The Gift That Keeps on Giving – Episode 207

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your hosts, best-selling author Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hi, folks. Welcome to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have the president of Partners for Prosperity, best-selling financial author and our co-host, Kim Butler is in the house with us today and we’re going to be discussing an article that I actually found in a July edition of the NRA magazine. Again, not trying to get politically involved here one way or the other in your NRA and whole weapons and that kind of thing. But they do have here a handout that they give out called Creating a Constitutionally Centered Will.

[01:03] And it’s basically a guide that they give on how you can make sure that you support the causes that are important to you throughout your lifetime and throughout the lifetime of your heirs. And I think that’s kind of cool. Absolutely. It’s so amazing, first of all, how many people have out-of-date wills. But then second of all, how the will often just addresses the financial transaction that needs to happen to get assets from one generation to the next and doesn’t address anything about what those people loved, what they cared about, how they spent their time, what they were focused on, etc. So I love this additional input and I know that our estate planning attorney who’s been on this podcast before, Rick Randall,

[01:56] is very interested in including people’s thoughts on this matter in the legal documents that he helps them with. So let’s hear it from the article bits and pieces in terms of maybe some suggestions on how to do this. Okay, like I said, it has several steps and you can give me whether you agree or disagree. The first of them is rather simple and it’s just to do a bequest and you can bequest pretty much anything to anybody. Yes, so this is a delightful step to take, especially when something may not have a lot of monetary value but has a lot of emotional value. So let’s say for an example, since it is NRA, we’ll just use this example. Let’s say that an uncle has some rifles and some old guns and maybe they would be worth something but only to his nephew that really likes hunting.

[02:56] Well, then he could bequest those specific items directly to the nephew. But let’s also say that there was one particular gun that he had. And again, this is not a political statement. It means nothing. It’s just an item to talk about. But let’s say this one particular gun was museum worthy and there is a gun museum in his hometown or in some place that he travels for vacation that’s meaningful to him. So he should bequest that specific gun, go to that specific museum so that when his heirs are sorting through his various items, looking at this gun thinking, what are we going to do with this? None of us even like this stuff. The particularly identified guns go to the nephew who will enjoy them and make good use of them.

[03:44] And the one specific gun goes to the museum. So that’s an example of a bequest and it’s a fabulous idea. And it can be written in the legal documents, but it can also be done less formally. My grandmother had this green notebook and everybody knew about the green notebook and it contained all of her last items. And she had a couple pieces of furniture and I think a lamp that held meaning to her. And frankly, it didn’t really hold meaning to anybody else. But it was very important for her that the lamp be given to this one particular son. So, okay, fine. We made that happen. You know, what he did after with it is completely up to him. But in grandmother’s mind, I know that there was a lot of peace of mind because she had identified that this lamp goes to this son and this particular furniture goes over here, et cetera.

[04:39] And so you can get as detailed as you want on those bequests or not. You can just keep them broader and just say, you know, I’d like all my jewelry to at least be shown to my granddaughters to make sure that, you know, if they want it, great. If not, that’s okay, too. But you can identify those things that are important to you. Okay. Our next category is life income gifts. And in particularly, they’re discussing annuities that provide for income for the annuitant during their lifetime. But then the remainder would go to whatever is remaining at the point of death would then go to the charity. So you sort of take a chunk of money. And I have was heavily involved in this market about 10 years ago.

[05:34] The problem is now is it’s just the rates are actually negative inside most of these. You know, most of these by the time the fees and stuff come out, there’s not a positive gain on your money. So it’s not always such a good thing. But the idea is good that you set up an income for yourself and still leave what’s left to the charity. Right. Absolutely. So this is a financial strategy and probably typically done for the upper net worth oriented people. You know, I would say three to five million and above. And it can be very, very effective. It can help with capital gains if you have a particular asset that’s got a heavily embedded high capital gain. It can help you get out of some of that obligation.

[06:27] And as you identified, Todd, because annuity rates are so low right now, the actual income off this strategy may not be the best for each family’s situation. But there is good knowledge in being aware that it exists. And there’s actually two directions it can go. One is family first, charity second. And then the other is charity first, family second. And so if you’re curious about this, what I would encourage you to do is find your favorite charity. It could be an alma mater. It could be a church or a synagogue or some other group or association. The larger ones, I can almost guarantee you, will have information on charitable gifts and how you can involve the charity with your family’s estate plans.

[07:17] So reach out to them, learn about these various strategies and then see if they apply to your situation. And if so, it’s a nice way to include something that’s very, very important to you like a church or, again, an alma mater or an association in your further plans to know that today you’ve taken care of them, even though it may not be until tomorrow or at death, that they’ll actually get the money. But it’s a great strategy to learn about. Another one would be a retirement account designating the charity for a retirement account. This bypasses probate and actually will take it out of your estate value if you happen to be one of the few people that have an estate tax problem. Absolutely. Absolutely.

[08:18] So a lot of people end up being quite frustrated with a pension plan or a 401k rollover or some type of retirement account. And they are now realizing they’re going to have to pay tax on every single dollar in there. And so, as you said, if your estate is large enough and you have other income sources and maybe this is just an account that you don’t need, a fabulous way to benefit a cause that you care about is to give that account directly via the beneficiary designation to a charity. It will wipe out that tax concern. It will continue something that was important to you. I love the idea of there’s a charity. You’ve been writing a check to them every single year for a long, long, long time.

