MKA Executive Planners Blog

Basics of a Charitable Gift Annuity

Charitable Gift Annuities (CGA) are a very popular fundraising technique.  A CGA is a contractual agreement between a donor and a charity where the donor transfers assets to the charity, and in return, the charity is obligated to pay a fixed amount to the donor or donors, for a specified term, usually for life.

Individual Retirement Accounts (IRA’s) and other qualified plan assets (401(k), profit sharing plans, etc.) were designed to help individuals save for retirement in a tax advantaged way.  For simplicity, I will refer to all of these types of accounts as qualified plans.  The most significant tax advantage of qualified plans is tax deferral.  By this I mean that you contribute pre-tax dollars to the qualified plan and the contributions grow tax-free until withdrawn.   

Current Estate Planning – Tax Considerations

The interplay between basis, estate tax, and income tax requires that the estate planner take into consideration a number of factors (i.e., basis, growth potential, appreciation, federal and state estate taxes, and income and capital gain taxes) in order to determine if lifetime transfers are appropriate, and, if so, the proper asset and transfer strategy.  This is true regardless of the size of the estate.

Did You Know You May Have Both in One Product?

When it comes to discussing the pros and cons of Long Term Care, there will always be opposing views depending upon the age and outlook of the participant.  For the purposes of this article, I will assume age 50.  On the one hand, there is the “optimist” who believes that he or she will forever remain in good health and never need long term care and/or life insurance.   On the other hand there are the “realists” who understand that life and health are unpredictable, and much can happen in a span of 20 to 30 years.

Transamerica recently began sending letters to certain policyholders who purchased policies that were issued between 1987 and 1998.  The letter advises the policy owner that the monthly deduction rates (i.e., the cost of insurance charges) will be increased to cover the company’s expectations regarding its future costs of providing coverage and that the increase could be significant.  This alone may cause ongoing increased charges to cash value accumulation and the policy to lapse earlier than was previously illustrated.  For these policy owners a policy review is the only way to determine the impact of the change imposed by Transamerica.

Many publicly traded companies have provisions in their compensation policies and employment contracts that require bonuses be paid back and recovered by the employer under certain circumstances. 

Life insurance products may be designed to maximize death benefits or cash accumulation.  From an estate tax perspective, the need for the death benefit design has become less important.  The reason is that other than the state estate tax exposure, most people are no longer concerned with the federal estate tax, since the federal estate tax exemption is currently $5,340,000 per person.  The new wave of life insurance policies are trending toward a “cash accumulation design” for retirement income, with a number of enhancements that improve cash accumulation.

I have seen many financial plans.  A common plan will take into consideration a savings target during the income years, investment diversification, an assumed investment return commensurate with age and risk/reward profile, income need projected during the retirement years, and the impact of taxes and inflation.

Important Considerations

There are a great many reasons why foreign investors choose to invest in U.S. real estate.  The U.S. has a secure, stable economy and political environment, with attractive investment opportunities compared to other countries.  In a world of political turmoil, it is a safe and secure place to live or dwell.

The definition of “wealth” is quite broad.  In the context of this article, I will define a High Net Worth Individual (“HNWI”) as a person who has net worth of at least $15,000,000 and liquid assets in excess of $5,000,000.  At this level of wealth, a HNWI is primarily concerned with preserving wealth from estate and income tax drag, and would only purchase life insurance if it is considered a good investment compared to other investment alternatives.