Can You Write Off Life Insurance Premiums? (4 Advanced Strategies Explained)

What's up everybody. This one's going to be a fun, fun episode. We got some brains in the room and I'm not talking about myself. Um, one of the things that we all talk about when it comes to life insurance, there's so many benefits when life insurance is set up and used properly. And one of the, one of the common phrases that I've probably said hundreds of times is life insurance does not give you a deduction going in. You get, when set up and used properly, your money can grow tax deferred. You can use that money tax-free through a policy loan, and it obviously gets paid income tax-free. So there's some amazing tax benefits, but you don't get the deduction going in. Now, there are a couple of caveats to that statement. And in this episode, we are going to be diving headfirst into four areas where you could, or potentially could, I don't know, I have an attorney on the line here, uh, get a deduction. And, uh, so with that, I want to welcome Bill Bell, uh, from Hen Mutual, also a fellow podcaster and someone who's a brainiac and knows this stuff very, very well, thank you for being on. And then we also have Alden Armstrong, who's no stranger to the show. And he's also going to be on, we're going to be going through four scenarios. And we're also going to be going through four flow charts, which if you're someone that loves seeing visual things, you're going, this is going to be a must watch podcast, right? Gentlemen, on a scale of one to 10, how was that intro? Were you ready to go? Oh, that was at least a 17. I'll hand it over to you all then. And, uh, I'm excited to learn and I'll try to keep my questions to a minimum. Amazing. Well, thanks for the intro. Today's going to be a lot of fun. And as Caleb alluded to tax deductions for life insurance premiums, there's not a whole lot of options out there. And so where I want to start in this entire episode is, is Bill, can you address that elephant in the room? Well, why can't this be more possible to get a deduction for funding life insurance? What's the big limitation here? Well, first of all, thanks for having me. Uh, really appreciate it. Big fan of the better wealth, uh, channel. Uh, watch a lot of your videos on YouTube. Uh, so the answer to your question is, first of all, it's right in the code. Uh, it's internal revenue code section 264a. And it basically says you do not get a tax deduction for life insurance premiums. And that's regardless of whether a business owns the policy, an individual owns a policy. Bottom line, Caleb already hinted at it at the beginning. Life insurance in and of itself has so many great tax attributes to it. We have the tax-free death benefit. We have tax-free distributions from a properly structured life insurance policy. You get the tax deferred growth of the cash value. Getting tax deductions on top of that would just be one too many bites at the tax apple. So that's where the IRS really cuts it off and the code cuts it off. That being said, there are some strategies that involve life insurance where you could potentially get a tax deduction. The deduction in and of itself is not tied directly to the life insurance policy. It's because of the strategy, the structure that you're implementing. Uh, so I think that's what we're going to talk about here today, Alden and Caleb. Perfect. So effectively it's a non-starter. For traditional life insurance. However, there are some strategies that we're going to dive into where we can possibly, perhaps in quotations, make it possible, understanding tax attorneys on the call, we've got to play nice here. So let's dive into this, uh, this first one. So this is actually a plan that I discovered about two years ago. And I find a lot of value in it, talking to clients about it. This is the cash balance plan. Bill, in a nutshell, I'm going to pull up a flow chart here. Can you walk us through what is a cash balance plan? Why would it potentially be beneficial to certain business owners and how this can be tax deductible? Yeah. So I'm a big fan of cash balance plans and pension plans in general. Obviously pension plans are not something new. I think pretty much everybody that's going to be watching this is going to be familiar with a pension plan. And a cash balance plan is just a variant of a defined benefit qualified plan. So essentially you're establishing a business sponsored plan that is going to provide the participants with a defined benefit at the end of the day. Kind of the difference between a traditional pension plan and a cash balance plan is a cash balance plan has a kind of a target in regards to total value at the end of the day, where a traditional pension plan targets an annual benefit that's going to be paid out. But for, for all intents and purposes, they're very, very similar and they're beneficial to business owners for a few different reasons. One of which is if they provide a predictable source of retirement. Uh, second, they are a potential source of premiums for life insurance policies. And third, and what we're going to be talking about today here is that contributions to all qualified plans, including pension plans, as long as it's structured properly and they meet all the other caveats are tax deductible for the sponsoring business. So if you have a business owner that is looking to get sizable deductions, either now towards the end of the tax year, or even in early 2026, as people are doing their taxes with their CPA, they can actually implement one of these plans and get a sizable tax deduction, uh, for the 2025 tax year here. Uh, we call that the instant replay. Uh, whereas people, those business owners are working with their CPAs in early 26, they like, Hey, we're getting murder out of taxes. Is there anything we can do? You can actually implement a cash balance plan here in 26 for the 25 tax year, as long as it's done before the actual tax filings are done. Uh, so, and we see deductions here depending on the business and obviously the size of the benefit at the end of the day, two, three, $400,000 a year on an annual basis for those contributions to the cash balance plan. So, I mean, it is a sizable number in many cases. And Bill, would you just for the moment, compare this to a traditional, let's say 401k IRA or other type of pension plan, like a SEP per year and get a deduction for it? Yeah. I mean, kind of the maximum when you're talking about a, uh, 401k profit sharing plan where you have both business contributions and then elective deferrals is about $70,000. It goes slightly higher than that. If you have somebody over the age of 50, like I am, I'm able to put a little bit more in because of the catch-up provision. And then starting in a couple of years, there will be also the super catch-up that is available for people over the age of 60, uh, which is going to be beneficial to some people. But, uh, you're, you're really limited as far as the amount of contributions that can go into the