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Gifting Life Insurance to Ensure Local Legacy

Lee M. Gatta, CLU®, ChFC®, AEP® is a board member of the Community Foundation and financial advisor who offers financial planning, insurance, and investment advisory services.

Lee M. Gatta, CLU®, ChFC®, AEP® is a board member of the Community Foundation and financial advisor who offers financial planning, insurance, and investment advisory services. In the article below, Lee provides some guidance and personal insight on using life insurance as a vehicle for charitable giving. Thanks, Lee!

As an advisor, I help my clients plan for and navigate some of the most important and transitional stages of life. Along the way, I learn about what matters most to them – family, friends, pets, school, career, community. At its core, financial planning is about balancing current needs and priorities with future goals. It is not uncommon to hear from charitably inclined clients who wish they could do more to give back but feel constrained by life’s pressing demands.

A few years ago, my husband Joe and I found ourselves in a similar situation. We wanted to find a way to pay forward the support we have always felt from this community. Since we had our sights set on a charitable gift much larger than we were comfortable contributing at the time, we decided to use a life insurance policy to help achieve our goal. When I pass away, the policy will seed a fund at the Community Foundation, which will provide continued support in Central New York for issues that are of primary importance to us.

Life insurance is one of the most straightforward ways to leave a charitable legacy. This can be as simple as completing a beneficiary designation form to name a favorite charity or charities. But many clients don’t realize that they can also gift ownership of a new or existing life insurance policy to extend and increase their charitable impact.

In my case, my husband and I chose a policy with terms that fit with our goals, and the Community Foundation agreed to own and be the beneficiary of the policy. Though the Community Foundation owns the policy, we are eligible to receive a tax deduction for our donation to them of the annual premium payments. The flexibility of life insurance – including premium amount, frequency of payments and face amount – allows this option to be tailored to each client’s unique situation.

GIFTING A LIFE INSURANCE POLICY (RATHER THAN PROCEEDS) MAY BE A GOOD FIT FOR YOUR CLIENT IF THEY:

  • No longer have the need that originally led to a policy’s purchase (e.g., house is paid off, kids are out of college, retirement is funded, etc.)
  • Have adequate discretionary income to pay any ongoing premiums
  • Want to give more to charity than they might be able to with current assets
  • Would benefit from a current tax deduction by donating an existing policy outright rather than just making a beneficiary change

Additionally, in view of the recent SECURE Act provisions for payments to non-spouse IRA and qualified plan beneficiaries, life insurance makes sense as an asset replacement tool for those who wish to benefit charity and heirs. In this case, clients could leave their IRA or retirement account assets to their favorite charity(ies) and replace these taxable assets with tax-free assets to their heirs by purchasing a new life insurance policy to provide an inheritance.

IF LIFE INSURANCE IS A GOOD GIFTING OPTION, THERE ARE TWO TYPES OF POLICY OWNERSHIP GIFTS:

  1. With an existing policy, the ownership and beneficiary could both be changed to the Community Foundation or the client’s preferred charity. This would make the policy an irrevocable gift. This may result in an income tax deduction for the value of the policy. If the policy has more than $5,000 of value, an appraisal is required for the gift. If premiums are still required for the policy, the client could continue paying the premiums as gifts to charity each year. The charity could then pay the premium due. This would result in a possible tax deduction each year for the client.
  2. An insurable client could apply for a new policy that is originally owned by the Community Foundation or the client’s preferred charity. Similarly, the premium payments would be made by the client to the charity and would count as a charitable gift with a possible tax deduction. Even though required minimum distributions (RMDs) have been waived for 2020 under the CARES Act, clients may also direct unneeded distributions from IRAs and other qualified plans to make life insurance premium payments on new policies.

The Community Foundation works well for gifts of life insurance for a number of reasons. They have systems in place and experience to help clients with the application process, appraisals, interfacing with life insurance companies, following up on premiums due, and tracking policy provisions that may change over time. The proceeds can be used to create or supplement an endowment fund that supports a variety of charitable interests and goals over time. Based on my experience working with the Community Foundation as both a donor and professional advisor, I feel confident knowing that charitable stewardship and long-term local impact are at the core of its mission. By donating life insurance now, clients can create a legacy plan that will direct enduring support to their most cherished causes and charities long after they are gone.

Due to recent laws that have changed charitable deductions (e.g., Tax Cuts and Jobs Act and CARES Act) and beneficiary planning (e.g., SECURE Act), now is a perfect time to review your client’s charitable plans and to work with their other advisors and the Community Foundation to make sure any needed changes are implemented.

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