Charitable giving has been top of the mind for many Americans during the past 12 months. Billions of dollars have been raised for relief efforts as Hurricanes Katrina and Rita devastated the Gulf Coast states, the post-Christmas tsunami delivered unprecedented human suffering to the Pacific Rim, and wars in the Middle East and Africa created widespread misery.
And while many people dig deeper to help those in need both at home and abroad, some also want to make a difference over the long term–leaving a financial legacy to benefit worthy causes far into the future.
You can help clients make the most of their personal giving by introducing them to charitable giving with life insurance. Depending upon your client’s age and health, the premiums for a life insurance policy may represent just a small portion of the death benefit ultimately received by his or her favorite charity. As a result, a life insurance death benefit can provide a significantly larger gift to the charity than gifts of cash or property.
There is an extra incentive to give between now and the end of the year. Congress passed the Katrina Emergency Tax Relief Act earlier this year to promote charitable donations in support of relief efforts for hurricane victims. Donors to public charities supporting Katrina relief can take deductions for those gifts up to 100% of their adjusted gross income until the end of 2005.
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Those deductions also apply to gifts of life insurance. But whatever the charity, your client can choose a policy that insures his or her life. Or, if married, the client can purchase a survivorship policy that insures both spouses and pays the death benefit after the second death.
There are three possible scenarios:
Transfer an existing life insurance policy to the charity. If your client or their spouse already owns life insurance that is no longer necessary for personal needs, making a gift of the policy can be an attractive option. Many people discover that their life insurance needs change with financial and family circumstances. Of course, they need to make a comprehensive review of their financial needs before deciding to do this.
Tax benefits. The gift of an existing life insurance policy is income-tax deductible to the lesser of the fair market value of the policy or your client’s cost basis. Specific deduction limits apply as a percentage of your client’s adjusted gross income depending upon whether the charity is public or private. If public, the deduction generally may not exceed 50% of your client’s adjusted gross income. If the charity is private, the limit is 30% of AGI.
The charity purchases, owns and is the beneficiary of a new policy. The charity applies for and owns a policy insuring the life of your client, his or her spouse, or both, and is the beneficiary. Through cash gifts, your client supplies the charity with the means to pay the policy’s premiums.
Tax benefits. Your client may claim an income-tax deduction for gifts of cash to the charity for use as premium payments, subject to the same deduction limits for public and private charities. If your client remits the premium payments directly to the insurer instead of the charity, a 30% limit applies regardless of the type of charity involved. The conservative approach is to gift the premium amount to the charity and allow the charity to remit the premium amount to the insurance carrier.