I AM SURE YOU ARE LIKE MOST PEOPLE, the most important decisions you face is “where will my assets go” and not many of us feel like we have more than enough resources to meet all of our goals.

It would be nice if we could also utilize our resources and give twice!

Friends of New Passages have done this. Through careful and creative planning they have been able to make generous gifts to New PASSAGES without diminishing the amount they pass on to their family members.

 It’s simple:

1a.          FOR EXAMPLE—TOM AND LILY T, are in their 60s and are longtime supporters of New PASSAGES.  They have had a dream of creating an endowment in their names, but they are concerned about how such a gift would affect what they have available to pass on to their children.

This year they reached their dream by transferring $250,000 worth of stock to us to create the endowment. In their 35% tax bracket, the gift saved Tom and Lily $87,500 in taxes, which they used to purchase enough life insurance to replace the value of the stock they contributed—and they named their children as the beneficiaries. The policy will pay them $250,000 (the value of the stock used to fund the endowment) when both Tom and Lily are gone.

This plan is called a second-to-die life insurance. Since the policy pays only when both of the insured persons have passed away, the premiums are typically much lower than they would be for a policy on the life of either person individually.

  An asset-replacement plan can be created using individual policies.   A second-to-die policy simply increases the ability of donors to leverage their tax savings into life insurance proceeds to replace the value of assets they give to charity.

Of course, the cost of any life insurance policy is directly related to the age and health of the proposed insured. The younger and healthier the insured, the higher the face value generated by the premium payments.

With good planning, an asset-replacement plan (replacing an asset given to charity with a life insurance policy 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.  

 1b.When removing assets from your taxable estate, you have substantial tax savings.EXAMPLE—Audrey  makes a $500,000 gift to New PASSAGES 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.

Audrey 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 Audrey 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.

Please Note:    New Passages strongly advise that estate- and charitable-gift planning with life insurance—particularly when trusts are involved—you obtain the counsel of experienced professionals.   Please always consult with competent advisors.