Life Insurance as a charitable gift
June 9, 2014
by Brian Wolf

Most of the people who I work with would love to give money to charities; right after they win the lottery. You see, giving when you have an abundance of money is a lot easier than when you don’t have extra money. However, you can still make a difference to a charity if you want to, and it doesn’t have to put your financial security at risk.

Life insurance can be a good vehicle for making a substantial gift to charity at a modest cost. Depending on how the life insurance is structured, the premium payment may even result in a charitable tax deduction to the donor.

Here are three ways life insurance is typically used in charitable giving.

1. The donor may have an existing policy that has outlived its original purpose and the owner chooses to give the existing policy to his or her favorite charity. For example, a policy is obtained to provide collateral for a business debt or a personal debt, such as a mortgage, and the debt is now paid.

2. The donor wishes to provide a legacy to the charity at death and applies for a new policy to be owned by the charity as the original owner, subject to state insurable interest laws.

3. The donor has an existing policy that he or she wishes to continue to own personally, but chooses to name the charity as beneficiary for some or all of the death benefit.

In the first and second situations, the donor may continue paying the premium even though the policy is owned by the charity, or, alternatively, make an annual gift directly to the charity in order to allow the charity to pay the premium.

To qualify for a charitable income-tax deduction, the policyholder must transfer all rights of ownership to the charity.

If the insured owner reserves any rights in the policy, it would be a gift of a partial interest. The tax law is clear that gifts of partial interest are not eligible for a deduction.

An arrangement whereby the donor’s heirs would receive any portion of the death benefit would invalidate the charitable deduction.

A donor might want to consider gifting appreciated property, in lieu of making annual contributions to the charity, to provide for payment of the premiums.

The charitable deduction for appreciated capital gain property is not limited to the donor’s basis, but is based on the fair market value of the property. By transferring the property to the charity, the donor avoids paying the capital gains tax, and when the charity liquidates the property to pay premiums; it pays no income tax, being a tax-exempt organization.

In the instance where the donor maintains ownership of the policy and names the charity for some, or all of the death benefit, there is no income tax deduction for any portion of the premium paid.

Since there’s an unlimited charitable exemption from the federal gift tax, there are no gift tax consequences to any of the above transactions.

Plus, any death benefit from a charity-owned life policy will be excluded from the insured’s taxable estate.

Similarly, any portion of death benefit actually going to a charity on a personally-owned policy will be deductible from the insured’s taxable estate for federal estate tax purposes.

So, if you have an interest in turning your pennies into dollars for a good cause, give us a call and we can help.

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