Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Life Health > Life Insurance

Leaving a phoenix-like legacy

Your article was successfully shared with the contacts you provided.

In mythology, a phoenix is a bird that rises from its ashes and symbolizes renewal. The gift of life insurance to a charity is a phoenix-like act in the sense that the proceeds from one’s passing bring renewal to the charitable purpose. That renewal is enhanced by the fact that the death benefit can be many times larger than the total premium payments. In addition, the life insurance allows the donor to make a significant gift without reducing his or her estate and depriving family members of an inheritance. The donor may also enjoy an income-tax deduction.

Charitable choices

When contemplating a gift of life insurance, customers have three choices: naming a charity as the owner of an existing policy, naming a charity as the beneficiary of an existing policy, or setting up a new policy with the charity as owner and beneficiary. In this regard, if potential donors have excess life insurance that they no longer need, they might consider giving the policy to a charity. In doing this, the donor will be entitled to a charitable contributions deduction that is equal to the lesser of the policy’s fair market value or its cost basis. For this purpose, the fair market value of a paid-up or single-premium policy is its replacement cost or what the insurer would charge for a policy of the same amount on the date of the gift. In the case of a premium-paying policy, the value will be the interpolated terminal reserve plus any unearned premium. Any subsequent premium payments by the donor would be deductible.

If donors wanted to maintain flexibility with regard to their gifts, they could just name the charity as a beneficiary of the coverage. That way, they could change the beneficiary if they chose, but the price of that flexibility would be giving up any income-tax deduction. Further, due to having retained ownership of the coverage, the death benefit would be included in the donor’s gross estate with an offsetting estate-tax deduction.

See also: 10 estate planning tax facts you need to know

With respect to setting the charity up as the owner and beneficiary of a new policy, there is the question of insurable interest, which is a matter of state law. In a state where the charity does not have an insurable interest, the donor might apply for the policy and then transfer it to the charity. Alternatively, where the charity is deemed to have such an interest, it can apply for the policy and pay the premiums with gifts from the donor-insured. Fortunately, those gifts of premium dollars would be income-tax deductible by the donor.

Other insurance gifts

If customers have group term life insurance through an employer, they might make a charity the beneficiary of such coverage. By doing so, the customer would avoid being taxed on the Table I cost of the coverage in excess of $50,000. This means that, without having to make any outlay, the customer would provide the charity with a death benefit. Here again, if the customer retained the right to change the beneficiary of the coverage, the death benefit would be included in the donor’s gross estate, but there would be an offsetting estate-tax deduction.

Another charitable possibility would be for a customer to purchase a cash-value policy and add a term rider to the coverage, making a charity the beneficiary of the rider. This is a simple and cost-effective way of providing for the family’s financial security while also benefiting a charity. Again, for purposes of flexibility, the customer could retain control of the coverage including the right to change beneficiaries.

And in situations where a charity is dependent upon the ongoing generosity of a donor, in terms of the donor’s time or money, it is wise for the charity to consider insuring the donor’s life. Besides major donors of property and money, this coverage could include important board members and key employees to compensate the charity for the loss of donations and important services.

A wealth replacement option

Customers are sometimes hesitant to make gifts to a charity because of their concern that family members may feel deprived of their inheritance. Fortunately, giving property to a charity can remedy that problem by replacing the property with a wealth replacement trust. This is an irrevocable life insurance trust, or ILIT, set up by the donor to acquire life insurance that will pass death proceeds, income- and estate-tax free, to the donor’s family in place of the donated property.

Better yet, income-tax savings from the donor’s charitable deduction plus an income stream from some forms of charitable gifts, like charitable remainder trusts and charitable gift annuities, can help to fund the donor’s gifts to the ILIT to cover premiums.

For more on charitable giving, see:

Obama’s effort to limit charitable deductions faces pushback

Charitable giving linked to stock performance

World Vision survey: Americans are less charitable this year


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.