Life insurance as a planned gift in plain language
Don't let your eyes glaze over-there's potential here

Breaking news: Donor Managed Investment (DMI) accounts
A new idea with a potential donor relations pitfall

Against the Grain
Do you ask for proof of revocable gifts?

Consulting News
Another new client & a record breaking $25,000,000 gift

Your Feedback
I'm interested in your opinion

“For your donor and your non-profit, life insurance makes a great planned gift.”

Life insurance is often overlooked as a charitable gift, and I know that few planned gift prospects think of it as a giving vehicle. But, actively marketed and included in gift proposals, a gift of a life insurance policy gives your donor flexibility in making payments as well as charitable deductions, is easily stewarded, boosts your net assets and gives you an irrevocable gift that you can borrow from.

I'm talking about a whole life policy whose ownership is transferred to your organization. Term policies don't make good charitable gifts for two reasons: your donor does not earn a charitable deduction and you have no assurance that the policy will last long enough to return a death benefit to your organization. You might end up recognizing and stewarding a gift that does not come to fruition. (That's why the IRS does not allow a charitable deduction.) And, this article discusses a transfer of policy ownership, not a beneficiary designation. While the latter is a valid and potentially lucrative planned gift, I'm focusing this month on the irrevocable change of ownership.

I counsel clients to market life insurance gifts in face-to-face meetings, gift proposals, printed publications, estate planning seminars and website copy. This article will give you ideas of what to say to create interest. Let's have a look.

Your donor can easily effect a change of ownership. Every insurance company has a simple Change of Ownership form. You will have to give your donor the organization's legal name and federal Tax ID. Upon return of the form to the insurer, your non-profit owns the policy. Be sure you are named as the policy beneficiary so that the death benefit is payable to you upon your donor's death.

Your donor may earn a charitable income tax deduction in the year they transfer ownership. If the policy is not brand new then it has a Cash Surrender Value. The deduction approximately equals that value. The exact deduction equals the policy's Interpolated Terminal Reserve which is premiums paid plus interest earned minus administrative expenses. The insurance company can give your donor the Interpolated Terminal Reserve (or will give it to you if you already own the policy) but in proposing a gift of life insurance you are safe in explaining that the deduction is close to the Cash Surrender Value.

If your donor still pays premiums on the policy (probably semi-annually) then those premiums are deductible year after year. That feature induces a good number of prospects to become life insurance donors.

Premiums can be paid to the insurance company, naturally, or to your organization. If paid to the insurer, they are only deductible up to 30 % of the donor's adjusted gross income. If paid to your non-profit, the premiums are deductible up to 50% of adjusted gross income. That's a little known provision of the Internal Revenue Code and reflects the difference between a gift “for the benefit of” a non-profit and “to” a non-profit. If your donor decides to make payments to you then the procedure goes like this: you tell the insurer to send premium notices to your office, your office notifies the donor when the premium is due, the donor pays your organization the exact amount and you pay the premium to the insurer.

For a number of reasons payments to your organization are the better practice. While I recognize small offices may have difficulty providing the administrative support, consider the advantages: primarily, your donor has the flexibility to make their insurance premium payments with appreciated stock. They certainly cannot do that if paying directly to the insurance company. Gifts (i.e. premium payments) to your organization by stock will reduce the deductibility to 30% of adjusted gross income, but your donor avoids paying the capital gain tax. There are other reasons to have payments made through your organization. You can be sure payments are made and the policy does not face a risk of lapsing, you can thank your donor often and when you thank them you can tell them how the policy value has increased thanks to their latest payment.

If the donated policy no longer requires premium payments (called a “paid up” policy) then your donor's deduction equals their cost basis or the policy's replacement value, whichever is less. Cost basis is the sum of payments made minus cash dividends received. Replacement value is the amount your donor would pay in a lump sum to purchase the same death benefit.

I often help prospects gather the relevant numbers and understand the tax consequences of making a gift of one policy versus another. The comparison is usually between an existing policy and a new one.

On your end, your organization gets an irrevocable gift that increases net assets and can be borrowed against. The Cash Surrender Value, which increases with every premium payment, and as dividends are paid, is an asset on your balance sheet. And, you can borrow against that value at favorable rates. Before you do so, you would be wise to extend your donor the courtesy of informing them.

For your donor and your non-profit, life insurance makes a great planned gift. I could have said more but I just want you to get an understanding of the basics so you see the value and can open a conversation with prospects. If you need more information send me a message.

“What concerns me [about DMI accounts] is the donor relations problem that potentially arises out of the dual role of donor and investment manager.”

