Many of us have hearts of gold and desire to make a difference for our favorite charity.
One of the options to consider is funding the purchase of a life insurance policy, which offers the charity an effective way to ensure long-term projects can be funded. Life insurance policies can result in a substantial gift to a charity at a relatively small cost and provide the donor with charitable income tax deductions and charitable estate tax deductions. Typically, a person can purchase a policy up to age 70, and depending on the face amount, keep the premiums affordable.
There are two ways to structure the purchase of the life insurance policy “gift,” that will determine the taxable benefits available to the donor.
- If the donor owns the policy and names the charity as a beneficiary, the donor will not receive a current charitable income tax deduction and the death benefit proceeds will be included in their estate for estate tax purposes. This allows the donor to change beneficiary or just a portion of the policy to the charity. It also allows the donor access to the cash value during his or her lifetime. Upon death, the proceeds payable to the charity should qualify for a charitable estate tax deduction.
- A policy can be purchased with the charity as the owner and beneficiary of the life insurance policy. This allows the donor to receive an immediate charitable income tax deduction for the life insurance premium amounts. The charity may choose to liquidate or maintain the policy. Typically the donor will continue to donate cash directly to the charity so the charity can pay the premiums. At the donor’s death, the charity generally receives the life insurance death benefit proceeds income tax-free. In addition to the charitable deduction for premiums paid, the donor may get a charitable deduction for the policy itself. This is determined at time of transfer based on the lesser of the policy’s fair market value or the donor’s basis, which is the accumulated premiums paid by the donor to the date of transfer minus any dividends and withdrawals paid to the donor. The standard IRS annual limitation on charitable income tax deductions apply as do some state laws.
Another opportunity for the donor is when an existing life insurance policy exists and is no longer needed. A donor may donate the policy to a charity and receive a charitable income tax deduction for the donation of the life insurance up to certain limits. This requires all rights in the policy to be assigned to the charity and the policy actually delivered to the charity. The receiving charity would sign a change of ownership and beneficiary form supplied by the insurance company and would become the new owner of the policy. If the policy still requires additional premiums, the donor may continue to donate to the charity to cover the additional premium payments. These additional donations may be income tax deductible up to certain limits. Upon the donor’s death, the charity would receive the life insurance death benefit income tax-free.
Life insurance policies are a wonderful opportunity to give back to an organization. The rules on charitable deductions to qualified charities require review at the time a charitable donation is contemplated. These rules may change or be impacted by amended regulations, current tax court decisions, and case law. We advise that any donor seek professional assistance in planning their estate for estate planning needs and/or an insurance specialist.