Key Points:
1. This strategy immediately replaces the value of the hard asset in the individual’s estate. In many cases the value of the life policy is higher than the net sale price of the asset.
2. This strategy allows individuals to support their favorite non-profit without reducing the value of their estate.
3. All income tax brackets can benefit. Higher brackets realize higher returns.
4. This strategy is best used by individuals who do not need the proceeds from a hard asset for immediate income.
5. This strategy is best used for individuals who do not need the tax savings achieved through charitable donation for immediate income.
6. This strategy is often better suited for providing future income than is possible through retaining the hard asset.
7. This strategy avoids all of the costs associated with retaining a hard asset: taxes, insurance, maintenance, etc.
8. This strategy avoids the costs of selling the hard asset, which can be quite substantial.
9. This strategy is effective at turning a depreciating asset into an appreciating one.
10. Changes in the Federal Tax Code may reduce some of the benefit of this strategy, so it is better to act on it in 2009 than waiting.
We've seen the income of non-profits decline as the economy worsens. This article show non-profits how to increase the member's donations using the subsidies created by state and federal tax breaks. Many people have a tangible or 'hard' asset they do not need or want, nor do they need the money they could get from the sale of that hard asset. This article shows how individuals and non-profits have benefited from donating that hard asset to a non-profit and were able to fully replace its value in their estates. These strategies have increased giving to non-profits. The case studies and comments in the blog do not constitute tax advice.
Donation of Real Estate
A 56-year-old Fairfax woman inherited her family home upon her mother’s death. Located in rural SW VA, the home was worth $118,000. The home needed interior and exterior painting, a new roof, a good cleaning, and a host of minor repairs to make it ready for sale. Total estimated cost: $23,000. She would also need to pay brokers fees of 6% to sell the home, another $7,080. She would need to continue the insurance on the home, $855; pay the real estate taxes, $185; and pay someone to mow the lawn and keep the place neat and ready for showing, 250/month X 4 months (average time on market) equals $1,000. Her broker also told her it’s customary for the seller to pay 2% to 3% of the closing costs. Assuming a minimum down payment of 3.5% from the buyer, her share of the closing costs (2%) would be $2,277.40. Total selling costs: $34,397.40 or 29% of the retail price, leaving her a net of $83602.60.
The Woman is an attorney in private practice; her husband is an attorney with the Federal government. Their combined tax bracket (state and federal) is 43%. If she donated this property, she would realize a tax reduction of $59,740, just $24,000 less than if she were to sell it. The woman does not need the income from either the sale of the property or the tax deduction. She and her husband are making plenty now and are able to put money aside for retirement. However, she doesn’t’ want to diminish the value of her estate, which would happen if she sold the house ($34,397 reduction) or just took the tax deduction ($58,260 reduction in value of her estate).
Solution: She donated the house to her mother’s church and used her tax savings ($59,740) to purchase a single premium whole life policy. This policy added $158,677 to the value of her estate through its death benefit, or $75,075 more than the net proceeds of the home (47% more). In addition, the policy quickly grows cash value that she can access at no cost in her retirement years if she wants. This would be better than taking out a home equity loan since she won’t pay interest on cash she borrows from the policy.
Added benefit: She donated the home to her parents’ church. They were married in this church, she was baptized in the church, and her parents are buried in the church’s cemetery. Being a charity, the church won’t pay tax on the property. There are no broker fees involved in the transfer. Moreover, the church has plenty of volunteers to fix up the home. They could sell the property if they wanted to, rent it, or use it for one of their ministries.
Donation of a Vehicle
A retired-military 59-year-old man had a Class A motor home that he purchased used 2 years ago. After touring the US and Canada for a couple years, the man wanted to sell the vehicle. Given the cost of gas and the state of the economy, the only interested buyers were dealers, and they were only interested in giving him $31,000 or 43% of its list price of $72,000. The man did not want to take a $41,000 loss. Neither did he want to hold onto it with the hope the market would someday rebound, as the vehicle is a depreciating asset, losing about 15% of its value every year.
Solution: The man is a member of a church that sponsors an evangelist couple who do revivals around the country. He gets a 32% deduction (his combined tax bracket) on the full retail price of the vehicle, or $23,040. He purchased a single premium whole life policy, face value of $42,282, $11,282 more than he could sell the vehicle for. He also converted the asset from a depreciating asset to an appreciating one. And he can borrow from the policy at no interest in the future if he wants to.
Added Benefit: The evangelist couple gets use of a relatively newer vehicle for their ministry, a far cry for the ancient motor home they were using. There will be less cost in operations, due to the better condition of the vehicle. The vehicle also provided increased feeling of esteem in the couple, and also creditability in the congregations that they visited.
Donation of a Car
A 36-year-old woman is a regional sales manager at a pharmaceutical company. She drives over 30,000 miles a year in a car bought by her company and given to her for her business use.. She gets a new car every 3 years. Only the residual value of the car is taxable to her. She just got a new Chevy Impala in March. She has a 2006 Impala LS to get rid of. Her tax liability on that vehicle is 36% of $7440, or $2678.40. This means if she sold the vehicle, she would net $4,761.60 after taxes.
She donated the car to a social ministry who fixes cars up for low-income families. She buys a single premium whole life policy with her tax savings, face value of $6,783.00, or 42% more than what she would net if she sold the vehicle. She adds that amount to the value of her estate. Plus she turned a depreciating asset into an appreciating one. And she can borrow from the cash value of the policy at no cost in the future.
Her church gets a nice vehicle to fix and let a low-income family use so the breadwinner can stay employed, keeping another family off the welfare roles.
Donation of other tangible assets
A 42-year-old woman has relatively new and expensive medical equipment after the death of her handicapped daughter. The items include: an oxygen generator; an “air bed” hospital bed to prevent bedsores; a motorized custom wheel chair; a special lounge chair; a transfer hoist to lift her daughter from her chair to her bed, or from her chair to the bath; various physical therapy and resistance equipment for muscle tone and improved functioning. A used durable medical equipment (DME) dealer is willing to give her $4500 for all of it. She finds out the full retail value of the equipment, if cleaned and reconditioned, is about $21,500. The equipment was bought and paid for by the insurance company of the driver who injured her daughter.
The woman and her husband are in a 32% tax bracket. She donated the equipment to a non-profit that cleans and reconditions it, and gives it to low income people to use. She gets a $6880 tax break—itself $2,380 more than if she sold the equipment to the DME dealer. She bought a $25,303 life policy. The face value of the policy is $20,803 more than if she sold the equipment to the dealer. Plus she has increased the value of her own estate by more than $25,000.
The mother gets the emotional benefit of assisting others who are like her daughter. She adds much more than the sales value of the equipment to her estate. And she can borrow the cash value of this policy in the future at no cost.
Note: The examples are actual cases written by Richard B. Osmann, Ed.D., General Agent for Kansas City Life. 540-353-7913
