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 sizable 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.
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Revised:
July 10, 2008 15:52
.