Gifts And Charitable Gifts

<div class="Section1"><br /> <br /> Yes, subject to the limits on deductions for gifts to charities.<br /> <br /> The amount of any charitable contribution must be reduced by the amount of gain that would have represented ordinary income to the donor had the donor sold the property at its fair market value.<a href="#_ftn1" name="_ftnref1">¹</a> Gain realized from the sale of a life insurance contract is taxed to the seller as ordinary income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="36">36</a>). Therefore, the deduction for a gift of a life insurance policy to a charity is restricted to the donor&rsquo;s cost basis in the contract when the value of the contract exceeds the premium payments. Thus, if a policy owner assigns the policy itself to a qualified charity, or to a trustee with a charity as irrevocable beneficiary, the amount deductible as a charitable contribution is either the value of the policy or the policy owner&rsquo;s cost basis, whichever is less ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="144">144</a>).<a href="#_ftn2" name="_ftnref2">²</a> It is not necessary, however, to reduce the amount of the contribution when, by reason of the transfer, ordinary income is recognized by the donor in the same taxable year in which the contribution is made.<a href="#_ftn3" name="_ftnref3">³</a> Letter Ruling 9110016, in which the IRS denied a charitable deduction when a policy was assigned to a charity that had no insurable interest under state law, was revoked after the taxpayer decided not to proceed with the transaction.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Premium payments also are deductible charitable contributions if a charitable organization or a trustee of an irrevocable charitable trust owns the policy.<a href="#_ftn5" name="_ftnref5">⁵</a> It is not settled whether premium payments made by the donor to the <em>insurer</em> to maintain a policy given to the charity, instead of making cash payments directly to the <em>charity</em> in the amount of the premiums, are gifts <em>to</em> the charity or merely gifts <em>for the use</em> of the charity. The difference is important when the donor wishes to take a charitable deduction of more than 30 percent of the donor&rsquo;s adjusted gross income. When the policy is merely assigned to a charitable organization as security for a note, the premiums are not deductible even though the note is equal to the face value of the policy and is payable from the proceeds at either the insured&rsquo;s death or the maturity of the policy. The reason is that the note could be paid off and the policy recovered after the insured has obtained charitable deductions for the premium payments. A corporation, as well as an individual, can take a charitable contribution deduction for payment of premiums on a policy that has been assigned to a charitable organization.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> For a number of reasons, including concerns over the rules limiting a tax deduction to the lesser of fair market value or basis and because of the uncertainty regarding tax consequences of premium payments made by the donor directly to the insurance company on a policy owned by a charity, it is generally preferable for a donor to make cash gifts to a charity and allow the charity to pay premiums on policies owned by the charity. It is important, however, not to require that the cash gifts be used for premium payments.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(1)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>See Behrend v. Commissioner</em>, 23 BTA 1037 (1931), <em>acq</em>. X-2 CB 5; <em>Tuttle v. U.S.</em>, 305 F. Supp. 484 (N.D.N.Y. 1969).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.170A-4(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9147040.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Hunton v. Commissioner</em>, 1 TC 821 (1943); <em>Behrend v. Commissioner</em>, 23 BTA 1037 (1931); Let. Ruls. 8708083, 8304068.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 58-372, 1958-2 CB 99.<br /> <br /> </div></div><br />

<div class="Section1">There are exceptions to the disallowance rule for certain transfers involving charitable gift annuity contracts ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="607">607</a>) and charitable remainder trusts.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&sect;&nbsp;170(f)(10)(D), 170(f)(10)(E).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Generally, no. If the insured has any incident of ownership in the policy at the time of death, the proceeds are includable in the insured's gross estate, but a charitable deduction is allowable for their full value.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If, however, the law in the state of the donor's domicile does not recognize that a charity has an insurable interest in the life of the donor, complications may arise. In some states, a charity may not have an insurable interest with respect to a newly issued insurance policy given to the charity or for a policy applied for and issued to the charity as owner and beneficiary. If the charity does not have an insurable interest and the insurer or the insured's estate raises the question of lack of an insurable interest, the insured's estate may be able to recover the proceeds (or the premiums paid). The proceeds are includable in the insured's estate to the extent that the proceeds could be received by the insured's estate. No charitable deduction may be allowed if the executor recovers the proceeds for the estate or if the executor were to fail to recover the proceeds and the proceeds passed to charity.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC §§ 2042(2), 2055; <em>Commissioner v. Pupin</em>, 107 F.2d 745 (2d Cir. 1939); <em>McKelvy v. Commissioner</em>, 82 F.2d 395 (3d Cir. 1936).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>See</em> Let. Rul. 9110016 (revoked by Let. Rul. 9147040 when state law was amended to permit an insured to immediately transfer a newly purchased life insurance policy to charity).<br /> <br /> </div>

