Posted February 1st, 2005

Planning Matters

Life insurance policies are one of the most widely owned yet least utilized assets in charitable gift planning. This is in part due to the fact that some gift planners are reluctant to promote gifts of life insurance after having a bad experience in the past with charitable life insurance programs that promised to raise millions of dollars overnight with little or no effort. Many “vanishing premium plans” resulted in vanishing policies, leading to tremendous disappointment on the part of the donors and charities who participated in them. Certain plans such as Charitable Reverse Split Dollar Insurance were identified as abusive by Congress and the IRS and are no longer permissible. Today, regulatory and professional groups are investigating a number of other charitable “insurance” plans that seem to be primarily designed to benefit insurance companies, agents, and investors rather than charities. However, it is important for gift planners to realize that a number of legitimate opportunities do exist to help donors meet their charitable and personal objectives through the use of insurance. An understanding of life insurance basics may help donors and charities alike. This month’s “Planning Matters” is devoted to answering a variety of questions about the appropriate uses of life insurance for charitable gift planning purposes.

Question: What types of life insurance policies can be used for charitable purposes?

Answer: The proceeds of most life insurance policies may be directed to charity at death, whether they are term insurance or some other type of policy that includes a cash value. They may be new or existing policies.

Question: How might one arrange a gift of life insurance?

Answer: With an existing policy, the policy owner can simply make the charity a beneficiary of the policy. If tax benefits are desired, the owner can make the charity the irrevocable owner and beneficiary of a policy.

Question: What are the benefits of giving a new or existing policy to charity?

Answer: The donor of an existing policy will generally be able to deduct the lesser of the fair market value or the premiums paid prior to the gift. With a new or existing policy the premiums paid following the donation of the policy will generally qualify as a charitable deduction.

Question: What type of donor finds gifts of life insurance to be attractive?

Answer: Gifts of life insurance might appeal to a donor who would like to make a significant gift but does not have sufficient capital assets to do so at this time. The donor may give a new or existing policy with an appropriate face amount and thus fund the gift over a period of time. Depending on the policy selected it may be possible that only a limited number of premium payments will be necessary to sustain the policy.

Question: Can you describe the Life Insurance Wealth Replacement Strategy?

Answer: This strategy involves the use of a life insurance policy to replace assets given to charity through providing for the eventual benefit of the donor’s loved ones. For example, a 61-year-old couple that gives $500,000 of low-yielding appreciated stock to fund a 5% charitable remainder trust might use the savings from the charitable deduction and/or a portion of the income from the trust for a period of time to fund the purchase of a $500,000 insurance policy in an irrevocable life insurance trust for the benefit of heirs. In this way, they can provide a $500,000 gift while still providing for a $500,000 inheritance.

Although they are not as widely used as other gift planning strategies, gifts of life insurance can be the right fit for donors who may not be able or willing to make another type of gift. The wealth replacement strategy discussed above may be especially appropriate for donors who have concerns about “disinheriting” heirs as a result of making a large charitable gift. Remember to include life insurance in the spectrum of possibilities when discussing gift options with your donors. You may be surprised how many donors may decide they can use gifts of life insurance to fulfill both their personal and charitable goals.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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