Noted British novelist Henry Fielding is credited with saying, “A rich man without charity is a rogue; and perhaps it would be no difficult matter to prove that he is also a fool.”  This quote is not only a strong call to action regarding philanthropic giving, it also highlights both the moral and practical reasons to give.  

Engaging in charitable activities not only supports organizations in achieving their missions but also brings a sense of fulfillment to the donor.  Additionally, there are several practical benefits, such as tax advantages, associated with charitable giving. 

For those looking to maximize the impact of their giving, both in terms of its impact for the recipient and for their personal planning, there is a secret weapon that can help.  Life insurance!  That’s right, life insurance offers a unique and impactful way to support charitable causes.  Let us explain.

The Benefits of Using Life Insurance for Charitable Giving

Donors who choose to use life insurance to meet their philanthropic goals can enjoy several advantages:

• Charitable income tax deductions: Donations may be eligible for deductions on the donor's income tax.
• Gift and estate tax savings: Properly structured donations can reduce potential gift and estate taxes.
• Income stream retention: Donors might retain an income stream from the policy for life or a specified period.
• Capital gains tax avoidance: Donors may avoid capital gains tax on highly appreciated assets.
• Asset replacement: Life insurance can replace the value of assets given to charity.

Donors typically make charitable contributions through life insurance in two primary ways: direct gifts and indirect gifts.

Direct Gifts of Life Insurance

Direct gifts involve transferring ownership or beneficiary designations of life insurance policies to charitable organizations. Here are the key methods:

Transfer an Existing Life Insurance Policy

Donating an existing life insurance policy can offer substantial benefits. Donors may be able to claim an income tax deduction based on the policy's cost basis or fair market value, whichever is lower. This approach is often used by families who transfer policies to foundations they have established, reducing the risk of self-dealing conflicts.

Name a Philanthropic Organization as Beneficiary

By naming a charitable organization as the beneficiary of a life insurance policy, the donor can support the charity upon their death. However, since the donor retains ownership rights, no income tax deduction is available. The life insurance proceeds will be included in the donor’s taxable estate, but an estate tax deduction for the full value of the proceeds given to charity is typically allowed.

Charity-Owned Life Insurance

Donors can also make cash gifts equivalent to the premium amounts on new or existing life insurance policies owned by a charitable organization. These cash gifts qualify for income tax deductions, just like any other cash donation.

Indirect Gifts of Life Insurance

Indirect gifts usually involve charitable trusts, which are split-interest trusts that offer benefits to both the donor (or their family) and the charity.

Charitable Remainder Trust (CRT)

A CRT is an irrevocable trust that provides an income stream to the donor or their designated beneficiaries for a specified period, after which the remaining assets are transferred to a charity. 

CRTs can be structured in two ways:

• Charitable Remainder Unitrust (CRUT): Pays a fixed percentage based on the annual value of the trust assets.
• Charitable Remainder Annuity Trust (CRAT): Pays a fixed dollar amount annually based on the initial value of the trust assets.

Donors benefit from CRTs by receiving an income tax deduction for the remainder value expected to pass to the charity.

Charitable Lead Trust (CLT)

Conversely, a CLT provides an income stream to the charity for a specified term, after which the remaining assets revert to the donor or their designated beneficiaries. 

CLTs can also be structured as:

• Charitable Lead Unitrust (CLUT): The charity receives a fixed percentage of the trust's annual value.
• Charitable Lead Annuity Trust (CLAT): The charity receives a fixed dollar amount annually based on the trust’s initial value.

Unlike CRTs, CLTs are not tax-exempt, and income is either taxed at the trust level or to the donor, who must establish a Grantor CLT to receive an income tax deduction.

Donor Advised Fund

One popular non-trust option in the indirect gift category is a Donor Advised Fund (DAF).  A DAF is a charitable investment account sponsored by a 501(c)(3) organization and funded by a donor and is established for the sole purpose of supporting charities.  A donor may contribute cash, securities, or other assets to the DAF and retains certain control over how the funds may be distributed.

Recently, we have seen a number of clients who have gifted cash to the DAF.  The DAF then uses this cash to purchase a second-to-die life insurance policy on the donor and their spouse.  The donor received a tax deduction for the amount of cash donated and the DAF is able to use the proceeds from the life insurance policy to fund charitable work. 

Planning Your Charitable Giving with Stavis Wealth Transfer Solutions

Life insurance can be a dynamic tool for fulfilling philanthropic objectives. It allows for significant contributions to charitable causes while offering potential tax benefits to the donor and their family. At Stavis Wealth Transfer Solutions, we help clients navigate their charitable giving options, ensuring that their philanthropic goals align with their overall financial plans. 

By integrating life insurance into your charitable planning, you can create a lasting impact on your community while optimizing your financial benefits.