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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 68,
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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