When meeting with a client to discuss their interests and goals, the topic of charitable giving will occasionally come up. People often have charities or educational institutions that they're passionate about, and they may dream about making a large donation to help their cause. Too often the client's financial resources--or the interests of their family--don't support making such a gift. Life insurance can be a great tool to help clients realize their philanthropic goals.
Insurance Used to Fund a Gift
Funding a gift using an insurance policy can help your client give a much larger gift than would otherwise be possible. For example, a person could give $10,000 a year to a charity for five years for a total gift of $50,000, or he could make those same payments on a $ $325,000 guaranteed universal life policy (1) and greatly increase the impact to the chosen organization. Estate or income tax benefits for the gift may also be realized, an added bonus.
There are several different ways this can be arranged:
1. Name the charity as beneficiary of a policy - Your client may have a policy that he/she purchased years ago, but the situation that necessitated buying that policy no longer exists. The client could simply name their favorite charity, or charities, as a primary or contingent beneficiary of the policy.
Pros: The client maintains control of the policy, and can change their beneficiaries at will. They can also name multiple charities to receive money at their death.
Cons: There's no current income tax benefit on premium payments, however at death the estate will receive a full estate tax charitable deduction.
2. Transfer ownership of an existing policy to the charity - The client could transfer full ownership of the policy to a charity, so the charity becomes the owner and sole beneficiary. The client/donor would continue to make premium payments on the policy, unless of course the policy is paid up at the time of the gift.
Pros: The client gets an income tax deduction when the gift is made based on the value of the policy, as well as on all subsequent premium payments. The client can either pay the premiums directly to the insurance company, or make an annual donation to the charity in the amount of the premium payment so the charity could pay the premium. Your client should consult their tax advisor to help them determine the option that works best for them.
Cons: The gift must be irrevocable in order for the client/donor to get the income tax benefit, so he/she can't change their mind after the gift is made. If your client wanted to cease ongoing support of the charity, he/she could stop making further premium payments, but the charity would have the option to continue the payments and keep the policy in effect.
3. Purchase a new policy in the charity's name - The client could decide to purchase a new policy on their life, but make a charity the owner and beneficiary. The client/donor would make all premium payments.
Pros: They'd get the same income tax benefits discussed earlier related to transferring ownership of an existing policy. A client could also use the required minimum distributions (RMDs) that they're forced to take from their retirement plans, even if they don't need the income, to make premium payments.
Cons: Insurable interest rules apply here, and some states don't recognize a charity as having an insurable interest in a donor. The gift must be irrevocable in order for the donor to receive the income tax benefit.
While the process is generally pretty straight forward, there are some important things to remember when you discuss using insurance to fund a gift with your client.
* If the gift/policy value exceeds $5,000 the donor needs to get an independent appraisal of the policy and file Form 8283 with his/her tax return.
* Some charities don't want insurance policies signed over to them. This gift requires work today for a benefit that could be decades away. Some may actually cash in the insurance policy for the cash value--probably not the original intent of the gift. Other organizations, however, will realize that this is a great way to ensure funding in future years and will welcome this it. To save everyone time, your client should check with the charity they want to support before making them the owner of any new or existing policy.
* As mentioned earlier, some states do not deem charities to have an insurable interest in a donor's life--though that's loosened up somewhat as these types of gifts have become more common. You should check the insurance laws for the applicable state before proposing this to a client.
* Tax laws change frequently, and everyone's situation is different. Make sure your client consults with their tax advisor to ensure that the insurance gift is set up in a way that gives them the best tax advantage.
* Term-life insurance is not appropriate for funding a gift, at least not if making the charity the owner. No charity would be interested in putting the effort into a gift that they most likely will never receive.
Insurance as a Wealth Replacement Strategy
Insurance can also be used as a wealth replacement strategy within your client's charitable estate plan. Your client may have the desire to give a significant gift to their favorite charity or educational institution, but doing so will take away assets that would otherwise go to his/her family. Your client could actually give assets to the charity now, possibly avoiding capital gains taxes on appreciated assets, and take out a life insurance policy for family members to replace the value of the assets given away. It's a strategy that keeps everyone happy, and could help your client realize some great tax savings.
Target Audience
Insurance can be used as part of long-term or estate planning at any age, but the most likely clients to consider using it to enable charitable giving are pre-retired individuals (50 - 64) and those already in retirement (65 - 75). At these stages of life people are generally thinking more about their legacy. If they're charitably inclined, they'll be giving thought to how they can best support the organizations they care about.