plan. Defined benefit plans and cash balance plans work a little bit differently. And if you have that right kind of 50 something business owner, that's looking to put money away to really supercharge their retirement income. Again, the contributions could be three, four, five X what you would have with a traditional defined contributions. Wow. So using simple numbers, let's just say I'm a business owner. I've got a lot of cashflow. I have a great lifestyle and I want to plan for the future for retirement. Right now I'm putting in, let's just say a 70,000 a year into qualified plans, getting a deduction for it, putting that money away for the future. I want to be able to do more. And what you just told me is effectively we could do four to five times what you're currently doing in a cash balance plan, get a deduction for it. And that plan allows you to also own life insurance. So within that plan, perhaps let's talk a little bit more about the actual flow, how does life insurance play into it and then how can it be used for our future income? And Bill, it's my understanding that it almost has to be an asset like life insurance because in a cash balance plan, you can't earn a high rate of return. Correct me if I'm wrong on that, but that's another, it's not like you can buy life insurance, it's just life insurance or annuities are like the two assets that are the go-to with a plan like this. Yeah. It, you know, it really depends on the third party administrator and the financial professional. Some of them will fund part of it with traditional investments like mutual funds or whatever it might be. Uh, and then some annuities and then some life insurance. There is a maximum amount of life insurance that we could put into these plans. It's called the incidental benefit limits. Basically you're generally looking at anywhere from about a third or two thirds of the contributions can go into life insurance, just depending on the plan itself and the type of life insurance that is being utilized within the plan. Uh, but Caleb, you're right. Many of these cash balance plans are structured to have life insurance, but a lot of them actually aren't, uh, because, but you're a hundred percent right also in that if you have a plan that has explosive growth in regards to the investments within it, you could have an overfunded cash balance plan and life insurance is actually used in those circumstances as well. We'll get to that in just a second here. Uh, but to get back to Alden's original question, uh, first of all, the plan itself has to allow for the purchase of life insurance. Now it's easy to amend a plan document if it currently doesn't, but the plan specifically has to allow for life insurance into the plan once it's in there, then the third party administrator will take a look at the plan and determine what the maximum amount of insurance is. And obviously that gives us kind of our, our range in regards to how much death benefit we can have within the plan. There's a couple of different ways that they will calculate that. There's a test called the a hundred times test. There's the test called the essentially 50% test percentage of benefits test is the official term for it. I'm not going to go into those. Those are really nerdy kind of things that, uh, I enjoy talking about, but I'm not sure that, uh, your, your listeners would enjoy so much, but bottom line is we have a range in regards to how much life insurance can go into these plans. And then the third party administrator will work with the financial professional and the client to determine where that's going to be. The policy will be owned inside of the cash balance plan. And so it will be an asset of the plan. So that's where our distinction in regards to tax deduction of life insurance and tax deduction for the strategy comes into place here because we didn't get the tax deduction because we were buying life insurance. We got the tax deduction because of the contributions to the cash balance plan. Uh, every year that there is life insurance inside of a cash balance plan or any type of qualified plan, the participant has to pick up a cost. It's called the cost of current life insurance protection. It's essentially a term equivalent. Uh, and then, uh, if they die while the policy is inside the plan, the plan will pay out the death benefit. Uh, and assuming it's structured properly, the net amount at risk, which is the amount that I paid the rental cost on, if I'm the participant. We'll pay income tax free to, uh, my family or named beneficiary. So, uh, that's the basic structure as far as ownership inside the plan and so forth. Obviously there's a lot more intricacies and complexity to it, but that's basically how it works. So once it's in the plan, because to your point, the plan is a structure. We've got a third party administrator taking care of everything within that plan as a business owner, when can I actually get access to that cash value? You know, our audience, a lot of our audience really likes the leverage ability of life insurance. It sounds like in this structure, leverage ability isn't quite there, but there's gotta be a future benefit to where this could make a lot of sense for somebody. Yeah. So that's kind of where the magic of the life insurance comes into play here. Obviously it's really important that there's this pre-retirement death benefit protection, because a lot of times, especially with business owners, they need that protection because these plans are not going to be fully funded until a certain age at some point in the future. Uh, so they want the plan to sort of self-complete with the life insurance. But when they do get to a certain point, they have some options in regards to the life insurance and what they want to do with it. If they don't need the life insurance coverage, they can obviously surrender the policy. And that does happen in some circumstances because what the end game might be is that they're going to take the cash balance plan and roll it into an IRA and kind of stretch the distributions for as long as possible if they have other retirement assets. But they also can get the policy out of the plan a couple of different ways. They can buy the policy for its fair market value, or it could be distributed to them as part of a distribution from the cash balance plan, whether it's a lump sum at the end of the day. However, the TPA structures that. But again, at that point, the fair market value of the policy will be taxable income to that. When you're talking about a life insurance policy inside of a cash balance plan, the end game, kind of the, the idea for many people is that that fair market value is hopefully going to be less than the premiums that have been paid in. So you've got a deduction for what's going into the cash balance plan that's fully deductible. You buy life insurance inside the plan. In some circumstances, the policy cash value, the fair market value might be 60, 65%, 70% of the premiums that had gone into that policy. Plus