There are several ways you can use life insurance as the basis for a charitable gift.

Making the Charity a Beneficiary of Your Life Insurance Policy

You may wish to make the organization the beneficiary (or a contingent beneficiary) of a life insurance policy as a way to make a sizeable future gift. You retain lifetime ownership of the policy, keeping the right to cash it in, borrow against it, and change the beneficiary. A gift of this nature is treated much like a bequest made through your will. Because you retain the ownership of your asset (the policy), you will not receive an income tax charitable deduction for this future gift or for your premium payments during your lifetime. The policy's proceeds will be included in your gross estate, and your estate can take an estate tax charitable deduction.

Making a Gift of Your Policy

You may wish to transfer ownership of a policy to a nonprofit organization, or purchase a new policy with the organization as owner and beneficiary. If you make the organization the owner and beneficiary of a policy, you are entitled to certain tax advantages.

Example:
Since their children had grown up and begun lives on their own, the Walkers decided to review their finances. They realized that some of the insurance they carried while the children were dependent on them was now not really needed. They decided to donate a fully paid-up policy to the organization. Their financial advisor told them that as the policy is paid-up, they are entitled to a charitable deduction equal to the lessor of the premiums they paid over the life of the policy or the cost of a comparable replacement policy if purchased today.

The Walker children were very supportive of the idea. In fact, one of their children purchased a small whole life policy and designated the organization as the owner and irrevocable beneficiary. As a result, the annual premiums that are paid are a charitable deduction.

Wealth Replacement Using Life Insurance

A donor may make a current gift to a nonprofit organization and receive a charitable tax deduction. At the same time, the donor may purchase life insurance to replace the donated amount or perhaps, the amount after estate tax that the beneficiaries would have received. Depending on the circumstances, the charitable tax savings and any life income resulting from the gift may defray the cost of the wealth replacement insurance premiums.

Example:
John Abbott, age 66, wants to make a gift that will ultimately be used to purchase equipment for a nonprofit organization he has supported for years, but he is also concerned for his children and their futures. He creates a 6 percent Charitable Remainder Unitrust for $100,000, which yields a tax savings to him of $13,307. He then purchases a $100,000 whole life insurance policy that will maintain his children's inheritance. His annual premium payments are $4,500, which he pays for the first three years from his tax savings and subsequently with the increased income from his trust.

Creating a Life Insurance Trust

You may want to set up an Irrevocable Life Insurance Trust (ILIT). An ILIT removes the life insurance from your estate to help reduce estate tax while providing other benefits. For example, upon one's death, the proceeds of the life insurance policy may remain in the trust to provide income for the surviving spouse, but stays outside of the spouse's estate for estate tax purposes. Or, the trust could be used to distribute proceeds to children of a previous marriage. Although ILITs can be expensive and more complicated than owning life insurance directly, they may be an attractive option in certain situations.

There can be significant advantages to using retirement assets as a charitable gift. Please contact us to discuss your unique circumstances. As with all matters concerning estate planning, please consult your estate and tax specialists.

For more information about planned gifts, please contact Debi Kelly at (325) 677-6815 or by This e-mail address is being protected from spambots. You need JavaScript enabled to view it . You may also write to: DRI Legacy Builders, PO Box 1880, Abilene, TX 79604.