Flexible Vehicle of Charitable Giving

Donors to your organization have three basic ways to use a Life Insurance policy to benefit “your organization” directly:

  1. Name “your organization” as a beneficiary of the policy
  2. Assign all ownership rights in the policy outright to “your organization”
  3. As a wealth replacement instrument

A gift of almost any kind of property can enable an individual to achieve his or her philanthropic objectives but the nature of life insurance enables donors to make gifts of “startling significance,” and with a remarkable degree of flexibility.

Advantages of Life Insurance Gifts

Why should donors consider life insurance as a method of making a major gift to your organization? Here are some reasons:

  • For the same out of pocket cost, many individuals can make a larger gift through life insurance than through a bequest or lifetime gift, especially individuals of modest means who otherwise could not afford to make a substantial charitable contribution. Further, this charitable contribution can be made on an “installment plan” through life insurance premium payments. With the potential returns now illustrated in many universal life, variable life, and other products, the typical “middle American” can become a true philanthropist via life insurance gifts.
  • A life insurance contribution can enable an individual to benefit your organization without invading capital and depriving his or her family members of estate assets. The gift is created by regular premium installments and can be financed out of current income.
  • A life insurance gift is self-executing, simple to arrange, and assures that the donor’s wishes will be carried out.
  • Because life insurance proceeds payable to the organization are not subject to probate, they avoid (1) the delays and costs of estate settlement, (2) creditor’s claims, (3) will contests by disgruntled heirs, and (4) public scrutiny through probate records.
  • Life insurance assures the size of the gift in advance.  Your organization will receive a guaranteed sum, promptly and in cash, regardless of when the insured dies. If your organization owns the policy, it may surrender the policy for its guaranteed cash value or borrow on the cash value at an attractive interest rate during the insured’s lifetime.
  • Your organization immediately receives dividends that will probably increase annually, access to the policy cash values, and guaranteed growth. Upon the insured’s death, your organization may, if it wishes, take advantage of the insurance company’s investment facilities by leaving the proceeds on deposit with the company under a settlement option.
In all of these matters interested individuals will want to consult with their life insurance agent for specific information as it may relate to their circumstances, current company policy and governing laws.

Designating Your Organization as Beneficiary

Your organization may be designated as the revocable, irrevocable, or contingent beneficiary of a life insurance policy that an individual continues to own. Generally, the donor will not be allowed an income tax charitable deduction for designating your organization as beneficiary, but such designation may have desirable estate tax consequences. From your organization’s standpoint, it has the expectancy of receiving a death benefit at the insured’s passing.

Outright Gift of a Policy

When an individual gives an insurance policy to your organization, the amount of the donor’s contribution is generally the lesser of (1) the cash value of the policy or (2) the donor’s basis in the policy. Such amount will be deductible for income tax purposes, subject to the 50% of the adjusted gross income limitation and the five year carryover of excess contributions. From your organization’s standpoint, the outright gift is highly desirable; it is assured of receiving the proceeds eventually, and it has access to the policy’s cash value and dividends while the insured is alive.

Form of Assignment

A gift of an insurance policy to your organization must be viable to transfer ownership under most state legal requirements. Generally, this means that the donor must have intended to make a gift, must have relinquished control and possession of the policy, and must have delivered the policy to your organization. The surest method of accomplishing this is by an absolute assignment of the policy to your organization, which is a simple matter that does not require any legal documents. It also is important that the ownership of the policy be transferred on the company’s books and an endorsement to that effect be sent to your organization. The issuing company, of course, can provide the appropriate forms.

Replacing Capital Donated to Your Organization

A deterrent for some individuals in carrying out their philanthropic desires is the fear of depriving their family of assets that they might need — or at least resent not receiving, even if they don’t need them! Such individuals pay a price in loss of personal satisfaction and self-esteem, not to mention income tax and estate tax savings.

A planning technique has evolved to address both priorities: family financial security and philanthropic commitment. It’s often called “wealth replacement.” The idea is to find a way to avoid jeopardizing your family’s security while still providing major support to a worthwhile institution such as your organization.

Wealth replacement involves the combined use of a charitable remainder unitrust and a life insurance policy. Although it may sound rather complex, wealth replacement is actually a very effective way to attain family and philanthropic goals, while minimizing income and estate taxes, and, in some cases, capital gains taxes. Here’s how the wealth replacement works:

Mr. and Mrs. Bob Donor had a combined estate of $2,800,000. One of their major assets was stock in XYZ Corporation worth $570,000 that provided very little income but was highly appreciated. Actually the income was $4,275. By transferring this property to a charitable remainder unitrust, the couple can generate a sizeable current income (say 6% or $34,200 a year), avoid an immediate capital gains tax on the appreciation, and receive a large income tax deduction in the year of their gift, $214,399. (The actual deduction is based upon the donor’s age and the income the donor receives.) The appreciated asset is removed from their estate, thus saving taxes.

They can use the tax savings from the charitable deduction and/or part of their increased income to buy $600,000 low-cost survivor life insurance, with a premium of $26,000. The amount will be paid to their children (or to a trust for their benefit) at the death of the donor’s surviving spouse. This two-step arrangement replaces the asset that is donated to your organization, gives the couple a lifetime income, reduces their taxes, benefits their family, and provides a major gift to support your organization.