I got basis for that rental costs, the cost of current life insurance protection that I paid every year. That's kind of a unique thing for a life insurance inside of a qualified plan. So the amount that I would have to buy the policy out for, or have it distributed out, it's lowered by that as well here. So there is potentially some leverage there. You like how I'm using plenty of hedging language here, by the way, guys, I can see it in your faces, but, uh, you know, that's kind of the name of the game for me here. Yeah, exactly. Uh, but, uh, I mean, the successful plans that I've worked on and I've worked on literally hundreds of these over my career, uh, that's kind of been the end game is that they're either going to surrender to the policy, roll everything into an IRA and in some cases, or they're going to buy the policy out for the fair market value and use that tax-free income from the life insurance policy to supplement the pension plan or their other retirement assets, uh, as part of their retirement. Remember the goal of this video is higher level of review. Um, and so let's summarize this by saying, I see a lot of people do the strategy to get a deduction and then they buy the life insurance out. Would you say that that's kind of like the strategy to like get life insurance while getting a tax deduction? How does buying it out? Because there's no, like, there's going to be tax regardless of what you do, but please make the argument to me on how doing it this way and then buying out the life insurance in the future is better because if it's not better, then why would someone do it? Like, could you give me like the higher level overview of like, who would want to learn more about the strategy? So people that establish cash balance plans with life insurance, the goal at the end of the day is to try to buy the policy out for the fair market value, which if the policy is structured properly and you're using the right type of policy could be less than the premiums that have been paid in. So you potentially could have a situation where you put say $500,000 into a life insurance policy as far as premiums, and you buy the life insurance policy from the cash balance plan for 300 or $350,000. So that Delta there is your leverage. Once the policy's out of the plan, then you'll have the ability to take cash value distributions like you would any other personally owned life insurance policy. Okay. And the, the tax would be at ordinary income. If you, if you have it distributed, if you buy the policy out, there's no tax. Right. Cause you bought the asset. But if you bought, if you bought it out that one year, whatever it's valued at would be an ordinary income. Well, so you're, you're buying the policy with after-tax assets. So it's basically an asset swap. So I've got, say, I say I have $350,000 in a money market or whatever it may be. I swap that $350,000 into the plan. Plan gives me the policy, fair market values, $350,000. Now I personally own it. So there's no tax on that transaction in and of itself. And, and again, if you, if you roll that money into an IRA, there's no tax until you actually take the money out of the IRA at some point. Right. So I can see somebody just saying from a high level, I put in a $500,000, I get out $350,000, this is stupid math. But what we're not remembering perhaps is you're avoiding perhaps 40% income tax on the way in because you get a deduction, you're getting it back out as a discount, you're doing an asset swap. So that $350,000 you put into the plan, it's still going to compound and grow over time based on the administration of that plan. And now you have an asset that you can leverage against for tax-free retirement income. So this by and large is a very efficient tax play when structured properly. Yeah, it's, it's our go-to strategy for a lot of business owners. Uh, I would say probably 80% of the time that I get a call from a financial professional that's working with a business owner that's looking for supplemental retirement income, I wind up at least suggesting going down the road of looking at a cash balance plan. Now it doesn't work for everybody. You have to have the right type of business. They have to have predictable income because they have to make contributions. On an annual basis, there's a range that they have to make those contributions in and they have to have the right employee profile. If they have tons of employees, uh, that, uh, that might be problematic there, but for that right business, this is a great strategy and something that's very, very vanilla from a planning standpoint. All right, let's go, let's go on to the next, next one. I will say, if you want to learn more about any of the things that we talk about, if you want to even talk to someone about this scenario, we will have info down below, um, and whether you want to learn more or whether you want to even see if this is something that works for you, we, we, we have you taken care of. So again, purpose, purpose of this is to get me to stay engaged. You guys almost lost me there the last two minutes, but we're, we're, we're back in, we're locked in and we're going into, into strategy number two. Yeah. The other stuff is not as tech is not as technical, but I, I think I'm like, what value do I bring to this table? I bring the normal viewer, uh, you know, cause that will be an old in our, our, uh, a lot smarter when it comes to these structures. And so let's, let's talk about structure number two. So structure number two, Bill, as we dive into this, reviewing this, this is effectively just a qualified plan, right? A certain qualified plan that allows for the purchase of life insurance. So would you say there's a lot of overlap between what we just talked about in the cash balance plan usage wise and how this works here? Yeah, very much so. Uh, I think that the one difference here is that sometimes we talk about profit sharing plans specifically as good wealth transfer vehicles, uh, profit sharing plans are unique in that they actually allow a couple of different types of life insurance that you don't generally see in other types of plans, uh, one of which is profit sharing plans allow for the purchase of survivorship, uh, life insurance, which you don't see in cash balance plans in most cases. There's also, uh, there's also guidance that says you can use variable inside of profit sharing plans, although we do see variable on occasion inside of some, uh, cash balance plans. But again, this is really technical, but, and so I'm not going to go into it here, but there are situations where we have, uh, clients that have big IRA balances that they don't need for retirement income, where we're actually able to roll those dollars into a profit sharing plan by survivorship in that plan for state tax purposes, and then potentially buy that policy out kind of using that same leverage strategy that we talked about with the cash balance plan. So I'll just leave it at that for that particular strategy. To kind of