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.