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November 25, 2003 at 07:00 PM
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.