<div class="Section1"><br /> <br /> While the IRC generally disallows a charitable deduction for gifts of less than the donor's entire interest in property, it does permit limited exceptions to this rule. One of these is a gift of an "undivided interest" in property. This means that the donor may give less than his entire interest and still take a charitable gift deduction if he gives "a fraction or percentage of each and every substantial interest or right" he owns in the property.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In a letter ruling, the IRS took the position that a gift of a life insurance policy to a charity was deductible even though the donor retained the right, exercisable in conjunction with the donee charity, to change the charitable beneficiaries. The IRS reasoned that by sharing the right to change charitable beneficiaries, the donor had given an undivided interest in the right he retained and thus the gift came within the exception to the rule against deducting partial interest gifts.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 170(f)(3)(B)(ii); Treas. Reg. § 1.170A-7(b)(1)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Let. Rul. 8030043.<br /> <br /> </div>

<div class="Section1"><br /> <br /> No deduction is allowed for a transfer to a charitable organization made after February 8, 1999, if in connection with the transfer the charitable organization directly or indirectly pays, or has previously paid, any premium on any "personal benefit contract" with respect to the transferor. Further, no deduction is allowed if there is an understanding or expectation that any person will directly or indirectly pay any premium on a personal benefit contract with respect to the transferor.<a href="#_ftn1" name="_ftnref1">¹</a> A personal benefit contract is any life insurance, annuity, or endowment contract if a direct or indirect beneficiary under the contract is the transferor, a member of the transferor's family, or any other person (other than certain charitable organizations) designated by the transferor.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> In a case decided under rules in effect before 1999, a charitable deduction was not allowed where the charity provided a receipt stating that the donors received no benefit from their charitable contribution. The court held that in fact the donors were receiving a benefit under the charitable split-dollar arrangement.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> In a ruling involving a paid-up policy, the IRS took the position that no deduction will be allowed for gifts made after July 31, 1969, involving a split-dollar plan in which the donor gives a charity the cash surrender value and gives a noncharitable beneficiary the balance. A gift of the cash surrender value is considered a gift of less than an entire interest in the property whether the donor retains the right to designate the beneficiary of the risk portion or irrevocably designates the beneficiary prior to making the gift.<a href="#_ftn4" name="_ftnref4">⁴</a> Two 1969 revenue rulings, which allow a deduction, apply only to gifts made on or before July 31, 1969.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 170(f)(10)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 170(f)(10)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     <em>Addis v. Commissioner</em>, 2004-2 USTC ¶ 50,291 (9th Cir. 2004).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     Rev. Rul. 76-143, 1976-1 CB 63.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.     Rev. Rul. 69-79, 1969-1 CB 63; Rev. Rul. 69-215, 1969-1 CB 63.<br /> <br /> </div>

<div class="Section1">The IRS has ruled that a gift to charity of the annuity portion of a split-life contract is not deductible because it is a gift of less than the donor's entire interest in property.<a href="#_ftn1" name="_ftnref1">¹</a> The IRS reasoned that the donor, prior to making the gift, exercised the right to purchase the annual term insurance and, thus, the donor had retained a right in the property. Furthermore, the donor's subsequent annual cash contributions equal to the annuity premiums were treated by the IRS as given in exchange for the charity's continued election to allow the donor to renew the term life insurance. Thus, the donor continued to retain the right to purchase the annual term insurance. Because the donor retained a right, the donor's gift of the annuity portion was of less than the donor's entire interest in the property.<a href="#_ftn2" name="_ftnref2">²</a> The ruling did not clearly deal with the deduction of the annual cash contributions and some commentators believe they might be deductible. However, the reasoning of the IRS – that the annual contributions were in exchange for the continued right to renew the term insurance – suggests that the donor's entire interest in the cash contributions was not given.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>See</em> IRC § 170(f)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Rev. Rul. 76-1, 1976-1 CB 57.<br /> <br /> </div>

<div class="Section1">A charitable organization that pays premiums after December 17, 1999, on a life insurance, annuity, or endowment contract in connection with a transfer for which a charitable deduction was not allowable is subject to a penalty tax equal to the amount of premiums paid.<a href="#_ftn1" name="_ftnref1">¹</a> The IRS has indicated that other penalties may be imposed on charitable organizations involved in charitable split-dollar plans.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 170(f)(10)(F).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Notice 99-36, 1999-2 CB 1284.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Generally, no. An individual may take a gift tax deduction for the full value of gifts to qualified charities of life insurance and annuity contracts, and of premiums or consideration paid for such contracts owned by qualified charities.<a href="#_ftn1" name="_ftnref1">¹</a> Such a deduction is not allowed where an insured assigns (even irrevocably) to a charity the cash surrender value of a life insurance policy (either paid-up or premium paying), including a right to death proceeds equal to the cash surrender value immediately before death, if the donor retains the right to name or change the beneficiary of proceeds in excess of the cash surrender value and to assign the balance of the policy subject to the charity&rsquo;s right to the cash surrender value. According to the IRS, such a gift is neither one of the donor&rsquo;s entire interest in the property nor one of an undivided portion of the donor&rsquo;s entire interest in the property ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="121">121</a>), and so the deduction is disallowed under IRC Section 2522(c).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> If the law in the state of the donor&rsquo;s domicile does not recognize that a charity has an insurable interest in the life of the donor, a charitable deduction may not be allowed for a gift of a newly issued insurance policy (or premiums paid on the policy) or for gifts of premium payments on a policy applied for and issued to the charity as owner and beneficiary.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2522.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 76-200, 76-1 CB 308.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>See</em> Let. Rul. 9110016 (revoked by Let. Rul. 9147040 when state law was amended to permit an insured to immediately transfer a newly purchased life insurance policy to charity).<br /> <br /> </div></div><br />

<p>If the gift qualifies as a present interest gift ( Q <a href="javascript:void(0)">218</a>), each spouse's annual exclusion ($19,000 in 2025-2026, $18,000 in 2024, $17,000 in 2023 and $16,000 in 2022) can be applied to reduce or eliminate the gift tax. Thus, $38,000 in 2026 (2 × $19,000) can be subtracted from the value of the contract given and from premiums paid by the donor as gifts in subsequent years (so long as the spouse consents each year) in computing taxable gifts for years in which the gifts are made. The consenting spouse's unified credit also can be applied against any gift tax imposed on the spouse's gift where the gift is in excess of the allowable exclusion or is a future interest gift. (<i>See also</i> Q <a href="javascript:void(0)">214</a>.)</p>

<p>Generally, the value of a gift of life insurance is established through the sale by the company of comparable contracts.<a href="#_ftn1">¹</a></p><p> If a new policy is purchased for another, or is transferred as a gift immediately after purchase, its gift value is the gross premium paid by the donor to the insurance company.<a href="#_ftn2">²</a></p><p> If a person makes a gift of a previously purchased policy, and the policy is single-premium or paid-up, its gift value is the single premium that the company would charge currently for a comparable contract of equal face value on the life of a person who is the insured's age at the time of the gift.<a href="#_ftn3">³</a> A 1978 ruling concerned a single premium life policy in force for 20 years where the replacement cost of a single premium life policy of the same face value on the same insured was substantially less than the cash surrender value of the existing policy. The IRS ruled that the replacement contract would not be "comparable" and that in the absence of information pertaining to a "comparable contract" the value of the policy would be determined by reference to the interpolated terminal reserve value.<a href="#_ftn4">⁴</a></p><p> If the gift is of a policy on which further premiums are payable, the value is established by adding the "interpolated terminal reserve" (the reserve adjusted to the date of the gift) and the value of the unearned portion of the last premium.<a href="#_ftn5">⁵</a><br/><blockquote><em>Example</em>. A gift is made four months after the last premium due date of an ordinary life insurance policy issued nine years and four months before the gift was made by the insured, who was 35 years of age at date of issue. The gross annual premium is $2,811. The computation is as follows: </blockquote></p><table border="1" align="center" id="rte-9043ebe0-9734-11f1-9ff4-6d77a97dbcbb"><tr ><td width="397">Terminal reserve at end of tenth year</td><td width="87">$14,601.00</td></tr><tr ><td width="397">Terminal reserve at end of ninth year</td><td width="87">$12,965.00</td></tr><tr ><td width="397">Increase</td><td width="87">$1,636.00</td></tr><tr ><td width="397">One-third of such increase (the gift having been made four months following the last preceding premium due date) is</td><td width="87">$545.33</td></tr><tr ><td width="397">Terminal reserve at end of ninth year</td><td width="87">$12,965.00</td></tr><tr ><td width="397">Interpolated terminal reserve at date of gift</td><td width="87">$13,510.33</td></tr><tr ><td width="397">Two-thirds of gross premium ($2,811)</td><td width="87">$1,874.00</td></tr><tr ><td width="397">Value of gift</td><td width="87">$15,384.33</td></tr></table><p>The amount of a policy loan outstanding at the time of the gift would be subtracted.<a href="#_ftn6">⁶</a></p><p> The effect of the circumstance that the insured is uninsurable at the time of the gift is uncertain; there is no case directly on point.<a href="#_ftn7">⁷</a></p><p> <em>See</em> Q <a href="javascript:void(0)">116</a> regarding gifts with respect to split-dollar arrangements. </p><p> If the gift of the policy or contract is conditioned upon payment of the gift tax by the donee, the value of the gift is reduced by the amount of the gift tax paid by the donee.<a href="#_ftn8">⁸</a></p><p> A group term life policy assigned by an employee to an irrevocable trust on the day before a monthly premium was due was held to have no ascertainable value for gift tax purposes, but it was also held that after the assignment the employee would be deemed to have made a gift to the assignee whenever the employer paid a premium.<a href="#_ftn9">⁹</a> A 1984 revenue ruling valued the gift as follows: If the plan of group term insurance is nondiscriminatory or the employee is not a key employee, the Table I rates may be used. If the employee chooses not to use Table I, or if the plan is discriminatory and the employee is a key employee, the employee should use the actual cost allocable to the employee's insurance by obtaining the necessary information from the employer. The rates apply to the full face amount of the insurance.<a href="#_ftn10">¹⁰</a> Projecting the holding of the 1984 ruling to the nondiscrimination rules applicable to taxable years ending after October 22, 1986 ( Q <a href="javascript:void(0)">249</a>), it would seem that if the plan of group term insurance is discriminatory with respect to the employee, the employee must use the higher of Table I rates or actual cost. </p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. Treas. Reg. § 25.2512-6. </p><p> <a href="#_ftnref2">2</a>. Treas. Reg. § 25.2512-6(a), Example 1. </p><p> <a href="#_ftnref3">3</a>. Treas. Reg. § 25.2512-6(a), Example 3. </p><p> <a href="#_ftnref4">4</a>. Rev. Rul. 78-137, 1978-1 CB 280. </p><p> <a href="#_ftnref5">5</a>. Treas. Reg. § 25.2512-6(a), Example 4. </p><p> <a href="#_ftnref6">6</a>. IRS Form 712, Part II. </p><p> <a href="#_ftnref7">7</a>. <em>&nbsp;&nbsp;&nbsp;See U.S. v. Ryerson</em>, 312 U.S. 260 (1941); <em>Estate of Pritchard v. Commissioner</em>, 4 TC 204 (1944); Treas. Reg. § 25.2512-1. </p><p> <a href="#_ftnref8">8</a>. Rev. Rul. 75-72, 1975-1 CB 310. <em>See also</em> Rev. Rul. 76-104, 76-1 CB 301; Rev. Rul. 76-105, 76-1 CB 304. </p><p> <a href="#_ftnref9">9</a>. Rev. Rul. 76-490, 1976-2 CB 300. </p><p> <a href="#_ftnref10">10</a>. Rev. Rul. 84-147, 1984-2 CB 201. </p>