Creative Applications of Life Insurance in Charitable Lead Trusts

Creative Applications of Life Insurance in Charitable Lead Trusts

Article posted in Charitable Lead Trust, Investing on 1 February 2012| 4 comments
audience: National Publication | last updated: 5 March 2012


Writing on behalf of the American Association of Life Underwriters (AALU), Marguerite Rangel and Andrea Schaffer discuss three client scenarios in which cash value life insurance was utilized as an investment vehicle within charitable lead trusts. 

By Marguerite Rangel, JD, CLU, ChFC and Andrea Schaffer, CLU, ChFC 

The time is right for the review of Charitable Lead Trust strategies in your clients’ portfolios. That doesn’t mean these strategies are only for clients with six‐figure tax woes; clients appreciate CONTROL over their monies, and a well‐structured and appropriately‐funded CLAT or CLUT can go a long way in helping clients fully realize the value of their social capital.

Below are three examples of Charitable Lead Trusts implemented for three divergent clients in order to accomplish varying goals of philanthropy as well as tax mitigation and long-term asset accumulation. All examples were funded with cash, Modified Endowment Contract limit‐designed whole life insurance, and/or real estate. The tax-deferred nature of life insurance and real estate make those assets ideal for CLT structures. While municipal bonds have long been a favored asset, in these times of ultra‐low interest rates with an almost guaranteed increase in rates in the future, their inclusion in CLT structures at this juncture seems unwise due to principal risk and the low income they currently generate.

Example A

Client A is a high-income-earning business owner aged mid 50's, who is already philanthropic, but was not receiving much tax benefit from annual contributions, due to a phase‐out of deductions based on a seven figure income (currently, phase‐outs are suspended); annual charitable donations of $25,000 did not significantly reduce the taxpayer’s $1,000,000+ income. We recommended and implemented a Grantor Reversionary 20-year or Shorter (based on the life of the spouse) CLUT designed to be funded over the next four years with a maximum of $2,000,000 in contributions. The client wanted to increase charitable giving and the design implemented created both the assets to do so as well as substantial tax deductions for the client in each year contributions are made. To date, the client has funded approximately $1,000,000 dollars to the CLUT, resulting in approximately $400,000 in tax savings thus far. The tax savings have been used to invest in real estate; considerations whether the client will fund the remaining contributions in cash or real estate are being discussed currently.

The cash contributions to the CLUT fund a (modified endowment contract) MEC‐limit $5 million 20-year-pay whole life policy on the spouse, age 47, designed to be paid over the next five years before MEC status would be reached, including distributions for the annual payments to charity. The CLUT is the owner and beneficiary of the policy and of all assets will revert back to the grantor at the termination of the trust, at a date when the client anticipates retirement. The guaranteed cash values and subsequent guarantees attributed to the dividends once accrued are a perfect source of charitable payments without further tax ramifications. Additionally, the possible addition of rental real estate provides another source of funding for charitable payments as well as another source of funding for the life insurance policy.

Example B

The clients are a couple with no children who have recently taken an early retirement (he is 56, she is 49) and are very philanthropic. During their working years, they regularly gave between $50,000 and $75,000 per year. As we were planning their retirement, they expressed a desire to be able to continue their level of giving during retirement as well as create a large endowment for their charity at the second death.

We implemented a Grantor Reversionary seven-year or shorter (each based on the other’s life) CLTs for each of them, his funded with an existing life insurance contract (approximately $600,000 cash value), and hers funded with cash (approximately $400,000), which we then used to purchase a MEC limit $2 million 20-pay whole life policy. The CLTs helped to offset the taxes due on the sale of a practice, and the proceeds of the practice are the funds they are using for the next three years until qualified plan assets can be accessed freely. Additionally, the CLTs are continuing the $50,000 charitable gifting they wanted for the next seven years. Once the two CLTs end, the assets will revert back to the grantors and can supply additional income in retirement as well as significant death benefit (minimally $2,000,000+ if cash value is used in retirement) for their charity at the second death. For this couple, the creation of an endowment for the charitable causes they love has given them a sense of joy beyond words.

While there was no new insurance sale for his CLT, we were the original writers of that contract, and we believe it has been put to its highest multiple uses; death benefit protection for surviving spouses as well as, ultimately, the charity, tax‐favored cash accumulation, guarantees of principal to protect charitable payments, and a tax deduction to create more spendable income in the couple’s early retirement years.

