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.
