Interesting opportunities as a result of the new tax law

Image result for Interesting opportunities cartoonSlowly, we are starting to realize there are interesting opportunities as a result of the new tax law.  Many will take months or longer to come out.

Here is one – in addition to the most obvious that people with estate planning attorneys are likely going back to them as we speak:

No longer needed life insurance!

Yes, many life insurance policies were created specifically to pay any federal estate tax liability – saving the principal of the estate for the family.

But now the estate tax exemption just jumped to $11.2 million per person from $5.6 million per person.  In other words, anyone who had such a life insurance policy should be talking to their insurance/financial planner.  Why not do something charitable with that policy?

Want to get up to speed on the new tax law and various planned giving options?



Confused about life insurance policies? Me, too.


This is coming from a lawyer/planned giving specialist with 20 years experience in the business.  I even had a NY life insurance license (which I never used) and I am still baffled when it comes to life insurance.

So why the post?  I finally got some clarity from a good friend (who I met when taking the insurance course!) and I thought I would try to pass it on to the blog readership.

Here are the basic (slightly altered, of course) facts I had to examine for a client:  woman in early 80s  donates a universal life insurance policy with a death benefit of $300,000.  She has been paying for a really long time and it has a cash value of around $50,000.  But, she is not in a position to donate funds to help the nonprofit cover remaining premiums.  The insurance company gave the nonprofit a few options:

  • Don’t pay any premiums, lower death payout to $200,000, and if she dies within 5 years you win the $200,000.  If not, you lose.  (make a nasal buzzer sound to nix this idea)
  • Pay $15,000 a year until age 95 and if she dies by age 95, you win the full $300,000. If not, you lose.  (make the nasal buzzer sound again! That would mean nonprofit “invests” up to around $200,000 with a chance – just a chance – to win $300,000.)
  • Pay $9,000 a year until around age 90 – around a $100,000 “investment” to win $300,000 if she doesn’t make it to age 90.  If she makes it past 90, you lose.  (another buzzer sound, please!)
  • Lastly, cash in the policy today and walk away with $50,000.  (this sounds like the most reasonable course of action at this point for the nonprofit!)

This was a very disturbing scenario to me.  What happened to all of the premiums she paid over the years – well more than $50,000 worth!  And, if she lives too long, nonprofit gets nothing!  What kind of “investment” is that?  Why in the world would a nonprofit essentially bet on their donor dying like this?

So I called my former insurance course buddy and asked for some clarity.  What he explained to me is this:  universal life insurance is really nothing more than a series of term policies with a savings component (that could grow and eventually spin off enough interest to cover the cost of the term insurance).  Part of your premium payment pays for the current “term” cost of insuring you and part gets saved (with some guaranteed level of interest attributed to your “savings”).  During the early years, more of your premium is going into the savings part because the cost of your “term” part is less because you are younger. Opposite when you are older.  When they create the plan, they pick an age and pick a flat annual premium that will cover the cost of the policy until the desired age – but not necessarily later.

In the scenario I described, I suspect that either the premium was on the lower side and didn’t create a big savings account (cash value) or the premiums were only to a younger age than 95 or perhaps bad investment markets didn’t help either.  In any case, this policy on its face is not a great investment for the nonprofit because the cost at this point to maintain (or extend years) is really high.  So high, that if they chose to pay the higher amount, the policy would still be eating into its cash value to maintain the $300,000 death benefit – to the point where there would be no more insurance past age 95 even though you paid higher premiums over last 10 years or so.

So now I understand those darn illustrations which show premiums up to age 90 or 95.  Really, it is just eating itself up because the cost of the “term” part is so high at such ages. I think this woman’s insurance agent created a policy with a lower premium to a younger age (90 or 92) because she could not afford a higher premium.  And, we see by trying to extend the policy to age 95, not only do we almost double the premium but it is still not enough to keep it going past age 95.

I think this shows us why fundraisers desperately need independent insurance professionals to advise on insurance situations.  These policies are tricky and insurance salespeople often don’t highlight the parts that would cause doubt in the buyer’s mind.

By the way, I suggested strongly in this case to see if the donor really can’t commit to helping offset the insurance premium costs to keep her policy in force.  Let’s say she donates $5,000 a year to help the nonprofit keep the policy in force.  That would change the thinking process dramatically.    Without it, the nonprofit has no choice, as far as I can see, to cash in the policy.


