Leaving A Tax Free Legacy


Tax Free

Regardless of your reason for giving, a gift of a tax-free life insurance policy can represent a substantial future gift to a favorite charity at relatively little cost to you.  You can:

Make a Charity the Beneficiary of an Existing Policy:  If you have a life insurance policy you no longer need, you can name the charity as the beneficiary meaning that the charity will receive the policy’s death benefit, tax-free, after you pass away.  While there are no current tax benefits to this approach the value of the policy will be removed from your estate for federal estate tax purposes.

Make a Charity the Owner and Beneficiary of an Existing Policy:  Instead of simply naming the charity as beneficiary of an existing life insurance policy, you transfer full ownership of the policy to the charity.  The charity will then receive the policy death benefit, tax-free, after you pass away.  In addition to removing the value of the policy from your estate for federal income tax deductions.

Help a Charity Purchase a New Insurance Policy on Your Life:  If you wish to make a substantial future gift to a charity at a relatively low cost to you, another alternative is to consider purchasing a new life insurance policy and name the charity as a policy owner and beneficiary.  You then arrange to pay the premiums through gifts to the charity.  This approach provides federal income tax deductions and the policy proceeds are not included in your estate for federal tax purposes.

Important Note:  Most states through their “insurable interest” laws allow a charity to be the owner and/or beneficiary of an insurance policy on a donor’s life.  Since state laws do vary, however, it is important to consult with a professional advisor before making a gift of life insurance to a charity.  Please contact my office if we can be of assistance.

While most anything can be given to charity, these are the more common forms of donated property:

Cash:  Cash gifts are the easiest to give to a charity, both in terms of substantiating the deduction and in determining the value of the gift.

Real Estate:  Real estate that is owned outright and which has appreciated in value can be given to a charity.  The donor can generally deduct the fair market value of the property, up to an adjusted gross income (AGI) percentage limitation.  When a charity sells donated appreciated property, the capital gain then escapes taxation, up to AGI percentage limits.

Securities:  The best securities to donate tend to be those that have increased substantially in value.  As with real estate, the donor can generally deduct the fair market value of the security and the capital gain escapes taxation when the security is sold by the charity.

Charitable Gift Tax Implications:

  • Gifts of cash and ordinary income property are generally deductible up to 50% of the donor’s adjusted gross income (AGI).
  • The fair market value of gifts of long-term capital gains property (e.g., real estate, stock) is deductible up to 30% of AGI. There is, however, a special election through which a donor may deduct up to 50% of AGI if the donor values the property at the lesser of fair market value or adjusted cost basis.
  • Charitable contributions in excess of the percentage limitations can be carried over and deducted for up to five succeeding years.
  • The donor must itemize income tax deductions in order to claim a charitable deduction. A portion of itemized deductions is phased out for taxpayers with an AGI above certain limits.

Life Insurance:  If a charitable organization is made the owner and beneficiary of an existing life insurance policy, the donor can deduct the value of the policy as of the date of the transfer of ownership.  The donor may then deduct all future amounts given to the charity to pay the premiums.  If a charity is named just the beneficiary of an insurance policy on the donor’s life, no current income tax deduction is available.  At the donor’s death, however, the donor’s estate receives an estate tax charitable deduction for the full amount of the policy death benefit.

Please give my office a call if you’d like more information on tax-free charitable giving.  Book your Free Consultation Now!

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