- Life insurance can be a substantial, cost-effective gift to charity.
- A life insurance gift allows the donor’s family to retain other assets.
- Life insurance proceeds are paid to charity without probate.
- A life insurance gift is private, a bequest in a will is public record.
- An outright gift of policy to a charity will create current income tax charitable deduction (if the donor itemizes deductions) equal to the lesser of the policy’s fair market value or the donor’s basis in the policy.
- Death proceeds paid to a charity from an estate are deductible if the charity owns the policy, or the donor could donate the premium amounts directly to the charity.
- One, the donor gives an existing policy to charity, assigns all incidents of ownership to the charity and names the charity as beneficiary.
- Two, the donor applies for a new policy on the donor’s life with the charity as the original policyowner and beneficiary (subject to state interest laws).
- Three, the donor names a charity as a beneficiary of a policy that the donor continues to own.
Why make a life insurance gift?
- An insurance policy has the potential to create a substantial, cost-effective gift to charity through the policy’s death benefit. The result is a gift that is much larger than the donor may otherwise be able to make.
- Also, unlike a charitable bequest listed in a will, a life insurance gift does not become a matter of public record and is made without the delays of probate.
- Premiums paid by the donor after a lifetime gift of a policy to charity are deductible for income tax purposes if the charity is the absolute owner of the policy. The death proceeds paid to the charity if the charity is named as the policy beneficiary are deductible for federal estate purposes.
What are the tax considerations?
The gift of an existing life insurance policy can generate an income tax charitable deduction provided the donor assigns all rights – such as naming the charity owner and beneficiary – to the charity.
When considering make a charitable gift with an existing policy, the donor has two choices:
The donor may choose to give the policy itself to charity Note that the gift must be irrevocable. The donor receives an income tax charitable deduction for the outright gift of an existing policy. The donor can deduct the value of the policy or the donor’s cost basis in the policy, whichever amount is less.
Or the donor may choose to retain ownership and control of the policy and simply name the charity as the beneficiary of the policy. Note that naming the charity, as the beneficiary does not create an income tax deduction. At the time of the donor’s death, the policy proceeds will be included in the donor’s estate and the donor will receive an estate tax charitable deduction for the money that goes to charity.
If the gift is a new policy, the donor should first transfer funds to the charity. The charity then becomes applicant, owner or beneficiary of the new policy issued on the life of the donor. The donor receives a tax deduction for the initial premium amount paid to the donor. Also the death proceeds of the policy won’t be included in the donor’s gross estate at death because the donor never held any incidents of ownership.
The laws in most states make it clear that a charitable organization has an insurable interest in a donor. However, the donor’s legal counsel should check the laws of a particular state before the donor chooses to give a new policy to charity.
The Tax Impact
- The gift of existing life insurance policy to charity qualifies for an income tax charitable deduction provided the donor itemizes deductions and assigns all rights to the charity by naming the charity owner and beneficiary.
- The donor’s deduction is the lesser of the fair market value of the policy or the donor’s tax basis in the policy.
- The deduction is reduced if the policy is subject to a loan, or if a sale of the policy on the date of the gift would have produced ordinary income.
- The donor receives an income tax charitable deduction for premium payments the donor makes after a policy is transferred. If they’re paid directly to the insurance company, the deduction that year is limited to 30% of the donor’s adjusted gross income. But if the donor make annual cash gifts to a public charity, which uses them to pay the premiums, the donor may deduct an amount up to 50% of adjusted gross income that year. Strict limits may apply in the case of gifts to a private foundation.
- If a donor wants to retain ownership and control of an existing policy, he or she can simply add the charity as beneficiary. This won’t produce an income tax charitable deduction,, but it will create an estate tax charitable deduction for the death proceeds that go to the charity at the insured donor’s death.
- If the gift is a new life insurance policy, the donor should transfer funds for the purchase to the charity. The charity then becomes applicant, owner and beneficiary of the new policy on the donor’s life. The initial premium transferred to the charity is generally deductible, and the policy’s death proceeds won’t be included in the donor’s gross estate at death because the donor never held any incidents of ownership.
The Bottom Line
Life insurance helps create a charitable gift that is much larger than what otherwise might be given by the donor. Death benefits paid to the charity at the owner’s death invariably far exceed the premiums paid for the gift, and the donor can retain other assets for other uses or planning solutions.
The material is provided for informational purposes only. Parties considering applying for or purchasing private placement insurance and/or annuity products should seek their own tax and legal advice and should carefully review the contract. The information in this document is compiled from sources considered reliable, but no representation is made regarding its completeness or accuracy.
This material is neither an offer to sell nor a solicitation of any offer to buy a security or insurance product.