Using Life Insurance for Charitable Gifts

This article is provided by Paul Glowienke, Financial Advisor with Northwestern Mutual

The greatest advantage of a gift of life insurance is that a donor can make a substantially larger gift to charity by using life insurance than by giving any other asset. Relatively modest annual premiums mature into a substantial death benefit at the donor’s death. This is further enhanced when a charity owns the policy because of the income tax charitable deduction the donor receives.

The donor’s gift (cash to pay premiums) essentially costs less. For example, for a donor in a 30% tax bracket, a gift of $2,500 really costs $1,750 after factoring in the income tax charitable deduction.

The gift of an existing policy can be relatively “painless” to the donor in several respects. The transfer is simple; all that is required to complete the transfer is a change of ownership form. Absent a loan on the policy, the donor does not recognize income no matter how large the gain. In addition, if the donor does not intend to use the policy as a source of cash, a gift of a policy is not often perceived as a “loss” of an asset.

A charity-owned life insurance policy requires less administration by the charity than many other assets, like real estate or business interests. In addition, the charity can easily take advantage of cash values in the policy before the donor’s death by using loans or withdrawals. Both the cash value buildup and the death benefit are generally income tax-free to the charity.

The death benefit, whether from a policy owned by the charity or with the charity as beneficiary, is received by the charity without reduction for estate or income taxes and is not subject to the delays and expenses of probate. The death benefit is less likely to be contested by the donor’s beneficiaries than other assets.

Congress encourages charitable contributions by providing income tax deductions for gifts to charity. In order to take advantage of these deductions, a donor must meet certain requirements and is subject to certain limits:

  • If giving an existing policy, the amount deductible is the lesser of the donor’s basis in the policy or the policy value.
  • If giving cash, the amount of cash given is the amount deductible.
  • If the gift is to a public charity, the deduction is limited to 50% of the donor’s AGI. Public charities are generally organizations that receive their funding from government and the general public. Some examples of public charities are schools, churches, hospitals, charities for disease prevention or cure, and charities that benefit the community.
  • If the gift is to a private foundation, the deduction is limited to 30% of the donor’s AGI. Private foundations are generally organizations that receive their funding from a small number of donors, often members of the same family.
  • Deductible amounts not used in the current year because they exceed AGI limits may be carried forward for the next five years.
  • The donor must obtain a contemporaneous written acknowledgment from the charity for any contribution (cash or non-cash) of $250 or more.
  • If the amount of the charitable deduction claimed is more than $5,000, the donor must also obtain a qualified appraisal.

It is vitally important that you check with your financial advisor and your CPA when considering gifting or creating a life insurance policy that will benefit your favorite charity. It is a sophisticated way for you to become a voluntary philanthropist.

 

**Article prepared by Northwestern Mutual with the cooperation of Paul Glowienke. Paul Glowienke is an Insurance Agent with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Paul Glowienke is a Registered Representative of Northwestern Mutual Investment Services, LLC, a subsidiary of NM, broker-dealer, and member FINRA and SIPC. Paul Glowienke is based in Newport Beach, CA. To contact Paul Glowienke, please call 949-863-5803, email at [email protected], or visit www.paulglowienke.com/.**

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