This column includes a real-life case study dedicated to accomplishing three goals at the same time: 1) Enrich your family; 2) Enrich charity; and 3) Reduce taxes.
Best of all, it's easy to do, and the tax law becomes your friend instead of your enemy.
Let's start this case study with the facts: Ben and his wife Mary (both are 60) always wanted to give $1 million to their favorite charity. They are worth $10 million, which includes $4 million in treasury bonds. Their original thought was to leave the bonds or $1 million, whichever is less, to their favorite charity after both have died. They are in a 35 percent income tax bracket and a 50 percent estate tax bracket. (Even if the rates change, the strategies used in this case study remain the same.)
Here's the simple three-step plan we created for Ben and Mary:
Step 1:They give $245,000 of the bonds (it could be any investment asset, but it is typically an appreciated asset) to their favorite charity.
Step 2: Their favorite charity buys a $1 million in second-to-die single premium life insurance (SPLI) covering Ben and Mary for a premium of $245,000. (With an SPLI, you pay only one premium when the policy is purchased.)
Step 3: Ben and Mary's income tax savings for the gift to charity is $86,000, and they add an additional $85,000 to that amount. Then they put the entire $171,000 into an irrevocable life insurance trust (ILIT), which then buys $700,000 of second-to-die insurance, using an SPLI. Ben's and Mary's kids are the beneficiaries of the ILIT.
Let's summarize the economic and tax results after Ben and Mary are gone. To start, Ben and Mary spent a total of $330,000 (the original $245,000 they gave to their favorite charity, plus the $85,000 added in Step 3). The $86,000 in income tax savings was given to the ILIT, so it's a wash. The kids wind up with $700,000—tax-free—from the ILIT's policy, a profit of $360,000 ($700,000 less the initial $330,000).
Ben and Mary turned $330,000 into $1,700,000 ($1 million to their favorite charity and $700,000 to the kids), courtesy of tax-free life insurance and the tax law. (Note: Ben and Mary could have increased the amounts to their favorite charity and their kids tenfold by using all or part of the $4 million (only worth $2 million after a 50 percent estate tax hit) in treasury bonds. Also, Ben and Mary can increase (or reduce) the amount going to their family (or charity) by changing the amounts of SPLI to be bought by their favorite charity and the ILIT.
This strategy can turn $2 million (the after-tax value of the bonds) into about $17 million (with all taxes paid). You can divide the $17 million almost any way you like between your family and charity. Of course, you should work with the asset dollar amount (more or less) to fit your personal situation.
To learn more about saving taxes and giving to charity while multiplying your family's wealth, visit my Web site at www.taxsecretsofthewealthy.com, and click on "Personally Designed Philanthropy."