Innovative Strategies for Using Life Insurance in Charitable Giving

by Joel M. Breitstein, Attorney

Gifts of life insurance: The basics

There are two basic ways to make a gift of life insurance: an irrevocable gift of a new or existing policy where the donor gives up all incidents of ownership, or by naming the nonprofit organization as the outright or contingent beneficiary of an existing policy. Each approach has advantages and disadvantages.

Irrevocable gift of an existing policy. 

If a donor owns already excess life insurance (perhaps purchased for a reason that no longer exists), he, she or it (if a corporation) might consider making an irrevocable gift of the policy to a charity. 
If complete ownership is transferred to the nonprofit and the charity is named as the beneficiary, the gift will generate a charitable income tax deduction.

If the policy is "paid up" (i.e., no premiums remain to be paid), the deduction is generally equal to the policy's replacement value or the donor's basis, if the replacement value exceeds the basis. If premiums remain unpaid on the policy, the deduction can be calculated based on the policy's interpolated terminal reserve value, a value that might be slightly in excess of its cash surrender value. 
If the donor continues to pay the premiums on the policy (either directly to the insurance company or as a gift to the nonprofit organization that pays the premium), each such payment is tax deductible as a charitable gift. If the cash surrender value-or, in the case of a paid-up policy, its replacement value-exceeds $5,000, the donor must seek an independent appraisal and file a Form 8283 with his/her tax return.

Irrevocable gift of a new policy. 

A donor may take out a new policy and irrevocably name the nonprofit organization as the
owner and the beneficiary of the insurance contract. This can be an attractive strategy for a younger donor, because the premium cost is usually low compared with the ultimate death benefit that will accrue to the charity upon the donor's death.  [If there are 2 donors such as a husband and wife; if the policy requires the death of both the donors before any payment is made, this also reduces the premium further.  This is what Barb and I did for our policy that we donated to the American Heart Association.]

Whether the donor makes one single premium payment for the policy or pays premiums annually, each payment produces a charitable income tax deduction.
To maximize the tax advantage of this gift, the donor should consider making annual gifts of appreciated securities to the nonprofit organization, which will then make the premium payment. This will produce a charitable deduction based on the fair market value of the gift of the securities on the date the stock is transferred to the charity, and all capital gains tax that would
have been paid had the securities been sold, will be avoided.

Pros and cons of an irrevocable gift of life insurance. 

The primary benefit to the donor of making an irrevocable gift of the policy to the nonprofit is the charitable deduction that results for the value of the policy on the date of the gift and for each
subsequent insurance premium that is paid. The downside is that the gift is irrevocable-the donor can't take it back.
Nevertheless, if there are premiums to be paid, the donor always has the option to discontinue paying those premiums; but the nonprofit, as owner of the policy, has the right to (1) continue making the payments, (2) take advantage of a cash surrender option (if there is any cash value in the policy), or (as discussed later) (3) seek a life settlement solution.

Naming the charity as a primary or contingent beneficiary. 

If the donor wants to retain maximum flexibility, the charity can be named as either the primary or contingent beneficiary of the policy. This will not produce an income tax charitable deduction for the payment of future premiums on the policy, but it does afford the donor a full estate tax charitable deduction when the donor dies. The concept of naming one's favorite charity as a contingent beneficiary of a policy could be a good strategy for a childless married individual who wants to assure maximum protection for his or her spouse while both spouses are alive, yet wants to provide a benefit to the charity if the primary beneficiary predeceases the insured or both perish in a common disaster.

There are many additional ways life insurance can be used to benefit a charity.  These additional ways are discussed in the article noted here.  Source URL: http://www.pgdc.com/pgdc/innovative-strategies-using-life-insurance-charitable-giving

Overall all members of a charitable organization such as Saint Alban’s should learn about planned giving strategies.   They should especially consider ways in which life insurance can be used to enable them to make a substantially larger gift to the church than by a simple pledge.  The magnitude of the gift that can be given to the church using life insurance is huge and should be at least be evaluated each member of the congregation to see if this form of giving is right for them.