Building God's Kingdom: Legacy Giving
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Gifts of Life Insurance
Goal: Make a large gift with little
cost to you
Benefit: Current and possibly future income tax deductions
There are several ways you can use life insurance as the basis for a charitable gift.
Making the Charity a Beneficiary of Your Life Insurance Policy
You may wish to make the charity the beneficiary (or a contingent beneficiary) of a life insurance policy as a way to make a sizeable future gift. You retain lifetime ownership of the policy, keeping the right to cash it in, borrow against it, and change the beneficiary. A gift of this nature is treated much like a bequest made through your will. Because you retain the ownership of your asset (the policy), you will not receive an income tax charitable deduction for this future gift or for your premium payments during your lifetime. The policy's proceeds will be included in your gross estate, and your estate can take an estate tax charitable deduction.
Making a Gift of Your Policy
You may wish to transfer ownership of a policy to the charity, or purchase a new policy with the charity as owner and beneficiary. If you make a charity the owner and beneficiary of a policy, you are entitled to certain tax advantages.
Since their children had grown up and begun lives on their own, the Walker's decided to review their finances. They realized that some of the insurance they carried while the children were dependent on them was now not really needed. They decided to donate a fully paid-up policy to charity. Their financial advisor told them that if they made the charity the benficiary and owner, they would be entitled to a charitable deduction. To determin the charitable tax deduction, which will be approximately the cash value, the Walker's requested Form 512, a valuation form, from the issuing insurance company.
The Walker children were very supportive of the idea. In fact, one of their children purchased a small whole life policy and designated the charity as the owner and irrevocable beneficiary. As a result, the annual premiums that are paid are a charitable deduction if sent to the charity for it to pay the premiums.
Wealth Replacement Using Life Insurance
A donor may make a current gift to charity and receive a charitable tax deduction. At the same time, the donor may purchase life insurance to replace the donated amount or perhaps, the amount after estate tax that the beneficiaries would have received. Depending on the circumstances, the charitable tax savings and any life income resulting from the gift may defray the cost of the wealth replacement insurance premiums.
John Abbott, age 68, wanted to make a gift that will ultimately be used to purchase equipment for a charity he has supported for years, but he was also concerned for his children and their futures. He created a 6 percent Charitable Remainder Unitrust with $100,000, which yielded a tax savings to him of $13,307. He then purchased a $100,000 whole life insurance policy that will maintain his children's inheritance. His annual premium payments are $4,500, which he will pay from his tax savings for the first three years and subsequently with the increased income from his trust.
Creating a Life Insurance Trust
You may want to set up an Irrevocable Life Insurance Trust (ILIT). An ILIT removes the life insurance from your estate to help reduce estate tax while providing other benefits. For example, upon one's death, the proceeds of the life insurance policy may remain in the trust to provide income for the surviving spouse, but stays outside of the spouse's estate for estate tax purposes. Or, the trust could be used to distribute proceeds to children of a previous marriage. Although ILITs can be expensive and more complicated than owning life insurance directly, they may be an attractive option in certain situations.
As with all matters concerning estate planning, please consult your estate and tax specialists.
For more information or a confidential discussion of your charitable options, please email or call our legacy giving specialist and St. Michael's parishioner, Richard Lamport, at 505-508-1066. Please see our contact page for more information about Dick.