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 Zoo 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 Zoo,
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.
The Detroit Zoo has rescued
and provided sanctuary for dozens of exotic animals over
the last decade, a "life insurance policy" that has saved
some of the world's most amazing creatures. |
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 the Zoo. 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 Zoo 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 the Zoo, a
"Nuki," a blind hooded seal,
was rescued from an East Hampton, New York beach near the
mouth of the Saint Lawrence Seaway. She arrived at the Detroit
Zoo in October 2003. |
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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