Leave a Legacy with Charitable Contributions
For millions of Americans, “charity begins at home.” Many have decided to make a difference by donating money to local religious, educational, social, or cultural organizations. In addition to the immense satisfaction that comes from giving to others, charitable giving can provide tax benefits for the donor and his or her heirs when done as part of an overall estate plan.
Charitable Gifts of Life Insurance
Gifts of life insurance have unique advantages, such as the following:
Gifts of life insurance can be made in essentially two ways. Under the first, the insured is the owner of the policy, and the charity is the beneficiary. This arrangement is used when an insured/donor desires to retain control over the insurance policy. Under this arrangement, premium premiums are not income tax deductible to the donor. Additionally, since the insured owns the policy at death, the death benefit will be included in his or her estate for tax purposes, but it will be 100% deductible, since it is payable to a charity.
Under the second, the charity is owner and beneficiary. Unlike the situation where the insured retains ownership, the premiums are considered a charitable gift and may be income tax deductible to the donor within Internal Revenue Service (IRS) guidelines.
If the donor gives an existing policy to charity, the fair market value of the policy (generally, its full cash value) is allowable as an income tax deduction. The tax consequences of future premium payments for the gifted policy would be the same as described above, where the charity is both owner and beneficiary.
Charitable Remainder Trusts
If the prospective charitable donor is seeking a way to increase income, reduce estate and income taxes, avoid taxes on gains, and make a significant charitable contribution without reducing his or her family’s inheritance, a charitable remainder trust (CRT) and a wealth replacement trust may be appropriate. A CRT can allow an individual to make a gift to a charity while retaining a current income interest in the gifted asset during his or her lifetime.
As a general rule, it may be best to fund a CRT with an asset that, if sold outside the trust, would produce substantial long-term capital gains tax. After the trust is executed, the donor may transfer this appreciated, low or non-income-producing asset to the CRT. The CRT can then sell the asset and provide the donor an income for life, for a term of years, or for joint lives. Upon the death of the donor or the donor’s named non-charitable income beneficiary, the remaining trust assets will pass to the charity. Here are some of the benefits of using this strategy:
After the donor’s death, the remaining assets in the trust pass to the charity. The assets do not pass to the donor’s heirs. However, the tax savings produced by the charitable donation and the income generated by the trust can be used to pay premiums on a life insurance policy owned by an irrevocable life insurance trust (ILIT)—sometimes known as a “wealth replacement” trust. The life insurance policy in this trust replaces the value of the assets that pass to the charity in the CRT. Since the life insurance is purchased and owned by the irrevocable trust, the proceeds are free of income tax, as well as estate tax.
There are a variety of charitable giving tools and techniques that can provide generous donors with certain tax benefits. For specific guidance, consult your qualified tax and legal professionals.
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