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.
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
adviser 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.
Please note, individual
financial circumstances will vary.
The information on this site does
not constitute legal or tax advice.
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for purposes of illustration only.
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