Planned Giving

A ‘WIN-WIN-WIN'

“Given the places where you can put your money in the current low-interest-rate environment, the tax benefits from giving to Delbarton can be very attractive from an investment standpoint,” says David A. Lewis '78, who practices estate, trust and tax law in Morristown, N.J., and serves as president of the Delbarton Alumni Association and as chairman of the Campaign for Delbarton's Planned Giving Committee. “For example, when you create a Charitable Lead Trust (CLT) as a way to give to Delbarton, you use actuarial tax calculations that are partly premised on prevailing interest rates. And when rates are low, as now, these calculations typically yield higher tax benefits to the donor. Essentially, you get a lot more bang for each donated buck.”

Adds Roger Burgdorf, who is president of Burgdorf & Company, a life insurance consulting firm in Cedar Knolls, N.J., and a Planned Giving Committee member: “And if life insurance is used to leverage your gift to Delbarton, it can create a ‘win-win-win' situation – for you, your heirs and the School.”

In the following interview, Messrs. Lewis and Burgdorf discuss the many advantages of planned giving.

Q: What's the typical profile of someone who would find planned giving advantageous?

Mr. Lewis: Almost by definition, someone considering a planned gift has substantial assets and already has in place an attorney who does estate or tax planning. Planned giving usually has estate-tax or income-tax advantages that are conducive to the donor's needs and goals. And in the current low-interest-rate environment, the income and estate tax deductions associated with the various kinds of charitable trusts can yield particularly good results.

Q: How is this the case with a CLT?

Mr. Lewis: From the donor's standpoint, a Charitable Lead Trust is a great income-tax planning tool. It is most appropriate for a situation in which the donor wants to get the donated assets back. Basically, the assets are put into a trust; Delbarton gets some sort of income stream from it for a certain period of years; and then the asset reverts back to the donor. Meanwhile, the donor gets an upfront income-tax deduction for the actuarial value of the income stream. A good candidate for a CLT might be someone who has a big-income year because of a bonus, stock option or the like. With a CLT, the donor can benefit the School while at the same time getting an upfront income-tax deduction to help reduce the tax bite.

Q: What about a CRT?

Mr. Lewis: A Charitable Remainder Trust is the reverse of a CLT. That is, while it also yields the donor an upfront income-tax deduction, it's primarily an estate planning tool. In a CRT, the donor retains the income stream for a term of years, or for life – or sometimes, over two lives, as in a “second-to-die” trust. Then, upon the death of the donor (or the second donor), whatever assets are left in the trust would revert to the School. Like the CLT, it gives donors an upfront charitable income-tax deduction. However, unlike the CLT, assets donated to a CRT are immediately removed from the donor's estate, thus reducing estate tax exposure. In addition, because assets contributed to a CRT can be sold without generating income tax, a donor can convert low-yielding, highly appreciated assets into high-yielding “bond-like” investments without paying capital gains taxes.

Q: Bequests, gifts of securities or real estate, or outright cash gifts are well-known ways of giving. But designating life insurance as a gift may be unfamiliar to many. What are the particular advantages of giving life insurance to Delbarton?

Mr. Burgdorf : Well, the School always needs annual gifts, but it also needs larger gifts that are longer-lasting. And one way to convert an annual gift into a larger endowment-type of gift is through life insurance – because a policy's premiums are always much less than what its face amount is. In essence, the magic of life insurance is that the donor gets a tax deduction for a charitable contribution while the School gets a gift that is larger in scale and longer in duration than a conventional four-or-five year pledge. In my own case, my paying a premium over the next five years of the Campaign will essentially create an on-going “internally funded” insurance policy on my life. But Delbarton owns that policy from Day One, so the School can decide how best to use it. Of course, to get the maximum benefit from it, Delbarton should keep the policy until I die, and then receive all the proceeds. But from a balance-sheet standpoint, the School currently owns an asset that is building up cash value within it. So, Delbarton has the decision flexibility to surrender the policy early, take the cash-value amount, and use it. Another way the School could access cash would be by taking a loan against the policy's accrued value; upon the insured's death, the policy's proceeds would pay off that loan, and Delbarton would then get whatever net amount remains. It's truly like having your cake and eating it too. And, in the interim, the policy pays annual dividends, which the School can use to help cover current expenses.

Q: How else could a life-insurance gift be designed so that the donor and Delbarton would both benefit?

Mr. Burgdorf: Well, another idea that I have used a lot with clients is even better, in some ways, than structuring life insurance as a direct gift – and it's potentially more beneficial to Delbarton. I'm speaking of a “wealth replacement” trust, whereby life insurance is used to replace assets that can be given to Delbarton right now. Suppose I have $1 million worth of securities for which my total cost was only $200,000. If I were to sell those highly appreciated securities, I'd have to pay a large capital-gains tax on them, and the sale proceeds would be in my taxable estate which, when I ultimately died, would be reduced again by federal estate taxes. So, let's suppose that this conventional process would cut the $1 million by half or 40 percent, leaving only $500,000 or $600,000 for my heirs. What I might be more inclined to do is to gift those securities to Delbarton right now, take my tax deduction for the whole $1 million, save myself income taxes on that $1 million, and use part of the tax savings to buy a $1-million life insurance policy outside my taxable estate – that is, in a life-insurance trust. So, out of the tax savings I get for my big gift to Delbarton, I might allocate $20,000 to $25,000 a year for premiums to generate a full tax-free $1 million for my heirs when I die. This is a win-win-win situation. Delbarton gets the money now, and not after taxes; I'm able to give my heirs the whole $1 million when I die, on a tax-free basis; and the policy's premiums come out of the tax savings I get for giving Delbarton the money now. The whole point of this strategy is to substitute an asset, on a tax-favored basis, for an asset that is given to Delbarton now. And in the long run, it benefits the donor's family financially, because when the insured ultimately dies, the full value of the asset comes back to the heirs in the form of the policy's proceeds. It works very, very well.

We also use second-to-die life insurance policies in connection with charitable giving. They are perfect tools for long-term planning because they are much less expensive than individual policies. For example, my wife and I can be insured jointly, on a single policy. It doesn't pay benefits until the second person dies, but its cost is about 30 percent of what an individual policy would cost – say, $7,000 versus $25,000 – for the same $1 million of coverage.

Anyone interested in these Planned Giving options should call Craig Paris in the School's Development Office at (973) 538-3231, extension 3050. In addition, prospective donors should contact their own professional legal and tax advisers.