summarize to a degree, a cash balance plan, extremely customizable, you're setting it up, you're creating that plan with a third party ministry. So there's some flexibility there. The qualified plan route, it may have additional uses for survivorship cases, uh, partnerships, those types of things, but the plan likely already exists, so you have to be able to marry into it. Yeah, that's the case, uh, quite often. Every once in a while, there is a certain circumstance where we will establish a new, well, I should say we suggest establishing because I don't establish anything. Uh, I help to educate people on these strategies, but we, we will suggest us creating a new profit sharing plan for the purchase of a life insurance policy, especially in that kind of IRA rollover strategy that I mentioned earlier, again, super technical, we don't have to get into the intricacies there. Got it. Okay. Perfect. Well, this one seems pretty straightforward as far as retirement options, basically the same options we talked about before. And, uh, what I, what I really like about both these strategies is that if the plan doesn't work, you still have that death benefit paid to your family. So it's like a self-completing plan, which is really unique. Yeah. That's one of the biggest benefits of having a life insurance in the plan. We talked about the leverage, but you know, when those business owners, if they don't have life insurance outside of the cash balance plan, families love, obviously the fact that they have the protection, uh, with that policy inside the plan and the fact that it's on a pre-tax basis for many business owners, it makes it that much better. It's a good deal. Alden, if you could, could you go back to the version, the second slide, and then could you just walk through, through this, meaning like each step, like just walk through the steps on how this would, how this would be in the benefit? Yeah, totally. So very similar, similarly to the cash balance plan, the plan itself has to allow for life insurance documents, right? And then if that's the case, we can set up life insurance policy within some certain rules that's then managed by the third party administrator. The benefit is that this is outside of taxable environment. It's tax deferred vehicle. And so over time, we have that same growth effect that we talked about with the cash balance plan, growing tax deferred. When retirement comes, we have the ability to distribute just like cash balance plan or surrender the policy and roll it into the proceeds of an IRA. The main difference, and Bill, please keep me honest here, is that there would not be an option to buy it out of the plan in this instance. No, actually you do buy the policy out of the plan, kind of the same exit strategy, yeah, same exit strategies in regards to this. For your viewers, if you're a financial professional or that's working with a client, or if you're a client that somehow racked up a very large IRA balance, this is something that you may want to consider. I, you know, you don't think of huge IRA balances, but probably once a month, I get a call from a financial professional saying, Hey, I've got a client and they've got $60 million in their IRA or a hundred million dollars in their IRA. And it's usually somebody that was an early employee or an executive of a company that went public. And they just, they had an exploded qualified plan at their employer. And it's now sitting in an IRA and they don't know what to do with it. This is something that there is some real leverage there. If, if you run into those circumstances for the right client. So I should start calling all of my NVIDIA clients. You think that'd be a good idea? That's probably a good start right there. NVIDIA or any of the FAANGs that those are, those are good options there. Bill, we kind of just talked about two different things, right? We've talked about business owners, how maybe they want to put additional money into a cash balance plan that gives them a lot of benefit there. Increase their deductions. And we also talked about somebody who may have a very large IRA balance, right. And how that from a qualified plan perspective could also have some aspect of deductible life insurance. Now I want to transition the conversation to businesses one more time. It's talking specifically about the interaction between a business and an employee setting up what's known as an employee bonus agreement or executive bonus agreement. So would you take for, from a high level, describe what the arrangement looks like and why we can say that the business can deduct these premiums? Yeah. So this is probably the simplest advanced strategy that I work with on a day-to-day basis. This is basically just a policy that's owned by the executive paid via a bonus from his or her employer. So if, if I was the participant in one of these things, I would own the policy. My employer would pay me a bonus every year or every month or every quarter. However, the premiums were being assessed to pay the life insurance premiums. Now, in many cases, the employer sends the check directly to the life insurance company. But bottom line is it's compensation to me. And as compensation, as long as it is fair and reasonable and adequate under the IRS guidelines, they, the sponsoring business would get a deduction for that, just like any other compensation. So usually the pitch for something like this is, Hey, you're a key employee. We know that you need some life insurance protection for your family. We also know that your ability to save enough inside of our qualified plan is limited because of those, those, uh, contribution limits that we talked about earlier, you got somebody that's making four or five, $600,000 a year, putting $70,000 a year total into a qualified plan might not be enough for them. This can be used to supplement that. Right. If I'm the participant here, I own the policy. I can access the cash value at some points in the future through loans and withdrawals on a tax-free basis. So, and the fact that somebody else paid the premiums, my, my employer makes it that much better for me. So Bill, if I'm the business owner, can I do this? If I'm the owner and sole employee of a business, if you're a high income earner or own a successful business, you're already creating real value in the world. The real question is, are you keeping that money, protecting it and growing it the way that actually supports your long-term goals at Better Wealth? We help people like you better keep, protect, and grow their wealth through various tax strategies, estate planning, specially designed life insurance, retirement planning, and even a fractional family office service. If you're interested in one or more of the areas we can serve and want to learn more, the next step is to book a free clarity call with us. Click the link in the description or tag comment below to get started. Back to the video. So that's probably the most frequent question that I get and people that do what