We don't get breaking news about new Planned Giving vehicles too often. Planned Giving is a fairly static practice area. An exception came in early October when the Wall Street Journal reported on a new giving vehicle, the Donor Managed Investment account. The creators of the DMI have a promotional brochure here.

A Donor Managed Investment account, or DMI, gives your donor investment control over assets after they have been given to your non-profit. Your donor earns a charitable income tax deduction in the year the gift is made yet retains control over how the assets are managed. Your non-profit pays a license and servicing fee based on assets under management to Winkelvoss Consultants, the DMI's creator and, significantly, any growth of the assets is tax free.

I applaud Winkelvoss's ingenuity. I also think non-profits should sit back and wait for competitors with lower rates and refinements, discussions with their CFO and to allow time for considerable issues to be worked out.

Winkelvoss has applied for a patent for their idea. Regardless of whether it is granted, I predict fiduciaries will design their own similar products with variations, because the DMI can be a good idea. But it's the first runner off the block and I'd like to see more of the race run before I predict a winner. I counsel conservatism when it comes to rolling out new planned gifts, because close donors are so hard to acquire and cultivate, and so easy to lose.

What concerns me is the donor relations problem that potentially arises out of the dual role of donor and investment manager.

Your donor has the right to manage the assets, now owned by your non-profit, for a fixed period of time as long as agreed upon benchmarks are achieved in money management. What happens if the benchmarks aren't achieved by your now donor-investment manager? Undoubtedly you have the right to take control over the investments. But can you comfortably exercise that right? Will the donor-investment manager willingly relinquish authority or plead (angrily?) for another quarter or two so they can improve their performance? How big is the donor-investment manager's ego and what will your organization's other donors think? This is akin to the non-profit that has the right to sue a donor's estate under a testamentary contract or cash in a life insurance policy when the donor can't keep up the premium payments. All of these unfortunate situations give the non-profit a right that it may be loathe to exercise when the donor is high profile, close to the institution, vociferous, has lots of donor friends or the organization fears bad publicity.

The DMI grants a donor investment authority over assets of your non-profit. That's great when the donor-investment manager is savvy, targets are met and the portfolio performs well. If performance goes south, your institution and your donor are likely to have issues around money and ego. I have a hard time conceiving of more contentious issues.

“When a donor names you as a beneficiary of their will, they have elevated you to the status of loved one or very dear friend.”

Revocable gifts are those your donor can take back-they can revoke their gift to your organization. The revocable planned gifts are principally bequests, revocable living trusts and beneficiary designations on life insurance policies and retirement plans.

Many non-profits require proof or documentation when a donor informs them of a revocable gift. I think the better practice is to not ask for documentation, but to trust your donor's word and accept only that documentation the donor offers.

I will use bequests as the example because those are far and above the most popular planned gift, revocable or irrevocable. But my reasoning applies to all the revocable gifts.

When a donor names you as a beneficiary of their will, they have elevated you to the status of loved one or very dear friend. Those are the only people we include in our wills and that is an acknowledgement to be revered and respected. Your organization does not demonstrate respect and gratitude when it asks “may we have a copy of the will?”

Also, your organization gains little by asking for proof. Filing a copy of the will or bequest paragraph does not make the gift irrevocable. Good stewardship does that, and good stewardship does not start with a request for written proof. A note in the donor's record or a memo in a paper file or a copy of the donor's letter informing you of their intention will suffice. Go ahead and make them a member of your planned giving recognition society on the strength of their word.

As well, there just isn't much incentive for a donor to lie. Typically, planned gift recognition societies offer members a lunch or dinner once a year and, perhaps, preferred seating at a low cost event or a reduced price for a large event. I just don't think there are many people who will mislead you for that small payoff. If, on the other hand, you spend considerable money hosting your revocable gift donors at more lavish affairs or on complimentary trips, then I can see an argument for requesting documentation. Most non-profits cannot afford that.

Finally, I think the cost of asking for proof is too high. You risk alienating your donor and commencing stewardship badly. If your grandmother told you she has included you in her will, how would she feel if you asked her for a copy of the will or bequest paragraph?

I believe the best practice is to believe your revocable gift donors, acknowledge them and welcome them swiftly into your recognition society.

I am grateful to add Marymount Manhattan College as my newest client. I thank them for their confidence in my ability to help and I look forward to working with Vice President Margaret Minson and her staff.

I am thrilled to have worked closely on the negotiation and closing of Baruch College's $25,000,000 gift from William and Anita Newman. This is the largest gift in Baruch's history and one of the largest ever to the City University of New York (CUNY) system.

I am always interested in your opinion of The Martignetti Report. Please send me a message with your comments.

If you know anyone with an interest in Planned Giving, please forward this to them.

Best regards,

Tony Martignetti, Esq.
Planned Giving Consultant

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