As their professional advisor, you can help them figure out how to make that happen, while still helping them protect their family.
Insurance Used to Fund a Gift
Funding a gift using an insurance policy can help your client give a much larger gift than would otherwise be possible. For example, a person could give $10,000 a year to a charity for five years for a total gift of $50,000, or he could make those same payments on a $ $325,000 guaranteed universal life policy (1) and greatly increase the impact to the chosen organization. Estate or income tax benefits for the gift may also be realized, an added bonus.
There are several different ways this can be arranged:
1. Name the charity as beneficiary of a policy - Your client may have a policy that he/she purchased years ago, but the situation that necessitated buying that policy no longer exists. The client could simply name their favorite charity, or charities, as a primary or contingent beneficiary of the policy.
Pros: The client maintains control of the policy, and can change their beneficiaries at will. They can also name multiple charities to receive money at their death.
Cons: There's no current income tax benefit on premium payments, however at death the estate will receive a full estate tax charitable deduction.
2. Transfer ownership of an existing policy to the charity - The client could transfer full ownership of the policy to a charity, so the charity becomes the owner and sole beneficiary. The client/donor would continue to make premium payments on the policy, unless of course the policy is paid up at the time of the gift.
Pros: The client gets an income tax deduction when the gift is made based on the value of the policy, as well as on all subsequent premium payments. The client can either pay the premiums directly to the insurance company, or make an annual donation to the charity in the amount of the premium payment so the charity could pay the premium. Your client should consult their tax advisor to help them determine the option that works best for them.
Cons: The gift must be irrevocable in order for the client/donor to get the income tax benefit, so he/she can't change their mind after the gift is made. If your client wanted to cease ongoing support of the charity, he/she could stop making further premium payments, but the charity would have the option to continue the payments and keep the policy in effect.
3. Purchase a new policy in the charity's name - The client could decide to purchase a new policy on their life, but make a charity the owner and beneficiary. The client/donor would make all premium payments.
Pros: They'd get the same income tax benefits discussed earlier related to transferring ownership of an existing policy. A client could also use the required minimum distributions (RMDs) that they're forced to take from their retirement plans, even if they don't need the income, to make premium payments.
Cons: Insurable interest rules apply here, and some states don't recognize a charity as having an insurable interest in a donor. The gift must be irrevocable in order for the donor to receive the income tax benefit.
While the process is generally pretty straight forward, there are some important things to remember when you discuss using insurance to fund a gift with your client.
* If the gift/policy value exceeds $5,000 the donor needs to get an independent appraisal of the policy and file Form 8283 with his/her tax return.
* Some charities don't want insurance policies signed over to them. This gift requires work today for a benefit that could be decades away. Some may actually cash in the insurance policy for the cash value--probably not the original intent of the gift. Other organizations, however, will realize that this is a great way to ensure funding in future years and will welcome this it. To save everyone time, your client should check with the charity they want to support before making them the owner of any new or existing policy.
* As mentioned earlier, some states do not deem charities to have an insurable interest in a donor's life--though that's loosened up somewhat as these types of gifts have become more common. You should check the insurance laws for the applicable state before proposing this to a client.
* Tax laws change frequently, and everyone's situation is different. Make sure your client consults with their tax advisor to ensure that the insurance gift is set up in a way that gives them the best tax advantage.
* Term-life insurance is not appropriate for funding a gift, at least not if making the charity the owner. No charity would be interested in putting the effort into a gift that they most likely will never receive.
Insurance as a Wealth Replacement Strategy
Insurance can also be used as a wealth replacement strategy within your client's charitable estate plan. Your client may have the desire to give a significant gift to their favorite charity or educational institution, but doing so will take away assets that would otherwise go to his/her family. Your client could actually give assets to the charity now, possibly avoiding capital gains taxes on appreciated assets, and take out a life insurance policy for family members to replace the value of the assets given away. It's a strategy that keeps everyone happy, and could help your client realize some great tax savings.
Target Audience
Insurance can be used as part of long-term or estate planning at any age, but the most likely clients to consider using it to enable charitable giving are pre-retired individuals (50 - 64) and those already in retirement (65 - 75). At these stages of life people are generally thinking more about their legacy. If they're charitably inclined, they'll be giving thought to how they can best support the organizations they care about.
As their professional advisor, you can help them figure out how to make that happen, while still helping them protect their family.
