Charitable Donations of Life Insurance
insurance is often overlooked as a gifting option when individuals are
considering gifts to charities, but it can be an effective way to provide a
charity with funds for future work. Thus, the gift of a life insurance policy may
be something to consider.
tax benefits to the donor will depend on how the gift is structured. The gift
will normally be arranged so that either the donor owns the policy and names a
charity as beneficiary, or the charity owns the policy and pays premiums by way
of cash gifts made by the donor.
the donor retains ownership of the life insurance policy and names a charity as
the beneficiary, the donor will not receive a current charitable income tax
deduction and the death benefit proceeds will be included in the estate for
estate tax purposes. This is due to the retention of ownership that allows the
donor to change the beneficiary or leave only a portion of the life insurance
benefit to a charity. If the policy is in the form of a cash value life
insurance policy, this also means that the donor will still have access to the
cash value during his or her lifetime. Upon death, although the proceeds are
included in the gross estate, the proceeds payable to the charity should
qualify for a charitable estate tax deduction.
the donor wants to receive an immediate charitable income tax deduction for
life insurance premium amounts, then the charity must be the owner and
beneficiary of the life insurance policy. The charity may choose to maintain or
liquidate the policy. If the charity chooses to maintain it, typically a donor
will donate cash directly to the charity so the charity pays the life insurance
premiums. At the donor’s death, the charity generally receives the life
insurance death benefit proceeds income tax-free. In addition to a charitable
deduction for premiums being paid, a donor may get a charitable deduction for
the policy itself. This is generally 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.
a donor has an existing life insurance policy that is no longer needed, the
donor may donate the policy to a charity. He or she may receive a charitable
income tax deduction for the donation of the life insurance up to certain
limits. To do this, all rights in the policy must be assigned to the charity
and the policy must be delivered to the charity. There is usually a change of
ownership and beneficiary form from the insurance company that must be
completed. And, the receiving charity must sign the change of ownership form as
the new owner of the policy. If additional life insurance premiums are needed,
then the donor may make continuous annual donations to the charity for the
additional premium payments. These additional donations may be income tax
deductible up to certain limits. At the donor’s death, the charity should
receive the life insurance death benefit income tax-free.
is evident, the use of life insurance may be an excellent way to donate to a
charity. It could result in a substantial gift to a charity at a relatively
small cost and may also provide the donor with charitable income tax deductions
and charitable estate tax deductions.
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.
Stark Hood, JD, CFP, is president of the Hood Group, which provides consulting
services to business organizations and foundations. She currently serves as a
consultant to the CCIM Foundation’s Real Estate Gifting Realized Program.
Contact her at firstname.lastname@example.org. Learn
more about the Foundation’s gifting program at www.realestategifting.org.