ENCOURAGING GIFTS OF LIFE INSURANCE: A Gift with Lots of "Leverage"

If you are at all like me, the words "life insurance" cause your eyes to glaze over and a drowsy feeling to come over you (apologies to my life insurance friends). While it may not be the most exciting topic for many of us, using a life insurance policy to fund a charitable gift can have some pretty exciting results. Let's look at how encouraging these gifts can really pay off for your charity.

One of the main purposes of whole life insurance is to protect a family during the early years. In case of the premature death of the primary breadwinner, life insurance provides a cushion for the spouse and young children. It allows them to continue their present living conditions, educate the children, and may provide additional financial benefits. As years go by and the children grow up and financial conditions change, families often end up with a paid up whole life policy. It provided great protection during the early years but is no longer needed as the children leave home and parents accumulate other savings and retirement accounts. The purpose for purchasing the policy is no longer valid.

When the policy is purchased originally, either the spouse or the children are named as beneficiaries; the insured is usually the owner of the policy. The value of the policy, either face value or cash value represents years of payment of relatively small premiums. Like a savings account that is added to regularly over a long period of time, you hardly notice the small payments, and after many years the value of that small "investment" is now a significant amount of money. These "paid-up" policies represent a very attractive charitable gift alternative.

Every nonprofit, regardless of size or fundraising sophistication should encourage these gifts of life insurance when talking with donors about gift alternatives. The easiest way for a donor to make an insurance gift is simply to include the charity as a full or partial beneficiary of the proceeds of the policy. This requires a simple change to the beneficiary designation form, which can be obtained from the insurance company issuing the policy. Although the donor would receive no current income tax deduction for this type of gift, the estate would receive an estate tax deduction.

Another easy way for a donor to give an insurance policy and at the same time receive a current income tax deduction would be to give the policy outright to the charity. The donor would make the charity the owner and beneficiary of the policy by completing forms available from the insurance company. Some of the benefits for the donor would include:

• An income tax deduction in the year of the gift equal to the "replacement value" of the policy. The deduction is limited to 50% of adjusted gross income of the donor, but any excess deduction that cannot be used in the first year may be carried forward up to 5 additional years.
• The ability to give a major gift to the charity of his/her choice with no current "out-of-pocket" costs.
• Removal of the value of the policy from the donor's estate assets, which could result in lower estate taxes. If the donor should die within 3 years of giving the policy to the charity, it would be included in the estate but would usually qualify as an estate tax deduction.

In order for a donor to qualify for these tax benefits, he/she must irrevocably transfer all incidents of ownership of the policy to the charity. The donor gives up the right to:

• Change beneficiaries
• Surrender or cancel the policy
• Assign the policy, or revoke an assignment
• Pledge the policy as collateral for a loan
• Borrow against the cash surrender value of the policy

If the value of the insurance policy exceeds $5000, the donor must also get a qualified appraisal of the value of the policy because life insurance is considered "property." As stated before, the value is generally the replacement cost of the property unless that amount exceeds the donor's tax basis in the policy. In that case, the donor's basis would be considered to be the value. The insurance company issuing the policy can provide the donor with the proper written valuation. It is important to remember that with this type of gift, the donor must file a Form 8283 stating the value of the gift and the charity must sign the document.

There are many other ways an insurance policy may be used as a charitable gift vehicle, some more complicated than others. The two methods mentioned in this article are appropriate and easy for most charities to include in their major gift fundraising promotions. Tell potential donors how the gift of an insurance policy can create an endowment, provide funds for important new programs, or expand your mission. It only take one life insurance gift of $50,000 - $100,000 to give your organization a major boost!

If you have questions about life insurance charity gifts, please contact me. I would be happy to discuss how your organization might promote these gifts.

Mary Downey
(210) 545-0303
(210) 391-6830 mobile