Joel Koenig and Tim Emery

Painless Philanthropy

Written by:

Joel Koenig and Tim Emery

The Koenig Group LLC

You want to create a legacy by helping to fund the worthwhile organizations you have supported over the years: The Endowment Fund, The Hadassah, The Hebrew Home, and maybe The Jewish Social Service Agency (JESSA). You enjoy a very comfortable lifestyle, have adequate income security, a nice home, and a wonderful family. You would like to perpetuate your family’s values by contributing to the long-term success of the causes you support by helping to build the endowment funds of those groups.

But you may wonder, “Can I contribute large sums of money without hurting my current lifestyle? Can I leave a large charitable bequest at my death without taking away from my heirs’ inheritance?” The answer to both questions is a resounding, “Yes!”

This article will address two ways that older and affluent - yet not rich- people can truly accomplish their goals without fear or loss of lifestyle.

Case Scenario

Our client is an 80-year-old widow in good health with a current net worth of $3,000,000. Her lifestyle needs are easily being met by the retirement plan she inherited from her husband, her small pension plan, Social Security, and over $100,000 a year of income from bonds, CD’s and municipals.

In addition to annual gifts to her children and grandchildren, she gives $20,000 of her income annually, split among all of her charities. Her assets are more than sufficient to make larger gifts during her lifetime, though she is not comfortable in doing so. She plans to leave a legacy of about $200,000 to various charities; the rest will go to her heirs (and the IRS!!).

Financial independence is her most important goal. The fear of not having adequate income, the high cost of aging, and the uncertainty of the future has caused her to avoid using the opportunities available to increase her family’s legacy, including the legacy of strong Jewish philanthropic values.

Figure I shows the current distribution plan of her estate (all charts assume death in Year 5).

A Simple Strategy

How can our client increase her legacy to her children while maintaining the same lifestyle and also reducing the amounts going to the IRS?

The strategy involves a hedge against her living too long - and also a hedge against her dying too soon. By repositioning some of her assets into a tax-favored annuity, she can guarantee a regular income that she cannot outlive. Although a portion of the payments is taxable, most of each payment is received tax-free over her normal lifetime. Her after-tax net income actually increases!

She can use her increased net income to purchase a life insurance policy to replace the principal she used to purchase the annuity -- without changing her current cash flow. Properly structured, this can provide a much larger net benefit to her heirs. Who loses in this arrangement? Uncle Sam.

Figure II shows the distribution of her estate using this simple strategy.

The Win-Win-Win

Under this approach, our client can increase her charitable legacy in addition to the legacy to her heirs while still maintaining her same lifestyle.

The Endowment Fund has an insured endowment program that can help donors increase their charitable legacies through an income tax-deductible program that uses life insurance owned by the fund. The premiums are fully deductible by the donor as a charitable gift. Moreover, the Federation currently matches 100% of the cost if the policy benefit is left as an unrestricted gift to the Endowment Fund.

In this scenario, our client contributes $50,000 a year of her current capital over four years into the matched endowment program (above her current giving program). This contribution creates a charitable deduction, saving as much as $20,000 of current income taxes. Thus, her estate is only reduced by $30,000 a year or $120,000 in total. The charities will receive an additional $645,000 at her death, while her children and the IRS will receive $60,000 less than the second strategy.

Our client fully achieves her philanthropic goals, leaving her family and her charities a substantially higher legacy at her death without adversely reducing her current lifestyle. Everyone wins!

Joel Koenig is the Principal of The Koenig Group, LLC. Tim Emery is an Associate. They specialize in helping affluent clients provide greater security through creative financial planning, innovative wealth preservation, and charitable planning strategies. For more information, they can be reached at 301-652-4545 or and .

The Koenig Group LLC