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Who Should Own The Policy?

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In the example in this article, it was assumed that the charity owned the life insurance policy on the life of the client. Doing so offers certain benefits. However, it may make sense to have an entity other than the charity own the life insurance policy.

The greatest benefit offered to the client is that if the charity receives the funds directly, the client receives an income tax deduction. The amount of the deduction will vary based on the type of property donated (cash is usually deductible up to 50% of a clients adjusted gross income) and will be subject to any itemized deduction phase-outs that might apply. By donating directly to the charity, and relying on the charity to make the premium payments, a client can receive the benefit of a charitable deduction.

In some cases, a client might be willing to forgo the current itemized deduction, opting instead to own the policy himself or herself or to pay the premium on behalf of the charity. Without making the gift directly to the charity, the itemized charitable deduction will be foregone.

This bypassing a deduction approach might be attractive if a client wishes to keep his or her options open regarding a charity. For example, the client could fear that one day he or she might disagree with a charitys direction. The client may be concerned with a charitys long-term stability. The client might even be concerned that a charity, after obtaining the life insurance policy, will choose not to pay the premiums and use the cash for other more immediate objectives.

Still, other clients might opt to use a trust set up to own a life insurance policy and pay the death proceeds to a charity. Using this approach, a client can spell out how the death proceeds should be used and allow the trustee the flexibility he or she needs to assess what might be a changing charitable landscape. Each year, a client can make gifts to a trust that owns the life insurance policy. Within the trust, the trustee can be given a list of charities, or the client can be given a list of charitable objectives so as to allow for flexibility.

In fact, the trustee might even be able to hold the death proceeds and pay out the proceeds based on terms set by your client. Where these trusts are utilized, they typically will not allow for a current deduction and will not even qualify for an annual exclusion gift. However, a client can maintain long-term flexibility with a trustalbeit with a higher tax result.

Keep a few things in mind where trusts are concerned. The trusts discussed above are not intended to be charitable remainder trusts. Those are very different planning devices, outside the scope of this article. While charitable remainder trusts can own the life insurance on a client/trust grantor, that is not always their primary objective.

Another planning device, along these same rough lines and best suited for highly affluent clients, is a private foundation. These are complex entities and usually only appropriate for those clients with the ability to make large donations. These also are outside the scope of this article; however, keep one thought in mind. With proper planning a private foundation might be able to own a policy on a key donor, allow your client to receive a tax deduction for his or her contribution and direct the death proceeds with much the same result as a client might hope to achieve through a trust.

Keep in mind also, that many community foundations allow donations to be directed toward the purchase of a life insurance policy and allow for the death proceeds to meet specific client objectives. Using a community foundation can allow for a current income tax deduction, yet allow a client some degree of flexibility. Moreover, it helps avoid the drafting considerations, costs and management of a trust.

In short, by giving up some control, a client can receive many of the benefits of a trustincluding directing funds to a favorite charitywhile avoiding the costs involved with maintaining a trust.

–Mark Teitelbaum

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.