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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 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. Click here
to return to Wills and Bequests.
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