Gifts of Life Insurance
Goal: Make a large gift with little
cost to you
Benefit: Current and possibly future income tax deductions
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. If you purchase a new policy, our PDF brochure (Charitable Endowment Insurance Policy) may be helpful regarding notification for insurance policies and instructions to the charity for the use of the proceeds.
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 if they made the charity the benficiary and owner, they would be 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 to the charity and passed on as premiums for the insurance policy 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.
John Abbott, age 68, wanted to make a gift that will ultimately be used to purchase equipment for a charity he has supported for years, but he was also concerned for his children and their futures. He created a 6 percent Charitable Remainder Unitrust with $100,000, which yielded a tax savings to him of $13,307. He then purchased a $100,000 whole life insurance policy that will maintain his children's inheritance. His annual premium payments are $4,500, which he will pay from his tax savings for the first three years 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.
We would like to help make certain your intentions are executed accordingly. For more information about the importance of having a will, please email or call the Vice President of Development, Sharon A. Jones, at 352 379-6226. We are happy to answer questions and offer suggestions confidentially based on your personal circumstances.