In the fall of every year, financial advisors often address their clients’ year-end planning, including opportunities for charitable giving. With asset values rising for some clients, charitable planning may be back as an attractive planning opportunity in 2016.
This article summarizes four planning strategies for clients (referred to as donors for purposes of this article), showcasing popular uses of life insurance in connection with charitable planning.
(1) Name the charity as the policy’s beneficiary
If the charity is named as the beneficiary, the donor will not receive an income tax deduction for premiums paid, but will have the ability to change beneficiaries later, generally with no estate tax consequences.
(2) Gift existing policy to charity
A donor may choose to gift an existing policy to charity outright by transferring ownership of the policy to the charity. In this case, the maximum allowable deduction will be limited to the lesser of the fair market value of the policy or its cost basis.
In addition, the donor should be certain to gift his/her entire interest in the policy. Finally, the charity must have an insurable interest in the donor under applicable state law.
Many other factors limit the actual amount of the deduction which may be taken in any one tax year, including whether the charity is public or private and the donor’s adjusted gross income. As in all cases involving complex planning, donors should seek the advice of their tax attorney and/or CPA for an analysis of the tax consequences given their particular circumstances.
(3) Allow charity to purchase a new policy and make premium gifts
If, on the other hand, the donor allows the charity to purchase a new policy to the charity and gifts the premiums, the donor will generally receive an income tax deduction for the initial premium amount and the additional premium amounts. But the donor won’t have the opportunity to change beneficiaries later because the charity is the owner of the policy and retains all ownership rights.
As in the case of gifting the policy, the charity must have insurable interest under applicable state law. The actual amount of the deduction for the client will depend upon the donor’s facts and circumstances.
With regard to underwriting new policies owned by charities, financial advisors should familiarize themselves with the financial underwriting guidelines of the insurance carriers considered for the coverage. The financial underwriting guidelines for carriers vary.
A donor can purchase life insurance to replace the amount of wealth given to a charity, writes Brett Berg. (Photo: Thinkstock)
Some common financial underwriting guidelines include, but are not limited to:
The face amount will generally be limited to a multiple of the donor’s giving history to the charity;
The donor may need to demonstrate an established ongoing relationship with the charity; and
The donor may need to demonstrate that the client has taken appropriate steps to satisfy other insurance needs for his/her family before helping the charity establish a policy on the donor’s life.
(4) Use life insurance to replace gifted wealth
A donor may also want to give other assets to charity either during life or at death. In these situations, a donor may want to purchase life insurance to replace the amount of wealth given to the charity. Such gifting strategies vary in their complexity.