[09:05] And wouldn’t it be nice if, in essence, that annual gift could continue on? Well, one way to do that would just be to give that retirement account directly to that charity. It would be in the form of a lump sum, but you could also make instructions in your bequest or your will or your estate planning documents, your living trust, et cetera, about how they handle that lump sum. And so maybe they only use a certain percentage of it every year or they only use it for certain things or what have you. So yeah, I think a lot of people are not aware that you can actually give a retirement plan directly to a charity and remove it from your estate and remove it from income taxation. Next is one of my favorite strategies is using a life insurance policy.

[09:56] Now, when a life insurance policy is properly purchased and made the beneficiary as an irrevocable trust, it is tax deductible in the year that it is set up, is my understanding that that’s still true. This used to be the big thing we did 10 years ago. I don’t know of anything changing in that arena. Right. So this is where you’re giving the policy to the charity. That’s what you’re speaking of, correct? Correct. They would be the beneficiary. Right. And you’re irrevocably giving it to them. That’s the difference. That’s what’s going to create that deduction. So there’s a couple ways that this could be done. You could absolutely give it to them in an irrevocable trust. It’s an irrevocable gift.

[10:49] It’s theirs. You get some deductions and there’s a proper term that’s used there. It’s called the interpolated terminal reserve. That is how the policy is valued at that time. And it’s fairly close to the cash value number. Of course, you could be setting up a brand new one and handling it that way as well. And so that’s a great strategy. But I’d like to elaborate on that and identify just the benefit of giving a portion of or a full life insurance policy to a charity such that all of your other assets can go to the family. So let’s say, for example, somebody has a particular estate value and they want $100,000 to go to this one charity, but who knows what percentage of that estate that $100,000 is going to be?

[11:43] They could very easily buy a life insurance policy for $100,000. Now, of course, if it’s whole life, that $100,000 is going to grow. But we’ll just identify that they could limit the gift to the $100,000 and excuse me, they could limit the gift to the $100,000 and that would enable the charity to get the $100,000 and then the family gets everything else. And so for the donor, it’s a point of clarity around their estate plans. Like, they know their charity is handled and then they know that they get to spend all their other money while they’re living and then anything that’s left over goes to the family. Because I think a lot of times it’s very important for a donor that a charity get money, but that donor may end up running out of money.

[12:32] And so in essence, the charity’s not going to get anything because the family’s going to close out the estate and use the final dollars to do that and there’s really not going to be much left. So a life insurance policy can play the role there of making sure that whether it’s done on an irrevocable basis or just a revocable basis, because again, the family, the donor, they may change their mind along the way, but if the beneficiaries made the charity, then the donor knows that that charity is going to get that amount of money and that will provide them a lot of peace of mind. I know we see a lot of people can’t wait to be 59 and a half so that they can access some of their retirement funds, but there’s also people on the

[13:17] other side of that who really don’t have any need for that. And at 70 and a half, they’re forced to take minimum distributions. And how wonderful it is to take those minimum distributions, you could give those directly to the charity or you could fund a life insurance policy which would be a much bigger contribution over a lifetime. Yes, that’s an excellent idea. So you’re 70 and a half, you take your requirement of distributions, use those to pay a premium, maybe also a paid up addition writer contribution, and that takes literally pennies that would have gone to a charity every year and turns them into dollars that will go to the charity at death. That’s a great additional idea. And then the final one is a charitable lead trust, which I must admit,

[14:08] I’m not familiar with that term, a lead trust. Yeah, so this is, as I was saying earlier, you have either family first and charity second. That’s the charitable remainder trust. This is charity first and family second. So the charity is taking the lead. They’re getting the income off a particular asset. And then the family gets the asset upon death. So it’s exactly opposite of the second thing that we talked about. Again, the charity is taking the lead and getting the income from the asset and with some deductions that benefit the donors, of course. And then the family gets the asset upon death and the charity is no longer in the picture. That’s what a charitable lead trust is. I think it’s extremely important if you’re listening to this and you

[15:06] are in a situation where some of this interests you, every one of these is a different situation. This is not something where it worked for the guy down the street, so it ought to work for you. You’re talking about very unique and specialized planning. And this is where you want to take your time, educate yourself, and make the right choices for yourself. It’s not a tremendous amount of work. Just don’t copy somebody else because no two estates are the same if you fit the people we’re talking about right here. Absolutely. Very well said. And if you would like some help with this, because this definitely takes accountants and attorneys involved, please email us to hello at partners4prosperity.com and we will connect you with an attorney

[15:59] that has specialized knowledge in this area and also understands prosperity economics. So again, if you’d like help in this area, please let us know. We’re happy to connect you with somebody that can get the work done for you, and that’s hello at partners4prosperity.com. Super. Thanks so much, Kim. I know we had to have our thinking caps on a little bit there today. And these may be questions that you, your parents, your grandparents, or something, if you fall into one of these situations, a lot of money and a lot of hard feelings and money not going where it was supposed to, a lot happens with people who are at this income level. So just hope that your family doesn’t affected by that because you’ve

[16:45] done a good job taking care of it ahead of time. So take care of everybody. We’ll see you again soon. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partners4prosperity.com. If you liked this episode, make sure you subscribe and leave a review. We managed to manage everything from the backend to the frontend and do online sales without complications. If Shopify was a cycling equipment, I would say it would be the bike itself. It’s what allows us to get where we want. It is in Shopify that we manage our business. Start your free evaluation at Shopify.com.