Life Insurance As a Charitable Planning Tool
There are many reasons you might want to leave money to a charity, and using life insurance is one of the easiest and most common methods of achieving this goal. If structured properly, a life insurance policy can result in current and future tax advantages for both you and the charity of your choice. There are different tactics you can use to donate life insurance proceeds to a charity, and each one has its own pros and cons that must be considered.
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Naming a Charity as Beneficiary
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The most common method of donating to charity through the use of life insurance is listing the organization as the primary or contingent beneficiary. You retain ownership and control of the policy and continue to make normal scheduled premium payments. If you have listed the charity as the primary beneficiary, the policy proceeds will be distributed to the organization upon your death.
If the charity is the contingent beneficiary, the death benefit will be distributed to your heirs, or the listed primary beneficiary, unless that individual or organization is unwilling or unable to receive the benefits, as in the case of a spouse who predeceased you.
Irrevocable Gift
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You can donate your life insurance policy to charity by making a gift of the policy. In this situation, all ownership rights, control over, and financial decisions regarding the policy are transferred to the charity. Future scheduled premium payments remain your responsibility, but access to any accumulated cash values and dividends are entirely at the discretion of the charity, with no further involvement from you. Once your policy is gifted to the charity, you cannot change your mind or take back control of the policy for any reason.
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Income Taxes
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If you choose to name a charity as the beneficiary of your life insurance policy, you still retain ownership of the policy and maintain the ability to change the listed beneficiary at any time. For this reason, there is no guarantee that you will donate the proceeds to the non-profit, so your premium payments are not tax-deductible.
When you die, if the charity is still the receiving beneficiary, the proceeds of the policy will be transferred first to your estate, then to the charity, with "an offsetting estate tax charitable deduction for the amount of proceeds that pass to the charity," according to the Advanced Strategies Group.
On the other hand, the Planned Giving Design Center explains that if you choose to make a gift of the policy and transfer ownership to the charity, "the gift will generate a charitable income tax deduction" if any value exists at the time the policy was gifted, and "each payment produces a charitable income tax deduction."
Donating Dividends
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If your goal is to provide current income to the charity, you can use your existing whole life policy for this purpose. Traditional whole life insurance policies generate dividends that are credited to your policy's cash value by default. However, the insurance company can send those dividends to you or to the charity of your choice, in the form of a check. You, your heirs and the charity will all benefit from this arrangement. You maintain control over the policy, your heirs will receive the death benefit when you pass away, the charity receives regular and continuing donations, and the dividend payments are tax-deductible as charitable donations.
Charitable Remainder Trust
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Through the use of life insurance within a charitable remainder trust, or CRT, you can provide income to your spouse or other heirs while still leaving the potential for a charitable donation. By arranging your estate plan to include a CRT, then placing your life insurance within that trust, your beneficiaries will receive income based on the provisions of the trust. "At the death of the last income beneficiary, the remainder goes to charity," the Planned Giving Design Center explains.
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