Think Giving To Charity Steals From Your Heirs?

Here’s a possible solution!

Jim Lorenzen, CFP®, AIF®

Giving to charity can create significant tax advantages. Many people use real estate and securities to gain these advantages.

If you were to SELL an appreciated asset, the gain would be subject to capital gains tax. However, by donating the appreciated asset to a charity, however, you can receive an income tax deduction equal to the fair market value of the asset and pay no capital gains tax on the increased value.

Example: Alan purchased $25,000 of publicly-traded stock several years ago. That stock is now worth $100,000. If he sells the stock, he must pay capital gains tax on the $75,000 gain. However, Alan can donate the stock to a qualified charity and, in turn, receive a $100,000 charitable income tax deduction. When the charity then sells the stock, no capital gains tax is due on the appreciation.

This may create a problem, however. When Alan made this gift to charity, his family is deprived of those assets that they might otherwise have received.

Potential solution: In order to replace the value of the assets transferred to a charity, the Alan establishes a second trust – an irrevocable life insurance trust – and the trustee acquires life insurance on Alan’s life in an amount equal to the value of the charitable gift. Using the charitable deduction income tax savings and any annual cash flow from a charitable trust or charitable gift annuity, Alan makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums. At Alan’s death, the life insurance proceeds generally pass to the his heirs free of income tax and estate tax, replacing the value of the assets that were given to the charity. Not bad!


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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.