Gertie Schmidt – Company Stock Buys Charitable Life Insurance & Creates a Legacy

In 1932, Gerald Schmidt founded his own company – manufacturing dairy farm equipment. Over the years, Gerald’s company kept up with the latest in dairy farm technology and developed many new, innovative products. The company grew and prospered and is still going strong today.  When Gerald passed away, he left the company to his three daughters.  This story is about the oldest daughter, Gertie.

Gertie worked her entire career in the family business and retired 5 years ago. She never married and did not have any children. At age 68, she is living a comfortable, active life and is involved with several local charities. She no longer works at the family company, but owns a large number of shares.

Gertie met with her financial planner Alice, as part of a regular annual review. They discussed Gertie’s large stock concentration in the family company and her annual gifts of that company stock to her favorite charities. Gertie didn’t need the stock or the dividends for her living expenses and Alice knew there were probably ways that Gertie could be more strategic with her giving. Alice called me to discuss the case. The three of us crafted a giving plan that allowed Gertie to avoid capital gains tax, reduce her taxable income every year, as well as give more money to her favorite charities.

Gertie established a donor advised fund at a local community foundation. She also donated a new life insurance contract to the fund. Every year, she donates some of the company stock to her donor advised fund. The foundation sells the stock back to the company and uses some of the proceeds to pay the premiums on the life insurance contract. The remaining proceeds are used to make grants from Gertie’s fund to her favorite charities. Because the charitable fund sells the stock, it is not subject to capital gains tax.

Her annual gifts of stock provides Gertie with charitable income tax deductions every year, which she uses to decrease her taxable income. She does not recognize any capital gains tax when the annual gifts are made. At her passing, the death benefit from the life insurance contract will go to her donor advised fund and support her favorite charities long into the future.