Opportunities to Maximize Your Charitable Gift - Part 4

Marshall Rathmell |


As the holiday season approaches, many people begin to think about giving and helping others.  We typically get questions as to how to most effectively and advantageously give donations and charitable gifts.  Marshall has written a series of short stories that help describe how donors of all types and ages can maximize their benefits while benefiting others. 


An elderly individual approached me wanting to understand the ins and outs of donating a life insurance policy.  The individual was being asked to be an example to others by having a charity name her after a contribution.  Through careful planning, she had substantially whittled down her assets to only provide what she needed to survive.  She lived comfortably with a pension, social security and a modest investment account for emergencies but had no current assets to donate.  What she did have was a very old life insurance policy which was maintaining itself with the dividends from the underlying cash value.  She no longer needed the life insurance because it was purchased to provide her family with income if she had died during her working years.


Fortunately, she had several options. The simplest way to use life insurance to give to a charity is to name a charity to receive the benefits of your life insurance policy. As the owner of the policy, she can simply designate the charity as beneficiary. Designating the charity as beneficiary allows her to make a larger gift than she can otherwise afford. If the policy is a form of cash value life insurance, she still has access to the cash value of the policy during her lifetime. However, this type of charitable gift does not provide many of the income tax benefits of charitable giving, because she retains control of the policy during her life. When she dies, the proceeds are included in her gross estate, although the full amount of the proceeds payable to the charity can be deducted from her gross estate.


Another simple way of making a charitable gift is to assign to the charity policy dividends from cash values (term life insurance cannot be used). She owns the policy and her heirs (the designated beneficiaries) receive the proceeds at her death.


An alternative is to donate the existing life insurance policy to charity. To do this, she must assign all rights in the policy to the charity. She must also deliver the policy itself to the charity. By doing this, she gives up all control of the life insurance policy forever. This strategy provides the full tax advantages of charitable giving because the transfer of ownership is irrevocable. She may be able to take an income tax deduction equal to the lesser of your adjusted cost basis or FMV. The policy is not included in her gross estate when she dies, unless she dies within three years of the transfer. In this case, your estate would get an offsetting charitable deduction.


If she didn’t own a policy a creative way to use life insurance to donate to a charity is simply for the charity to insure her. To use this strategy, she would allow the charity to purchase an insurance policy on her life. She would make annual tax-deductible gifts to the charity in an amount equal to the premium, and the charity would pay the premium to the insurance company.

-Marshall Rathmell-


Click here to see Part 3

Click here to see Part 2

Click here to see Part 1 


*Some of the material above was prepared by Broadridge Investor Communication Solutions, Inc.

**Before gifting a life insurance policy, changing the name of a beneficiary or any other charitable strategies consult with a competent tax and/or legal professional to understand the effects on your specific situation