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.