I do on a day-to-day basis get. Answer is probably not. Uh, it, it, and here's why. If I'm paying compensation in the form of an executive bonus, yes, you get a deduction for the business, but remember the participant has to pick up that bonus as taxable income every year. Uh, if they're a past serenity owner, it's a wash. And in fact, if they're an S corporation owner, it could actually be worse because of employment taxes to do that. We used to potentially see some leverage in C corporations, but once they cut the C corp rate down to 21% as part of the tax cuts and jobs act, it just very rarely comes up, so we usually only think of executive bonuses for non-owner or minority owner employees, the owners in and of themselves, it's just not going to provide them any tax benefit for doing this, they might as well just take part of their passer income or part of their, their traditional compensation. And exactly right. Yeah. So I wish that would work. Like I got a lot of people calling me asking like, Hey, can I, can I do this? I'm like, no, sorry. The math doesn't work that well. Um, but the, the idea of being the business picks up the bill, but because it's a deduction to the business and taxable to you, it's a wash. That's what you're saying. So LLCs, S corps, any pass-through entity that lands on your 1040 would be actively nullified for the strategy. But remember with the S corporation, it actually could be worse because of some employment taxes. Yeah, that's right. So very good. Don't want to play with this, but the basic structure, right. They pay the premium on your behalf, you get the benefit, but you also have to pay the tax on that benefit. Now, there is something that we are able to do where the entity itself would do a second bonus that covers just the tax portion based on their tax bracket. This is called a double bonus. And in this structure, the employee is benefiting exclusively and not having any tax drag. Did I explain that correctly? That's correct. Yeah. Basically if you have like a $10,000 premium, the business would get that $10,000 premium plus an additional amount to cover the taxes. So the net out-of-pocket cost for the employee slash participant is zero. Now, the interesting thing that I really like about this is that we have the ability to add restrictions. And so for example, I'm working with a gentleman based out of Texas who has an associate pastor that he wants to do an executive benefit plan on, but he wants that person to be around as his successor, so what we've set up is a stepped approach to how quickly and by how much percentage-wise of the cash value he can actually access. And so for this type of strategy, it's a very good way to effectively have some aspect of golden handcuffs for that individual. And so they stick around, so they get the full benefit that's being added on their behalf. If they break that agreement, they leave, what happens? Bill, what would happen if the golden handcuffs didn't work, let's say? Yeah. So this is the part that confuses a lot of people. When you think restrictions traditionally and vesting schedules, people assume that if the person doesn't meet the requirements that's set up in this agreement, because there is a written agreement written for Ariba, that the money's going to go back to the employer. But remember the employer already got a deduction here, so it's really challenging for money to go back to the employer. If you have a situation where the person leaves before they meet the requirements of the written agreement, the money essentially stays inside the life insurance policy and funds the cost of insurance until the policy lapses at some point in the future. Obviously, if the employee slash participant wants to keep the policy going, they could continue to pay premiums, but the restriction will always exist on the policy. They'll never be able to access the cash value. So it winds up being kind of a bad deal for them at the end of the day. In reality, in a lot of circumstances, there's some negotiation where the employer actually does lift the restriction, but they're under no obligation to do so. So they could just basically lock up that cash value until the policy lapses or the death benefit does pay out at the death of their participants. So, Bill, what's the cash value access that the employee has as it relates to this? Do they have full control over it? Or is it limited? There's also common phrases out there called golden handcuffs. Talk to me about all of this and some of the strategies that can be used with a plan like this. So I'm going to give you my favorite answer. It depends. It's not like you're on the show here. No, no. So if there's no restriction on the policy, if it's not a REBA and it's just a traditional 162 executive bonus, the executive's access to the cash value is unlimited from day one because they own the policy. The premiums are being paid by the employer, but there's no restriction. They could take cash value out of the policy. They can utilize the policy as collateral for loans. Whatever it is that they need to do, they will have that ability from day one. Now, if there's a restriction on it, like we just talked about, then they will have to wait until that restricted is lifted or the employer signs off on any kind of cash value distribution or collateralization of the policy to be able to do so. So I don't want to say it depends in every circumstance because it doesn't. But in some circumstances, it's just it depends on the structure. Yeah, exactly. I'll just break it down simply like this. If it's a non-REBA, you have full access from day one. If it's a REBA, it will be dictated by the terms of the written agreement. Got it. Okay. So in a nutshell, an executive bonus arrangement, it's a way to incentivize or effectively bonus, like it says in the name, a key individual or employee at the company. So the individual that owns the business or the business itself doesn't receive a lot of other benefit outside of the fact that your employee now thinks you're amazing. Is that is that pretty fair? I mean, you get the deduction, but it's the same as paying them a bonus W-2. Yeah, it's a attract, reward, retain strategy. If you are a business and you're providing a benefit like this, it might differentiate you from your competitors when you're in that war on talent. Awesome. Well, I think we're good on this one that we can roll into our last strategy that we'll talk about. Now, this one is interesting because there's so many different ways that it can be done. What we're going to talk about is how charitable giving with life insurance can actually happen. And so this is kind of separated into two separate buckets, what we'll call simple strategies and then advanced strategies. But from a, just starting a conversation perspective, we're going to touch on some simple strategies to where we may be able to do some charitable giving associated with life insurance and when those might be deductible. So Bill, we have this up on