Need More Retirement Income? Sell Your Life Insurance Policy!

April 8, 2009 by  
Filed under Financial

dollarbills150x131Did you know that there is now an “after market” for life insurance policies? If you are over age 65, there are companies that will buy your life insurance policy for more than the cash value. They will even buy term insurance, which has no cash value.

Who buys policies and why would they want them?

Institutional investments and pension funds buy policies to comprise a portion of the fixed income segment of their portfolio. The transaction is handled by life settlement companies that are legally bound to confidentiality and privacy. The pension fund that may buy your policy doesn’t know who you are or anything about you and could care less. For them, the transaction is all about the math.

Why would a person sell their life insurance policy?

Generally, the life insurance policy has outlived the need for which it was originally purchased. The kids are grown, education completed and the person’s 401(k) plan will provide for retirement.

In other cases, the sale averts a problem with the policy. For example…

Many Universal Life policies eventually reach a point where the original premium is no longer sufficient to carry the policy.
The premium required to carry a Universal Life policy to a certain age is dependent on mortality assumptions, insurance company expenses and interest rates. With the sharp decline in interest rates over the last few years, many UL policies now require a substantial increase in premium to keep them going.

Some policies have large loans. People may have tapped the cash value at some point and never paid themselves back. Some may have used the cash value to pay the premium.

My experience (over nearly 40 years) is most people do not pay the interest on the loan each year. If the policy owner doesn’t pay the interest, it is added to the principal. Over time, the loan and unpaid interest can eat up the entire cash value.

Eventually, the person finds themselves backed into a corner. They either pay the premium plus a huge interest requirement each year, pay the loan down or let the policy lapse.

Even if they do nothing, the policy will eventually collapse on itself for lack of sufficient cash value to pay the interest. When that happens, there are three bad results.

First, the insurance company sends the IRS with a report stating the gain. The gain is the excess of the total cash value (not counting the loan) over the total premiums paid.

Second, there is no money in the policy to pay the tax. It must come from other resources.

Third, the tax is ordinary income, not capital gain.

The third problem is a term policy that has reached the end of its term. It may have been a 10, 15, or 20 year level term. Despite what you may think, in the real world, many of my clients in their late 50’s or early 60’s who have a policy that is soon to expire, still want and need insurance coverage. When I go shopping on their behalf, I have to break it to them that the premium is substantially more than they were paying and/or their current medical condition (even for minor things) has put them a less favorable underwriting classification with a higher premium.

Selling a policy averts all these problems. There are a number of areas to which the funds received can be applied, which I’ll cover in a subsequent post. One application can quickly add substantial funds to a church’s endowment fund.

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Three Steps Toward Building an Endowment Fund for Your Church

March 25, 2009 by  
Filed under Financial

sunset_cross_square150x1311For all the good churches do, most of the funding for their ministries come from pledges. What if every church was endowed? Here are some suggestions you can employ in your church to build a bigger endowment fund.

All 88 keys of the Phoenix Symphony’s Steinway piano are endowed. They went for $5,000 a key. Penn State has every position on its football team endowed.

Is your church endowed? If not, why not?

The church I just started to attend just celebrated its 50th anniversary. It’s not a big church – about 350 members. It finished 2008 $33,000 in the red.

This is not unusual. Because of the current economic climate, many churches took a big hit the fourth quarter of 2008. In a December 1, 2008 article, The Barna Group predicted that churches would receive $3 billion to $5 billion less than expected the last quarter of 2008.

Financing ministries from the interest on endowment funds goes a long way toward shielding the good a church can do from economic downturns.

Some churches have done a good job building their endowment fund. I would refer you to ‘Financing American Religion” by Mark Chaves and Sharon L. Miller. However, every church can do more. Here are several of my opinions about some of the steps needed to build a church’s endowment fund.

1. Fish where the big fish swim

You probably have heard of the 80/20 rule, which holds that 80% of anything comes from 20% of the people involved in the activity. With respect to building an endowment fund, it’s more like 98/2. You need to concentrate on major gifts. 98% of the money will come from 2% of your congregation.

2. Solve a problem

While it is true that many donors are 100% altruistic, you stand a better chance of getting a major gift if you can show a major donor how to solve a problem that simultaneously results in a gift to your church.

Most of these problems involve tax savings. For example, how to sell a business without paying a capital gains tax and how to pass on wealth to the next generation without first giving half of the person’s estate to the government are typical examples.

Yes, I know, the tax aspect of major gifts is not the primary reason gifts are made. Most of the time, it’s not even on a person’s list. Nevertheless, if you can show someone who is interested in your cause how to make a gift that satisfies his or her interest and support of your mission and help them solve a problem at the same time, your chances of getting the gift (maybe even a larger one) is enhanced.

3. Provide case study information

I believe that many potential major donors do not know about the planning techniques the law allows that lead to a major gift.

In my financial and estate planning practice of 39 years, I called on numerous business owners who had no idea they had a problem. No one had ever pointed the problem out to them. My view is that it’s the same lack of communication of “what’s possible” that limits the receipt of major gifts by a church.

If you provide examples of what others have done to solve specific problems, people can easily see if the solution might work for them. This is the first step in opening up a dialogue about the possibility of a major gift.

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Christian Money Management: The Silver Lining In The Current Bad Economy

March 3, 2009 by  
Filed under Financial

cloudpuff150x131Every cloud has a silver lining. There are two sides to every coin. The knife cuts both ways.

The dire state of the economy has given rise to some of the best opportunities to make a gift to your church seen in decades.

Many gifts in the planned giving arena use the IRS’s current “Section 7520” rate, commonly referred to as the AFR, in the calculation of the income tax deduction you receive as a result of your gift.

