by Steve Goodman
CPA, MBA – President & Chief Executive Officer
Contact Steve today for more info.
Many people desire to make large charitable gifts during their lifetime but hesitate due to concerns about compromising their family’s financial security. Life insurance can help alleviate these concerns by enabling the donor to give to his/her favorite charity while providing for the donor’s heirs and beneficiaries.
One common technique employs a life insurance policy, an irrevocable life insurance trust (or ILIT) and a charitable remainder uni trust (or CRUT) in a two-step process. The first step is to set up the CRUT and then transfer cash or property into it. The CRUT provides income for up to 20 years or for the rest of the donor’s life.
The second step concerns the income generated by the CRUT. The income provides the means to make annual gifts to the ILIT. The ILIT uses these funds to pay the life insurance premiums. When the donor dies, the designated charity receives the remaining assets in the CRUT. The beneficiaries receive the life insurance proceeds via the ILIT as the donor directed.
This technique may offer significant tax advantages. The donor receives a tax deduction for the present value of the remainder interest of the charity in the CRUT. Payment of capital gains taxes is deferred on the transfer of appreciated property into the CRUT. If the donor is the sole income beneficiary, the donated property and the life insurance will not incur estate taxes.
There are several different scenarios when it comes to using life insurance as a charitable giving tool:
- The donor can give an existing life insurance policy to a charity. Ownership of the policy will be assigned to the charity upon completion of an absolute assignment and the charity will become the beneficiary.
- The donor can obtain a new life insurance policy naming the charity as the policy owner and beneficiary.
- The donor can continue to own a life insurance policy and simply name the charity as the beneficiary.
If one donates an existing policy to a charity, the donor can deduct this gift as a charitable donation if the donor assigns all ownership rights to the charity. The deduction will be the lesser of the fair market value or the tax basis in the policy subject to charitable deduction limitations.
If the donor makes premium payments after transferring a life insurance policy to a charity, these payments become charitable donations for the donor. If payments are made directly to the insurer, the deduction is limited to 30 percent, or possibly 50%, of the donor’s adjusted gross income (AGI). If the gifts go to the charity which then pays the premiums, the maximum deduction rises to 50 percent of AGI. The limits are lower for donations to a private foundation.
One can fund a substantial life insurance policy with a relatively small annual charitable contribution using gifts of cash or appreciated the property. Once donated, the donor no longer has access to the policy’s cash value or an ability to change the beneficiary designation. If the charity accesses the cash value to meet liquidity needs, this could jeopardize the donor’s plans to leave a legacy after death.
Charities usually prefer to receive life insurance policies as an outright gift. Gifted policies are assured of yielding a death benefit, assuming the charity makes any required premium payments. Donors should note that the charity does not have to continue making these payments. It can choose to let the policy lapse if it prefers.
Here are a few more considerations to keep in mind when transferring ownership of an existing life insurance policy to a charity:
- A donor should ensure that the charity has an insurable interest in the donor under applicable state law.
- If the value of the policy has a value of $5,000 or greater, the donor needs a qualified appraisal to deduct the donation as a charitable contribution.
- If the contribution exceeds AGI limits in the current year, the donor may be able to carry the deduction over for up to five years and apply it in a future year.
If the donor prefers to retain ownership and control of a life insurance policy while naming a charity as the beneficiary, the donor cannot take a charitable donation deduction. The death benefit proceeds will be included in the donor’s taxable estate. However, an estate tax charitable deduction will be created when the donor dies and the charity receives the payout as beneficiary. This scenario is usually appropriate for donors who want to retain control of their life insurance policy, including the ability to change beneficiaries later if they want.
CPA, MBA – President & Chief Executive Officer
About Steve Goodman
For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.
He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.