the screen and the audience will be able to see this too. It's super blurry right now. Can we go through some of the simple strategies, high level, just to outline how the charity could benefit from a life insurance policy? Yeah, sure. Uh, so the simplest one that everybody thinks of is a charity owns a policy on one of its donors and the donor pays the premium for that life insurance policy. Subject to the AGI limitations for charitable deductions, that premium payment, uh, because the charity owns the policy has all the benefits associated with it, uh, should be deductible for that premium payer. Uh, so that's the really simple one. Now the challenge with that one always comes in with, and I get this call all the time, uh, Hey, I've got a client and they want to have a policy owned on their life, uh, by their, their alma mater. And it's going to be a million dollar death benefit. And I'll ask, well, how much do they give to this charity on an annual basis? And they'll say, well, they never have. And so that becomes a little bit challenging, uh, there, yeah, a little bit problematic. Uh, but in the, in the right circumstance, if you've got a, uh, a donor that has given to that charity has a history of giving to the charity, uh, you, you could potentially do that now. The second one here, which is charity named as a beneficiary, you don't actually get an income tax deduction there when you, you pass away. Anything that's left to charity is a dollar for dollar deduction on your state taxes. So that's really more of an estate tax play more so than anything, uh, obviously with the $15 million estate tax exemption we have coming in next year, that becomes less beneficial just from a tax perspective for a lot of people here, but, uh, that is kind of the play there. And then the gifts of a life insurance policy, uh, you have some circumstances where people, they bought a policy for family protection. Maybe now their kids are grown. They finished college. They don't need the policy anymore. So they can give that policy to their favorite charity, uh, and get a deduction for potentially the fair market value of that policy when the policy is given to the charity. Uh, so, uh, those are kind of the three simple ones here. There's not a lot of rocket science that's going into these. Uh, they're really, really simple to implement. The tax, the taxes will just vary depending on the individual and what the circumstances. I got, I got a question cause this, this seems pretty straightforward, but I think it's very powerful. There's a ton of churches out there and we'll just use churches as an example. So let's say a church is, is there everyone's tithing and, and the pastor of the church, um, with, with those funds buys a life insurance policy on himself where the, the beneficiary is the church. Um, is that, and, and so it would be after that church is, is a non nonprofits. They're not paying, they're not paying taxes on the money. They're able to fund a policy. Technically, you know, walk with me as an attorney here. The, could the pastor get benefits? Like, could they utilize that cash value for personal stuff? But then when they pass away, the death benefit gets paid to the church or the congregation could charities and churches act like that. Where am I going wrong? And if that's, if that's the case, this is something that I think more people should do. Yeah. So simple answer is that the policy is owned by the church and they could for any church purposes that they want. And it same goes for any charity. Now, if they choose to take cash value distributions and then give it as compensation to the pastor for his or her own personal use, they could certainly do that. Uh, in fact, we do see that in circumstances where charities own policies or nonprofits own policies on their executives, take cash value out of the policy, uh, to, uh, distribute, uh, for whatever purposes they may need. The one kind of downside when we're talking about life insurance versus other investments is the tax leverage that we gain in like for-profit businesses goes out the window with charities because they're nonprofits. So they're not worried about tax deferred growth or tax-free distributions because they don't pay any taxes. But a lot of churches do capital campaigns. So they're, they're literally like building buildings and all, and you could make the argument that the death benefit, even though the income tax-free nature is not necessarily going to benefit them. It's, it's your, you're able to do a capital contribution. You're able to use the cash value. The church would be able to use it for down payments and stuff. And then obviously as a church continues to tithe, they could pay back that loan. So that's like a, uh, uh, a reserve church could use. And then if, and when the head pastor passes away, uh, that money, then, uh, that death benefit gets paid into that church, potentially paying off the loan or just allowing them to have greater assets in their, in their congregation. Is that, is that like, would you say that that's an accurate statement? That's the, yes, that's a hundred percent accurate. I mean, there's, you have the ability to use the dollars for whatever the church's deeds are and the death benefit will pay to the church. What we do see in those circumstances sometimes is that the charity or the church will go to one particular well-heeled donor and say, Hey, we want to do this, we want to buy a policy on our key person inside of the church. It, which is a pastor or in charity, it might be an executive director or whatever it may be. Would you be interested in funding this for us? Uh, and in that circumstance, because it's a donation to the nonprofit, they, that, that well-heeled individual that's making that premium payment, making that contribution would get the deduction for that there. So that's, that's certainly something that we do see occasionally. I wouldn't say it's used very frequently, but, uh, it is, it is done more so in traditional nonprofits, I would say than in a church situation, but we do see it in churches in the, some of the larger churches with bigger congregations for sure. And something as well, we know we've shot a video earlier this year. I think it came out in January where we talked about the fact that a tax structured insurance policy typically is going to be a non-MEC, not a modified down contract. Within a nonprofit, you can MEC the heck out of that and it doesn't matter. And so for, for all the strategies that we're talking about, technically we could buy a very small amount of insurance and make the cash value growth in that policy extremely efficient because the MEC status does not have to be considered as a problem. Yeah, obviously I would always, uh, have the nonprofit talk to their tax and legal advisors before doing that, because there's this nasty little thing out there called UBTI, unrelated business taxable income, uh, that could potentially rear its ugly head. It doesn't come up very frequently, but