These strategies might provide more for
the charity and tax benefits for the donor.

    The use of life insurance to make charitable gifts can be an effective and cost-efficient means of fulfilling charitable intentions without making a sizable donation while alive. Depending on the type of insurance used and the nature of the gift, charitable donations involving life insurance often can result in income tax deductions for the donor and current as well as future value to the charitable recipient. Some of the strategies for using life insurance for charitable gifting are discussed below.

As Beneficiary Of An Existing Life Policy
    The simplest way to use life insurance to make a charitable gift is to name the charity as the beneficiary of an existing insurance policy. Provided the designation is not irrevocable, the benefit of this approach is that the donor can change the beneficiary designation at any time prior to death if the donor changes his or her mind about making the charitable donation or wants to name a different charity instead. Another advantage is that more than one charity can be named as  beneficiary if the donor wishes to benefit a number of organizations.
    However, there also are disadvantages to this approach. First, the donor does not remove the proceeds of the insurance from his or her estate (although a corresponding charitable deduction should be available to the estate, assuming the charities named as beneficiaries are organizations for which bequests qualify for estate tax deductions). Second, because the donor is still the owner of the policy, payment of the policy premiums is not a charitable contribution for purposes of income tax deductions.
    From the perspective of the charitable organizations named as the beneficiaries of the policy, this is the least desirable approach as the charity does not receive any current contribution and has no guarantee that the policy will still be in place or that the organization will still be the named beneficiary at the death of the donor.

Assigning Ownership Of An Existing Term Policy
    Rather than simply naming a charity as the beneficiary of an existing policy, the donor can transfer ownership of such a policy to the charity. The charity then can name itself as the beneficiary of the policy. By gifting a term policy, the donor is not giving up an asset of significant value. However, the income tax deduction for the gift of such a policy is limited to the value on the date of the gift, which, in the case of a term policy, is likely to be negligible. If the donor intends to continue making the premium payments for the policy, he or she can write a check each year to the charity to cover such payments. The charity can then pay the premiums using money gifted by the donor. The donor would be entitled to a charitable deduction for income taxes for such gifts, subject to the usual charitable deduction limitations.
    A disadvantage of this arrangement is that the assignment would be an absolute transfer of ownership, and the donor would not be able to change the beneficiary. The donor could stop making contributions to the charity to pay the premiums on the policy, however, at which point the charity could either make such payments itself or allow the policy to lapse. Another downside is that it would be difficult to transfer ownership of a single policy to multiple charities if the donor wishes to benefit more than one organization.
    Although the charity would still have to wait until the death of the donor to collect on the proceeds of the policy, the charity would be certain that the beneficiary of the policy would not be changed. In addition, if the donor decided to stop making payments to the charity for the policy premiums, the charity would have the option of making such payments from other funds, thereby ensuring the policy did not lapse due to the donor's failure to pay the premiums.

Assigning Ownership Of An Existing Whole Life Policy
    If the donor transfers ownership of an existing whole life policy or other nonterm policy to a charity, the donor is making a gift of the cash surrender value of the policy to the charity for which an income tax charitable deduction should be available (subject to the usual charitable deductions restrictions). If the cash surrender value is high, this could result in a significant income tax savings to the donor. Of course, the higher the value, the more the donor is giving away.
    As with the term policy, if the donor intends to continue paying the premiums, donations to the charity can be made each year which the charity can use to pay the premiums. These annual donations also would qualify for income tax deductions, subject to the usual restrictions for charitable contributions. If the donor gifts a single-premium or paid up policy there will be no future payments due, thus eliminating the need for annual contributions to cover additional premiums.
    Again, the donor could not later change the beneficiary of the policy as the charity would now be the owner of the policy. However, as with the term policy, the donor could stop making contributions to the charity to cover the premiums if he or she so desired. The charity could then either cash in the policy for its surrender value, monetize its value in the secondary market or continue to pay the premiums from other funds.
    The major benefit to the charity of this technique, over the others mentioned above, is that the charity receives an asset with current value. Rather than simply waiting for the insured to die before receiving any economic benefit, the charity conceivably can borrow against this policy or cash it in prior to the death of the insured and receive an immediate benefit. Of course, this ability may be seen as a disadvantage to the donor if he or she intends the charity to hold the policy until the donor's death.

Offsetting A Gift Of Property
    If the donor has assets he or she would be willing to gift to charity but is concerned that such a gift might reduce the inheritance of the donor's family, another option is to use life insurance to "offset" the gift. In this way the donor can give assets to a charity now while purchasing life insurance with a face value equal to the value of the charitable gift and naming his or her estate (or family members directly) as the beneficiary of the new policy. In this way the charity receives an immediately usable donation and the heirs of the donor's estate are in no way affected by the charitable gift. The benefit to the donor is that he or she receives an immediate benefit in the form of the allowable income tax deduction for the charitable gift.
    In addition, if a properly structured insurance trust is used to purchase the new policy on the donor's life, the donor's heirs may end up better off than if they had received the original assets given to charity, as the insurance proceeds will not be included in the donor's taxable estate. Going one step further, a Charitable Remainder Unitrust (CRUT) can be created to which appreciated assets could be contributed. The CRUT would pay the donor a fixed amount each year until the donor's death, after which the assets remaining in the CRUT would be distributed to charities. The donor could use all or a portion of the annual CRUT distributions to fund the insurance policy placed in the insurance trust, thereby offsetting the reduction in the donor's estate created by the charitable gift.

Issues To Consider
    If the donor wishes to retain ownership of the life insurance policy and simply name a charity or charities as the beneficiary(ies), the beneficiary designation should not be irrevocable or the donor will lose the ability to change the designation if desired. In addition, as the retention of ownership of the policy will mean the policy is included in the donor's estate for tax purposes, the donor must be certain that the named beneficiaries are qualified charities for estate tax deduction purposes, and that the tax provisions in the donor's will and/or state law provide that the charities will not be obligated to pay a portion of the estate tax due as a result of the inclusion of the policy in the donor's estate.
    When transferring ownership of a policy to a charity, in order to remove the policy from the donor's taxable estate and receive an income tax charitable deduction for the value of the policy, the donor must make an absolute assignment of the policy to the charitable organization and cannot retain any incidents of ownership over the policy after the transfer. The value of the gift for income tax deduction purposes also must be considered, and it may be necessary to obtain a valuation of the policy from the insurance company to verify the deduction.
    In addition, the donor should not transfer a policy with an outstanding loan. This could result in the loss of the income tax deduction for the gift and may also trigger bargain-sale rules resulting in a taxable gain and/or ordinary income to the donor.

Laura Weintraub Beck is a Private Clients Group senior associate in the Stamford Office of Cummings & Lockwood LLC. David T. Leibell is a principal in the Private Clients and Charitable Planning groups in Cummings & Lockwood's Stamford office. Arthur A Bavelas is a leading strategic advisor catering to family offices and the ultra-affluent.