Gifts of Life Insurance
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.
Example:
Since their children had grown up and begun lives on their own, the
Walkers 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 as the policy is paid-up, they are
entitled to a charitable deduction equal to the lessor of the premiums they
paid over the life of the policy or the cost of a comparable replacement
policy if purchased today.
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.
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.
Example: 
John Abbott, age 60, wants to make a gift that will ultimately be used to
purchase equipment for a charity he has supported for years, but he is also
concerned for his children and their futures. He creates a 6 percent Charitable
Remainder Unitrust for $100,000, which yields a tax savings to him of $13,307.
He then purchases a $100,000 whole life insurance policy that will maintain
his children's inheritance. His annual premium payments are $4,500, which
he pays for the first three years from his tax savings 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, please contact Steve French at (408) 998-5865 or email at steve@lungsrus.org.
Please note, individual financial circumstances
will vary. The information on this site does not constitute legal or tax
advice. Donor stories and photographs are for purposes of illustration only.
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webmaster. Revised: December 28, 2006 17:52.