we always want to make sure that they dot the I's and cross the T's in those situations, but you're right, Alden. Uh, if the policy is never going to leave the nonprofit and UBTI is not at issue, a MEC's not a problem. You could do a single pay on that. Uh, and, uh, and basically have a, uh, the smallest amount of life insurance coverage as possible under the 7702 rules. Got it. This is the fun about having a tax attorney on the call. You say something super fun. And he's like, eh, just a second. Hey, what, what do I say? It depends. Yeah, it depends. Let's, uh, let's go on to the next, the more advanced strategies. Awesome. So the second side of how we can have an life insurance interact with charity comes in the form of three different trust structures. There's a lot more, but these are the three that we're going to highlight. And at its core, these are all irrevocable trusts. So what that means from a very tangible perspective is these are primarily designed for wealthy individuals who want to capture a portion of their wealth that they've accumulated and trap it outside of their taxable estate. To be saved for a future benefit for a future beneficiary. The reason some people like to do this is to avoid estate taxes, but also to maximize the benefit that they can leave to their charity. So what we're going to run through very briefly here are three different trust structures, wealth replacement, trust, charitable remainder trust, and then a charitable lead trust. So Bill, if you take over and explain conceptually wealth replacement trust, what's actually happening and why is that beneficial? Yeah. So a wealth replacement trust is just a really fancy name for an irrevocable trust that is used to make a family whole. If a individual is going to make a large donation at their death to a charity. So let's say you've got a, uh, a, a affluent individual, they're worth, say $50 million and at the end of their life, they want to give $25 million of their net worth to their favorite charity, but they also want $50 million to pass on to the next generation. So they essentially don't want to disinherit their family. You would have set up one of these wealth replacement trusts basically to net out what is going to be given to the charity at their death. So again, in that situation that I just mentioned earlier, you might have a $25 million life insurance policy inside of that wealth replacement trust to true up what goes to the family so that they're not disinherited by the charitable gift. Uh, we see this a lot actually in conjunction with these other two strategies, the CRT and the CLT that we'll talk about here momentarily. Uh, but, uh, it could be used on just sort of straight decrees. You might, if you've got a really affluent family, they might be putting money into a private foundation, uh, at their death and you use a wealth replacement trust to kind of make sure that the family gets their fair share. Uh, so it's kind of a neat structure, uh, for those ultra affluent families that are looking to do, uh, sizable charitable giving at their death. Got it. Okay. And we've actually done an episode on the channel on real, uh, charitable remainder trusts in, in recent, I think about two months ago with my, with my good, with my good friend, rich bear. Yeah, it was a really good episode a couple of weeks ago. Um, so Rich and his firm, they specialize in, in charitable remainder trust. They do some lead trust planning as well. But the, the idea here, if I understand it correctly is this is effectively the same idea, flip-flopping the benefit. What I mean by that is a charitable remainder trust in that structure we're going to gift an asset or assets or cash of some kind into this charitable remainder trust, and then receive as the grantor or a family member, an annuity stream, so income off of that for a period of time, when you establish it, there can also be an immediate tax deduction, which is pretty cool. And then after passing that individual, when they pass, now we have whatever's left in that CRT is given to a charity. So that's the remainder is passed on. The lead trust just flips that on its head. Instead, the annuity stream, the income with a lead trust is paid to a charity. And then at the end of that grantor's life, then the remainder is then passed on to the family. So did I get that correct Bill? Keep me honest, please. Yeah, that is correct. Uh, obviously there's a lot of intricacies to these, these are really sophisticated strategies. Uh, but we see them as really good, uh, strategies for people that have highly appreciated assets, because you basically get to spread the tax out over a period of years, rather than selling those assets and having to pay capital gains tax or whatever tax is going to be assessed all at once. So, uh, for the right clients that has those right assets, these are really powerful if they're charitably inclined, because I like to remind everybody that the C and a CRT and a C and a CLT stands for charitable. And so if they're not charitably inclined, you wouldn't go in and knock on the door and say, Hey, you got to see the CRT it's the greatest thing ever. But if they are charitably inclined, they have highly appreciated assets. They're affluent. Both of these strategies are, are, are, are great. And which one you implement, just it depends on the clients and what their expectations are for the CLT. A lot of times we see the end beneficiary actually being a family trust, uh, or irrevocable trust. Uh, that those dollars will, uh, dump into, uh, after the, uh, after the CLT period is over, uh, for the charitable, charitable remainder trust, uh, obviously the, the charity is going to get whatever's left in the trust at the end of the term. Uh, both really great strategies for the right clients. So coming back around to kind of land the plane here, guys, we've got one more strategy. And I kind of chuckle whenever I read this because the strategy literally called zero estate tax plan. And I was recently working with another client. He's got a fairly hefty estate tax bill that we're projecting for them in the 40 to $50 million range. And so we sat down with them, looked at the estate tax problem, and we started coming up with some solutions. But the way we framed it is, okay, Mr. Client, you pass away at this projected time, but this amount of wealth in your estate, your estate owes 50 million in estate taxes. Do you know how quickly that's spent by the U S government? About six seconds. Or what if we did something different? What if we took that and put it toward a charity instead? And so this is where this, this strategy really, really is a phenomenal because the benefit that's left behind when certain circumstances, you can make generational impact across thousands and thousands of people by redirecting where those dollars are going instead of to U S government IRS, you could redirect those to a charity. And so a lot of the structures we've covered help with this problem, right? They help with