Estate Planning
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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 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.
Contact Ted Place (816-654-7286) to confidentially discuss estate planning and giving at KCUMB within your unique circumstances.
Please note, individual financial circumstances will vary. The information on this site does not constitute legal or tax advice. Donor stories and photographs are for purposes of illustration only. As with all tax and estate planning, please consult your attorney or estate specialist. All material is copyrighted and is for viewing purposes only. Use of this site signifies your agreement with the terms of use. The content in this Planned Giving section has been developed for Kansas City University of Medicine and Biosciences by Future Focus. Please report any problems to section webmaster. Revised: May 23, 2008 8:37.
