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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 67, 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.
Click here to return to Wills and Bequests.
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