getting to a zero estate tax problem, leading a bigger impact. One of the things we really believe here at Better Wealth is that we've got one life and the way that we choose to live that life is going to ripple in eternity. And so for us, this is really fun. When we get to clients who have an internal perspective, who have a perspective of wanting to leave a really big generational impact, these are the types of strategies that we start bringing into the situation. So Bill, do you have anything in particular to say about the zero estate tax plan as it's discussed here? Yeah, you summarized it pretty well. All of them. The idea here is that we're not going to pay any estate taxes and we're going to do so through charitable giving. Now, when I first started in this industry, the estate tax exemption was a million dollars. It's going to be $15 million next year. So, I mean, it's, it's a huge difference. But for ultra fluent people, when you put it the way that you did where, Hey, you can give your money to your favorite charity, or you can give it to the government. A lot of times they're like, well, you know, maybe I do like my favorite charity or whatever it might be. And like, and like I said, for the ultra fluent, maybe it could be a private foundation or a DAF or something along those lines. But the idea here is, is that we, we figure out what that estate tax exemption is going to be by doing some simple projections there. A estate planning document specifically, their will is set up to give anything that is going to be above that estate tax exemption to a name charity or a group of charities or whatever it may be. Uh, anything below the estate tax exemption will pass to the family. And because you have the exemption sheltering those dollars from estate taxes, obviously you get to stay tax free. And then that's where our friend, the wealth replacement trust comes back into play is now we're going to have life insurance. Inside of an irrevocable trust to basically true up the family, uh, for what was given to the charity. Now, are you going to get dollar for dollar as far as life insurance versus what's going to the charity? Maybe, maybe not, but, uh, the kind of the, you put those two parts together, the amount that was in your state, but sheltered from estate taxes because of the estate tax exemption. And now this life insurance inside of the wealth replacement trust is going to provide a significant legacy to that next generation. Uh, and in some cases we can actually do multi-generational planning using more sophisticated types of trusts and so forth. So it's a really elegant kind of simple solution. Uh, and when I bring it up to people that are working with affluent clients that want to benefit charities, they're like, Oh yeah. Why didn't I think of that? Uh, but, uh, it's, it's, it's really powerful, uh, because you're able to pass on a lot of, a lot of assets without sending anything to the government for state taxes. That's right. And that's why you're here at 1-800-ASK-BILL. That's 1-800-ASK-BILL. Just kidding. Don't call that number. But my, my point is, you know, there are professionals in this space who love the creativity that's possible at these, at these certain situations. And so I think overall guys, it's been a really good video providing some high level benefits across four different strategies. So what I'll do briefly here is we can go back over those four strategies just to make sure we land the plan really well. First one, we covered cash balance plan. This is highly sophisticated, but also a phenomenal opportunity for business owners who, who want to take more of their earned income and turn it into a deduction and put it away for a future use. And so in this strategy, we can plug in life insurance that also gives them additional tax benefits in the future. Once it's taken out of that plan. The second one we went over was how a IRA could effectively be rolled into a profit sharing plan that is then purchasing life insurance. And so we know the benefits of life insurance from a tax perspective, retirement benefits, as well as death benefits. And so what we're able to do is transfer it into a different type of structure where we can buy a, an insurance policy. It's a phenomenal opportunity for people who are sitting a lot of capital on, let's say, highly appreciated stocks or other assets in that IRA because you were an employee of Nvidia, right? Or Apple back in the day. And so really fun. I think we're going to be doing some additional content around this in the future as well. Third one was executive bonus arrangements. So think of this business owner wants to make an employee feel all sorts of warm and fuzzy inside. This is a great way to attract talent and keep that talent in the house. Bonusing your, your employees with life insurance. And so phenomenal opportunity sometimes referred to as a golden handcuffs when we add an aspect of restriction to that cash value for that employee. So something that we can dive into in future videos, if you guys want to see more details and case studies. This is a lot of fun. Um, as, as Bill mentioned, when he was talking about it and lastly, perhaps the, the most multifaceted, uh, one that we talked about today was any aspect of charitable giving with life insurance. There's some simple ways to do it, but who's paying it, who the beneficiary is, and maybe gifting an existing life insurance policy to a charity. That's fairly simple. Almost anybody can do that. On the other side, we start getting into more advanced strategies that include wealth replacement trusts, charitable lead or charitable remainder trusts, as well as this concept of let's leave nothing behind in it for an estate tax, let's roll all of that benefit into a charity to leave a generational impact. So I hope this was valuable for you guys. We covered a lot today in this overview video that took an hour. But at the end of the day, if you have questions, if you want to learn more about these strategies, please click on the link below, we're going to have some resources down there. Be happy to talk to anybody about these to see if it's going to be a good option for you to pursue. Bill, thank you so much for your time. Bill, I just want to say thank you so much for being on. We appreciate what you're doing. We appreciate your willingness to come on, flesh this out. Uh, and also your willingness to be a contributor of, of what we're doing in the industry. So thank you. And then Alden, thank you for being the co-pilot on this, on this video. I was a passenger, let's be really clear. I'm the passenger on the plane. Um, and, and this is, this is a lot of fun, technical at times, but I think the purpose of this video is just to make people aware and just know that if there's something that you want to learn more about, you know who to call and, and there's, there's a lot of deeper dives that we can do. On, on someone's personal situation. And so with that, thank you to you both. Thanks for having me.