing to share the case, email us at bob@robert-b-ritter-jr.com, and we will provide you with recommendations.

Testimonials:

"I use InsMark software products because the concepts are cutting edge, well documented and supported, and user-friendly for both my clients and myself."

Wayne Weaver, Clearwater, FL

"I really thought I knew all the techniques that affect my business, but I do now, thanks to InsMark."

Sam Keck, Financial Planner, Denver, CO

I have been using InsMark since it was a C:> prompt back in the early 1980s. The new Jazz release is the most exciting upgrade to the system I’ve seen in 28 years!  With unlimited options for customization, you can now be as creative as you want when producing illustrations.  I downloaded it last night, and used it successfully with my first appointment this morning.

Chris Jacob, CFP, InsMark Power Producer, SFI-Cadeau, St. Louis, MO.

Note:  All of the illustrations and graphics associated with this Blog assume the non-guaranteed policy values shown continue in all years.  This is not likely, and actual values may be more or less favorable.

Note:  This information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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More Recent Blogs:

Blog #53: “There Wasn’t Nigh As Many As There Was A While Ago”

Blog #52: Participating Loans vs. Fixed Loans

Blog #51: Avoiding the Tax Bomb in Life Insurance

Blog #50: The Cost of Waiting

Blog #49: More CheckMate Selling®

 

3 Reasons Why It’s Profitable For You To Share These
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Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #53: “There Wasn’t Nigh As Many As There Was A While Ago”

there-wasnt-nigh-as-many-as-there-was-a-while-ago-solders-at-war-image

“There wasn’t nigh as many as there was a while ago” is one of the lines from Jimmy Driftwood’s classic, The Battle of New Orleans, about the last battle of the War of 1812 when 3,600 militiamen led by Colonel Jackson (Old Hickory) chased 12,000 British regulars “down the mighty Mississipp’.”  

Here is the first verse and the chorus:

In 1814 we took a little trip

Along with Colonel Jackson down the mighty Mississip’.

We took a little bacon and we took a little beans

And we caught the bloody British in the town of New Orleans.

[Chorus:]

We fired our guns and the British kept a’comin.

There wasn’t nigh as many as there was a while ago.

We fired once more and they began to runnin’ on

Down the Mississippi to the Gulf of Mexico.

Click here for The Battle of New Orleans sung by Johnny Horton whose 1959 version is the best-known recording of the song.

“There wasn’t nigh as many as there was a while ago” got me thinking about why there are tens of thousands fewer career life insurance agents than a generation or so ago.  The industry is simply not developing dedicated producers as it once did.

The decline began in earnest in the early 1980s with the advent of universal life (UL).  The big mutual companies saw it as such a threat to Whole Life that they not only refused to offer UL, they bad-mouthed it continuously.  I remember MassMutual had an advertisement featuring President Bill Clark stating something close to this: When MassMutal offers universal life, you’ll know it’s OK to buy it.  Ultimately though, MassMutual, and almost all the other mutuals, began offering UL.

The non-mutual stock companies quickly adapted to UL, the new kid on the block.  In most cases, uninhibited by the New York State insurance commissioner, they offered skyrocketing commissions often exceeding 100% of first year target premiums, a previously unheard level of producer compensation.

Producers left the old line mutuals in droves to join the companies offering UL and the higher commission that accompanied it.  In response, the traditional companies hyped commissions and overrides and "poof" — there went much of the money traditionally spent on recruiting and training.  And “poof” went many of the “green pea” recruits who, in turn, traditionally became career producers.

U.S. agents of Prudential Financial sank to around 2,500 from a peak of 20,000.  MetLife’s fell to 8,000 from 14,000.  In all, the number of U.S. life insurance agents affiliated with a specific company today is down nearly a third since the 1970s according to LIMRA.

When I first started InsMark in the late 1970s, there were more than 50 companies that hired and trained new agents each year.  Now there are only a handful.

But experienced producers will continue to become independent from the few mutuals who remain in the recruiting game (e.g., New York Life, MassMutual, Northwestern, Guardian).  As time passes, I believe Indexed UL (IUL) may draw off many of these producers just as UL did in the 1980s because, after the learning phase, those who become successful no longer need financing or sales assistance from career agencies.  They are the candidates for increased compensation and products with higher potential yield.  Speaking of potential yield, recently one of the premier IUL companies began offering a new index with a 140% participation rate with no cap.

Although they argue to the contrary, the mutual companies are very concerned about IUL.  The argument about Whole Life vs. IUL is unending, and in many ways, it is like the eternal arguments about religion and politics where neither side gives the other any credit for serious thinking.

I have many friends dedicated to using Whole Life in their practices, and I have no quarrel with that.  For many conservative consumers, the product guarantees of Whole Life are well worth the loss of the yield potential of IUL.

But independent producers have largely converted to IUL and so have their clients.  Will the mutuals adopt IUL?  Probably — but not for a while.

But one day soon, we might see this ad:  MassMutal offers indexed universal life; it’s now OK to buy it.  I hope so as it will tend to quiet down the controversy.

Note:  Last week’s email with Blog #52: Fixed Loans vs. Participating Loans was blocked as spam for several readers due to our use of the word “Loans” in the title.  It includes a good comparative analysis of the use of both loan-types on the same Indexed Universal Life policy.  If you didn’t receive it, click here.

New Features in InsMark

Our licensees are excited about the Jazz release (Version 17.0 of the InsMark Illustration System).  Click here if you would like to see one of our most popular illustrations in the Jazz format.

Click here if you would like to review the features of Jazz.

To license your own copy of the InsMark Illustration System, contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or 925-543-0513.

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More Recent Blogs:

Blog #52: Participating Loans vs. Fixed Loans

Blog #51: Avoiding the Tax Bomb in Life Insurance

Blog #50: The Cost of Waiting

Blog #49: More CheckMate Selling®

Blog #48: Dollars of Benefits for Pennies of Cost

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive