This month we’ve gone “back to school” with lessons related to GFLF’s core services. I’m glad the title didn’t scare you away, because, let’s be honest, economics class was always a little intimidating. But, fear not! The economics of charitable gifts of life insurance are easy to understand because it means mutual benefits for both you, as the donor, and your fave charity.
It may sound weird at first, but making a charitable donation of your life insurance policy can make for a valuable, tax-wise gift. Plus, there are multiple ways to successfully make a gift of life insurance fit in with your charitable giving goals.
A donor can:
- Make a lifetime gift of a life insurance policy;
- Name a charity as the beneficiary of a life insurance policy death benefit; and/or,
- Take donations that would have made to the favorite charity, use this money to pay premiums toward a life insurance policy, and ultimately leverage the cash into a much larger gift.
Lifetime Gift of Policy
A donor can transfer ownership of a life insurance policy to charity during lifetime. To accomplish the transfer, the donor must complete a change of ownership form that is typically available from the insurance company.
If the policy is not paid-up, the charity will need to maintain the policy until the insured individual’s death to receive the policy benefit. A charity may request that a donor make additional cash gift to cover the ongoing premium payments.
A donor will be making an immediate charitable contribution equal to the fair market value of the policy at the time of transfer. If the donor is taking a federal charitable income tax deduction of $5,000 or more, the donor must obtain a qualified appraisal by a qualified appraiser.
Life Insurance Death Benefit
A beneficiary designation is used to specify who the beneficiary of the life insurance policy will be. A beneficiary designation is usually revocable during the donor’s lifetime and it becomes irrevocable at death. A gift specified in a beneficiary designation will not come into effect until the insured individual’s death.
Form of Gift
A donor can specify that a charity will receive a percentage of the total death benefit (e.g., 5% of the total death benefit) or a specific dollar amount.
A life insurance policy that is owned by the donor will usually be included in his or her estate for estate tax purposes. The donor will receive an estate tax charitable deduction for amounts that are transferred to charity at death, saving federal estate taxes. (Admittedly, a tiny percentage of Americans are wealthy enough to even have to worry about estate taxes).
A Great Planning Opportunity!
A gift of life insurance may allow a donor to leverage available cash to provide a more significant gift to charity than might otherwise be available. For example, a donor might pay $5,000 a year in premiums to purchase a $300,000 life insurance policy that benefits charity. In this situation, the donor’s charitable gift may be far greater by purchasing an insurance policy than if he or she contributed the $5,000 cash to charity each year.
A gift of a life insurance policy can be a good fit for donors who have existing policies that are no longer needed. The classic scenario would be policies purchased while kids were little, as time goes by, now donor has sufficient other assets to provide for children, or children are now adults and no longer require financial help in the event of the death of a parent.
Let’s Talk About How to Make This Giving Option Work For You!
Everyone’s financial, tax, estate planning, and charitable giving situation is unique. It’s highly recommended you consult with an estate planner and/or charitable giving expert so you don’t hit any accidental pitfalls! I offer a free one-hour consult, so don’t hesitate to contact me to get your smart tax-wise gift happen.