Gift Planning
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 sizable 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 66, 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. Click here to return to Wills
and Bequests. Please note, individual financial
circumstances will vary. The information on this site does not constitute legal
or tax advice. Donor stories and photographs are for purposes of illustration
only. As with all tax and estate planning, please consult your attorney or estate
specialist. All material is copyrighted and is for viewing purposes only. Use
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use. The content in this Planned Giving section has been developed for the
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Revised: February 21, 2005 15:53. |
