Legacy Planning: Donate a Life Insurance Policy Instead of Writing a Check

Did you know you can leave a lasting legacy for your favorite charity without writing a check? The donation of a life insurance policy can benefit both you and your charity. Just a small contribution can have a big payoff later.

How can you use life insurance as a wealth replacement strategy? People who have taxable estates may wish to maximize assets passing to individual beneficiaries when they die, reduce estate taxes at death, receive current income tax benefits, and make a significant gift to charity. An excellent way to meet these desires is by using a wealth replacement strategy that combines a charitable remainder trust and the gift of a life insurance policy.

You have three fundamental options to consider: designate the charity as the beneficiary, or give an existing or new policy to the charity.

• You can write the charity into your will as a beneficiary of the policy. You retain ownership; you will have the ability to leave only part of the policy to charity and to change the beneficiary.
• Transfer the ownership of an existing policy. The charity may liquidate it for operational funds, or invest the funds with a goal of a higher return than what a policy may grow to at your passing. It could do both.
• You can buy a new policy with the idea of passing on the benefits to the charity. It is possible to buy a policy for that purpose and finance it so you can retain assets and still make cash donations to the charity or charities of your choice. In today’s low interest rate market, there is no better time than the present to buy a new policy.

Before you begin, be certain the organization you want to support has a non-profit status known by the tax code as a 501(c)(3). Ask to see the certification and confirm it will accept life insurance as a gift.

Charities prefer cash value life insurance policies. You will have to name the charity, both the owner and beneficiary, to take an income tax deduction. The IRS won’t let you deduct the cash value of the policy from your income taxes if you simply name the charity as a beneficiary.

When considering life insurance policies for charitable giving, there is nothing that requires you to name only one charity. Several can be designated for a portion of the funds. Such a designation can be changed during the course of your life.

Finally, consider a wealth replacement strategy that allows you to receive income tax benefits while maximizing assets passed to beneficiaries, your estate, and charities.

Creating a charitable remainder trust allows you to receive income until you die — and your assets are passed to a charity or charities. You receive an income tax deduction upon its creation. Passing a policy to charity can reduce estate taxes by up to 40 percent. This savings can be used to purchase a life insurance policy owned by an irrevocable life insurance trust that benefits your children or other non-charitable beneficiaries upon your passing.

There are many nuances regarding insurance policy donations. Before acting, consult an experienced insurance broker who is an expert in explaining your options to you.

Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.