Anatomy of a Successful Insurance Gift

After recent posts regarding insurance gifts – both good and bad – I thought we would conclude the topic on a positive note because so much of planned giving is about being open and receptive to the possibilities.

The following are answers to my questions to Josh Rednik, the Executive Director of the MetroWest Jewish Community Foundation which recently announced a $20 million insurance gift from one of its major supporters.

Here are my questions and Josh’s answers noted by [JWR] and in bold and italics:

Was it a new or old policy?

[JWR] Existing policy that was owned by the donor’s private foundation.

Any premiums still due?  If so, is there borrowing being done to pay premiums or is the donor just paying?

[JWR] No premiums due.  The donors and I have a letter from the carrier stating as much.

One or two lives?

[JWR] Two lives, survivorship.

Whole or universal life?

[JWR] Universal.

Is the Metrowest Community Foundation the actual owner? Or does the donor’s privation foundation still own the policy?

[JWR] JCF MetroWest is the owner and beneficiary, though according to our agreement with the donor family, the proceeds will be transferred from JCF to the family’s supporting foundation at JCF when the policy matures.

Any other charities involved?

[JWR] Possibly.  Total death benefit is $20 million.  When the policy matures, the full proceeds will be transferred to the family’s supporting foundation at JCF.  According to our agreement with the donor family, a minimum of $10 million will stay in that foundation and will function like an endowment, to be used to support a limited array of programs focused on Jewish continuity and identity development. 

FYI, the same family is already on the books for a current commitment of $5 million to that supporting foundation.  That amount is payable over five years and we’re now in year three, there’s a little over $3 million in the fund as of today.  The fund operates like an endowment. 

The $10 million that is designated will be added to corpus and generate larger annual distributions in the future. 

The use of the other $10 million in insurance proceeds will be subject to the discretion of the supporting foundation trustees.  It could stay in the family fund and be used for similar programmatic purposes, making endowment-like distributions, or it could be used to support other charities that the primary donors might request in advance.  We’ll see about this long into the future…

Anything exotic going on?

[JWR] Not really.

How did it come about?  Was it a suggestion by staff?  by the donors? by the donors’ financial planner/insurance salesman?

[JWR] Good question.  It came about for a variety of reasons. 

First – trust.  I’d like to think that over the past few years, we have created a trusting relationship with this family, upon which all of this is predicated. 

Second – role of professional advisors.  I have a strong working and personal relationship with the donor family’s insurance planner and it was he who first suggested to the family that they consider JCF MetroWest as a recipient of this policy.  Without his suggestion, this contribution would not have happened.  I also know the family accountant and he was involved in this discussion/negotiation as well.

Third – patience.  Discussions on this possibility began over one year before the commitment came to reality, and there were many conversations, emails and letters exchanged in an effort to clarify and document how everything would work.

I think the big takeaways are:  (a) focusing time on getting to know your major donors and helping them engage in the philanthropy they seek is critical; (b) building trusting relationships with professional advisory community is equally critical.

Fundraisers should have a lot to think about here and thank you Josh for being so candid about this one!

Planned Giving Gone Awry: OSU and Pickens can’t undo insurance debacle

This story is slowing making the rounds about T. Boone Pickens, Oklahoma State U. and their big insurance debacle.  It was a debacle from the start, as far as I was concerned.  In short, around 2007, OSU and Pickens were snookered into buying what they thought was going to be $350 million in life insurance policies (on lives of their boosters).  And, yes, this made news in at the time and I had to field a bunch of calls about the doing such deals.

Without knowing the real details, I could have told you that any of these huge insurance plans (particularly ones that borrow to pay premiums – doesn’t look like the case here) are very risky.  Why?  Well, the insurance salespeople have only one thing on their minds: that first premium and the significant % of $ they will get paid from it.  They aren’t concerned about 5 to 10 years from now – they aren’t getting paid for that.

If you are interested in the details, it looks like from the following Forbes story that OSU laid out the premiums on the insurance policies out of their own pocket (not donor contributions) with the hopes that some boosters would pass away:  Not a bright gamble if you ask me.

You can look this one up on the web since it involves sports and lots of outlets are covering it.  Here was the first story to pass by me:

In short, OSU had second thoughts on the $350 million windfall plan – probably because it made no sense to keep laying out money when all of their boosters were healthy – and tried to get out of it through a technicality in the law (the 10 day revision provision).  There might have been other legal angels on this one but they went for one that was black and white, and they came out on the wrong end.