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Creative tool for ‘values-based’ estate planning.

By Ret Boney

A lumberyard owner wanted to give a significant amount of money to charity at his death, but the bulk of his wealth was tied up in the business he had built.

So he used a strategy called “values-based planning,” or charitable planning based on a donor’s personal values, says Phil Cubeta, chief of staff for The Nautilus Group, a division of New York Life.

With his children grown and self-sufficient, and believing they would be ill-served by additional wealth, the donor decided to make a family foundation the recipient of his wealth.

“Some feel too much money for children can have a negative effect on their development,” Cubeta says of the donor, who believed his children should work for their money, just as he had.

To achieve those goals without dumping a complex business in the lap of the foundation, which is not equipped to manage the daily operations of a lumberyard, the donor orchestrated a plan to use life insurance as part of his estate planning.

First, employees of his company purchased an insurance policy on the donor’s life for the value of the company, about $16 million, with premiums paid by the employees.

In some such cases, says Cubeta, the business owner may give employees raises to cover the costs of the premiums.

When the donor dies, the employees will receive the $16 million death benefit, which a legal buy-sell agreement states they must use to purchase the business from the donor’s estate.

The estate then will give the $16 million in cash from the sale to the foundation.

At the end of the process, the foundation will have received a large gift, and the donor will be investing in a charity he believes in, with the added benefit of avoiding a tax rate of about 40 percent had he willed the funds to his children.

“The best way to use life insurance,” says Cubeta, “is creatively as part of an estate plan, using money at death for the right purpose.”

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