Just to give you some historical perspective, a couple of years ago, in March  2007, the AFR was 5.8%. A year later, in March of 2008, it had dropped to 3.6%. In February, 2009, it hit the lowest it has ever been since Sec. 7520 was put into effect in 1989: 2.0%. As I write this, March 2009, it is 2.4%.

What does this have to do with me you say? Let me give you a couple of examples.

Let’s say you are age 75 and have a $50,000 CD down at the bank paying 4%. This only spins off $2,000 a year in interest and the interest is taxable. If you are in the 15% tax bracket, that leaves you with $1,700 to take to the store and buy groceries.

You need more income. Hey, have you noticed the price of bread and milk today? You would not be opposed to increasing your income and helping your church at the same time. In meeting with your financial planner, she suggests you look at a charitable gift annuity. CGAs are pretty plain vanilla—they have been around for over 100 years.

Here is a quick summary of the benefits of using a CGA.

  1. Your income will increase from $2,000 a year to $3,150.
  2. The rules say you can use the February AFR of 2.0 even though you make your gift in March of 2009. This means that 78.7% of the $3,150 is not subject to tax. Bottom line: More money for groceries.
  3. When you die, your church receives $50,000.

Let’s change the assumptions a little. Let’s say you were age 75 in March of 2000 and set up the same CGA when the Sec. 7520 rate was 8.0%. The amount excluded from tax would have been only 53.7%. 

Translation: With today’s low AFR, you pay less income tax and have more money for groceries.

 Another example on the other end of the spectrum. Let’s say you are a multimillionaire and are looking for ways to pass your estate on to your children with the least tax impact possible.

One option may be to use a charitable lead trust. The way this works is:

  1. You contribute (generally income-producing) property to a charitable lead trust that your attorney drafts for you.
  2. Your church (or another qualified charity) receives income from the trust for your life or a certain number of years.
  3. When you die, or when the number of years has expired, the property is distributed to your children.

In a nutshell, given the current AFR, the payout percentage chosen and the number of years the payout will last allows the property to pass to the children at a lower tax transfer cost or even no cost at all.

There’s a lot more to it than that, but for our discussion let’s see how the current low Sec. 7520 rate makes the charitable lead trust more attractive than ever before.

Assume you funded the lead trust with $1,000,000 and set it up to pay 7% ($70,000) a year to your church for 15 years at which time the trust would end and the property dispersed to your kids.

If the AFR was 8% (as it was in Feb. 2000), after doing the math the taxable gift resulting in transferring $1,000,00 to the next generation is $295,040. That is a substantial savings.

However, if the AFR was 2%, the taxable gift would only be $100,549!

In fairness, I should point out that other planned giving vehicles, a lower AFR produces worse results.

I hope the take-a-way from this is that if you are a person who is interested in increasing your income, reducing your taxes, preserving your estate from undo taxation while simultaneously helping your church, it would be prudent to examine the various planning giving techniques which may apply to your situation.

If you represent a church and are interested in raising more money for your ministries and/or building an endowment fund so that eventually your church can finance its operations from the interest on the investments in your endowment fund instead of primarily relying on pledges, it would be wise to communicate and publicize the planned giving techniques that currently have high value due to the low AFR.

This is no small potato. During a planned giving seminar I attended in June of 2008, the attorney from the software company that I use to crunch the numbers indicated that the average lead trust that they consulted on in 2008 was $5,000,000.

If you are a church, I’ll leave you with this thought: A $5,000,000 lead trust that paid out 6% for 15 years would generate an annual income to your church of $300,000. Over the 15 years, it would add up to $4,500,000. If the $300,000 were put in your endowment fund and earned 6% for 15 years, it would grow to $7,400,000 (and change). $7,400,000 at 6% would spin off $444,000 a year forever.

What ministries do you have that could benefit?

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How To Make Tax Free Transfers From Your IRA

March 3, 2009 by  
Filed under Financial

truck150x131Want to potentially lower your taxes and help your church financially? Then acquaint yourself with the IRA Charitable Rollover. Currently, this piece of legislation has a time limit and is due to expire at the end of 2009.

The IRA Charitable Rollover was originally a part of the Pension Protection Act of 2006. It expired 12/31/2007. It was “extended” effective October 3, 2008 and expires again 12/31/09.

It allows persons 70 1/2 and older who have an IRA to transfer up to $100,000 tax-free to the qualified charities of their choice. The operative words are “tax free.”

Transferring an amount equal to or greater than the Required Minimum Distribution from an IRA can lower taxes as an IRA Charitable Rollover satisfies the RMD requirement but is not taxed.

RMDs have been suspended for 2009, but there is a push on to make the IRA Charitable Rollover permanent.

In addition, planned giving professionals and legislators are seeking to extend the tax-free transfers to charitable remainder unitrusts, charitable remainder annuity trusts, pooled income funds and charitable gift annuities.

If you don’t itemize, the IRA Charitable Rollover can enable a gift without any tax consequences. For non-itemizers, charitable gifts are otherwise non-deductible.

Using the IRA Charitable Rollover can possibly lower or eliminate the tax on Social Security retirement benefits.

If you are a generous donor, it can allow you to exceed the 50% of adjusted gross income limitation for cash contributions.

Bottom line: If you do not familiarize yourself with the IRA Charitable Rollover, you may be leaving money on the table.

If you represent a church and do not fully communicate the benefits of the IRA Charitable Rollover to your congregation, you are passing up an opportunity to put a six-figure number in your bank account or endowment fund.

For more information, see the video entitled, “How To Make A Tax-Free Transfer From Your IRA” at

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Robert Cavanaugh, Platinum Author