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Gifts of Life Insurance
There are several ways you can use life insurance as the basis for a charitable
Making the Charity a Beneficiary of Your Life
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.
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.
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
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
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.