Gifts of Life Insurance
There are several ways you can use life insurance
as the basis for a charitable gift.
the Charity a Beneficiary of your Life Insurance Policy
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
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.
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.
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.
John Abbott, age 68, 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
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.
all matters concerning estate planning, please consult your estate and tax specialists.
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