Example C

The client is a successful 39 year old business owner who gives approximately $20,000 annually to a variety of charities. She has a $2 million business that is growing rapidly, and she is very frugal with her monies. She may want to retire at age 50, so we designed a CLT to terminate soon thereafter. We recommended and implemented a Grantor Reversionary 12-year or shorter CLUT which allowed her to create enough deduction for her current year of contribution and an additional projected 4 years of carry forward deduction. As it turns out, she is earning additional revenues over projections, so she is continuing her cash contributions. The CLUT holds cash and a MEC limit $10 million 20-pay policy, which is funded as much as possible each year to get the maximum cash into a guaranteed, tax‐deferred accumulation environment which allows her to continue her philanthropy. While she has no children of her own, she has a large extended family for whom she provides some support and will likely continue to provide additional support in the future. Therefore, the ability to have control of significant death benefit in the future is paramount, as well as liquidity once the trust terminates.

These examples are specific situations in which a charitable planning strategy helped to amplify the benefits to the donor as well as to their charities. Each donor was able maintain control of their social capital, and create more personal wealth and philanthropic giving—all with products and structures that contain implicit guarantees. The best of all possible solutions: Give, Get and Keep instead of Pay, Owe and Lose!


Marguerite Rangel* JD CLU® ChFC® and Andrea Schaffer CLU® ChFC® are with Pacific Advisors in Pasadena, California. Their practice focuses on all aspects of planning for individuals and businesses, with special knowledge in charitable and investment planning, estate tax issues, executive benefits, and business succession. They serve clients on a nationwide basis.

Marguerite received her Bachelor of Arts in French from Humboldt State University and her Juris Doctor from the University of San Francisco School of Law. She studied at the Universidad Nacional Autonoma de Mexico in Mexico City and at the Alliance Française and the Institute of International and Comparative Law, both in Paris. She received her Chartered Financial Consultant® (ChFC®) and Certified Life Underwriter® (CLU®) designations from the American College in Bryn Mawr, Pennsylvania. A longtime member of the State Bar of California, she is also a member of the National Association of Women Business Owners and serves as a trustee of the Los Angeles chapter’s foundation. She is a member of the Mexican American Bar Association for which she served several terms as an officer and trustee. Marguerite is a founding member of the Board of Trustees of The Valor Academy, a charter academic middle school created for underprivileged youth in Los Angeles.

Andrea earned her Bachelor of Arts in English from the University of California in Los Angeles and a Master of Arts in English Literature from Claremont Graduate School. She received her Chartered Financial Consultant® (ChFC®) and Certified Life Underwriter® (CLU®) designations from the American College in Bryn Mawr, Pennsylvania. Andrea is a longtime member of the National Association of Women Business Owners, who in 2005 recognized her work by inducting her into its prestigious Hall of Fame. In 2010 she became a trustee of the Pacific Asia Museum in Pasadena.

Marguerite and Andrea are Investment Advisor Representatives of Park Avenue Securities (Series 65) and have General Securities Representative (Series 7) registrations. They are members of American Association of Life Underwriters, serve on the AALU Charitable Planned Giving Committee, and volunteer for the Susan G. Komen for the Cure, March of Dimes, Stephen S. Wise Temple and St. Monicas Catholic Community charities.

Contact:  323.316.9116 

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Re: Creative Applications of Life Insurance in Charitable ...

Don't understand the use of MEC Life insurance in a grantor CLT. If dividends or cash value are used as suggested in Example A aren't all such distributions from the insurance contracts taxable income to the grantor?

Re: Creative Applications of Life Insurance in Charitable ...

Is there a possibility that a deduction could be dissallowed if the CLT owns and is the beneficiary of the life insurance?

(e.g., could the charity be construed as "indirectly" paying the premium on a personal beneficiary contract)

IRC Sec. 170(f)(10)

Re: Creative Applications of Life Insurance in Charitable ...

Are there any "self dealing" restrictions that would preclude the grantor from taking a charitable deduction when the CLT purchases life insurance?

(e.g., could the charity be construed as "indirectly" paying premium on a personal benefit contract)

IRC Sec. 170(f)(10)

Re: Creative Applications of Life Insurance in Charitable ...

Any thoughts on 170(f)(10) and gifts of and premium payments for insurance donated to or purchased by a CLT (a "gift for the use of" charity)?

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