Philanthropic Planning
Charitable gifting of life insurance.
Life insurance has many potential uses in charitable gifting, and may be especially suitable for larger gifting. There are several ways to gift various benefits of a life insurance policy to a charitable organization, and the benefit to the charity and the tax treatment of the donation varies with the method used.
Although not meant to be comprehensive, the discussion below highlights some of the methods for gifting life insurance to a charity.
One method involves the donor gifting an existing life insurance policy to a charity. A donor may consider this option when circumstances have changed his/her need for the death benefit and cash value of the life insurance policy. In order to generate a charitable income tax deduction, the donor must make a completed gift of the policy to the charity during his/her life. To effect a completed gift, he/she must give up all ownership rights in the policy. The contribution of a policy yields a current income tax deduction to the donor for the value of the policy, which is generally its fair market value.
The contribution of a premium-paying policy is more complex than that of a paid up policy, and is only a viable strategy if in the applicable state, the charity is deemed to have an insurable interest in the donor. Furthermore, assuming the charity is not a private non-operating foundation, if the donor contributes additional amounts to the charity to fund ongoing premium payments, the deduction will be limited to 50% of adjusted gross income (AGI). If the donor pays ongoing premiums directly to the insurance company, the deduction may be limited to 30% of AGI. Any amount in excess of the deduction limits in a single year can be carried forward to offset income tax for five years.
Another gifting method involves purchasing a new policy for the charity. Under this method, the donor would donate a new policy to the charity, or the charity would purchase a policy on the donor; the donor would make ongoing premium payments by making continued gifts to the charity for that purpose. This option may be suitable for a younger donor since the premium cost would generally be low compared to the ultimate death benefit. The donor retains the option to discontinue the payment of premiums, whereby the charity as owner of the policy may continue paying those premiums, or may choose other options such as surrendering the policy for its cash value, placing the policy in "paid up" status, or seeking a life settlement solution.
A third method is to assign all annual dividends from an existing policy to charity, or use the dividends to purchase a new policy which irrevocably names the charity as owner and beneficiary.
Life insurance also can be used as a wealth replacement tool for surviving family members to replace other assets donated to a charity during life.
The donor can alternatively name the charity as the beneficiary of the life insurance policy. Although this will not yield an income tax deduction, it would provide an estate tax deduction at the donor's death to offset any estate tax liability he/she may have. The amount of the deduction would equal the entire amount of proceeds paid to the charity.
The use of life insurance to benefit a charity may have advantages over other methods. A life insurance policy offers a guaranteed death benefit as the value and the death benefit generally do not fluctuate such as with marketable securities. Life insurance contracts are aleatory, providing a magnified gift for a relatively small amount of premiums, allowing donors of modest means, regardless of economic situation, to fund posthumous projects. A life insurance gift may be very cost effective and is generally not reduced by federal taxes or administration or estate settlement costs. Life insurance also may be easier to administer for the charity as compared to other assets such as real estate, for example. The gift of a life insurance policy also may prevent the loss of an asset that the donor's heirs may expect to receive.
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