These days, charities are looking for more help than ever. If you’re considering making a gift to a charitable organization — now or any time during the year — you have a variety of options. While you can simply donate money to the charity of your choice, using life insurance as part of your charitable giving plans can add benefits and, if structured properly, provide additional flexibility. Here are a few tips on how you can work with your insurance-licensed financial professional as well as your own qualified tax and legal advisors to consider life insurance as a means for making charitable contributions.
Consider the following:
- Making a qualified charitable distribution — then using the tax savings to purchase life insurance
Last year the SECURE Act took away the ability to stretch an inherited IRA for a beneficiary’s lifetime. However, it extended what’s called a qualified charitable distribution (QCD). If you’re at least 70½, the QCD allows you to donate up to $100,000 per year to a charity, directly from your IRA, possibly without having to claim the withdrawal as income on your taxes.*
If you’re looking to leave a larger charitable legacy, you can use the money you saved in taxes to purchase a permanent life insurance policy to benefit either your loved ones or the charity, or both. Some policies offer a rider, sometimes included or sometimes at an additional cost that allows you to leave an additional benefit to a charity of your choice, on top of the policy’s regular death life insurance benefit to your beneficiaries.
- Leaving your IRA to a charitable remainder trust at death
By leaving your IRA to a charitable remainder trust (CRT), you can effectively stretch your IRA for the lifetime of your beneficiary and provide a substantial benefit to a charity as well. The CRT is required to distribute a percentage of the trust assets (5%-50%) to one or more of your beneficiaries for their life or for a term of up to 20 years. After that time period, the trust terminates and the remainder of the assets pass to a charity.
- Purchasing life insurance with your after-tax IRA distributions and using a charitable donation to lower estate taxes
You may be required to take distributions from your IRA or 401(k) by virtue of your age, even if you don’t need to take the funds. You can provide a legacy to your children or grandchildren by purchasing life insurance and adding them as beneficiaries. At your death, they will receive the benefit, and, if your estate plan also includes donating to a charity, you can potentially reduce or zero out any estate taxes.
- Designating a charity as the beneficiary of your existing life insurance policy
If you have family members who won’t need to rely on an inheritance, you may want to designate a charity as the beneficiary of your life insurance policy. That way, at your death, the charity can receive a substantial benefit.
- A gift of a paid-up life insurance policy to the charity
If you own a life insurance policy you no longer need, you can move it to paid-up status and then gift it to your charity of choice. They can continue to hold the policy and receive the death benefit at some point in the future without any cost to the charity. Or, they’ll be able to surrender the policy or take loans from the cash value, and you’ll receive a tax deduction for the cash value of the policy.
Keep in mind that loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse, so careful planning should be done if the charity wants to explore this approach. If the policy lapses, matures, is surrendered or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values.
- Gifting a policy directly to a charity
You can also donate a policy you’re still paying on to a charity. Your basis in the policy, or the cumulative premiums you’ve paid, will be the value of the gift though future premiums are also considered donations to the charity. For the gift of the policy to an IRC Section 501(c)(3) public charity, your charitable deduction is limited to 60% of adjusted gross income (AGI). For a premium paid in cash in 2020 or 2021 it is up to 100% of AGI. For all cash payments after 2021, the amount reverts to 60% of AGI on cash contributions of premiums to a public charity. For a gift to a private charity the amount is limited to 30% of AGI.
- Creating a philanthropic legacy through a private foundation and life insurance
If you donate to a private foundation, the foundation can purchase a life insurance policy on your life. You pay the premiums to the foundation as a donation, and the foundation uses that money to pay the premium. In the end, they also receive the death benefit.
- If you’re a charity board member, the charity may be able to purchase life insurance in your name to provide funds and protect against loss
Charitable board members can help provide additional funds to their charity by allowing the charity to purchase life insurance on a board member’s life. The board member can then make income tax-deductible monetary gifts to the charity in amounts equal to the annual premiums for the policy. This can help the charity protect itself if the member passes away by providing a substantial death benefit. After all, the board member might have been a key contributor in fundraising, management or might have lent special name recognition to the charity to drive contributions.
Talk to appropriate professionals to figure out your plan
As you can see, there are a lot of ways you can use life insurance to benefit a charity. However, some of these ideas are fairly complex, so you will want to talk with your financial, tax and legal professionals about creating a plan that works for your situation and ensures you fully understand the ramifications of your plan.
Please be advised that this article is not intended as legal or tax advice. Accordingly, any tax information provided herein is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.
This informational and educational content does not offer or constitute, and should not be relied upon as insurance, financial, tax, accounting or legal advice. Your unique needs, goals and circumstances require and deserve the individualized attention of your own financial, tax, accounting and legal and other professionals. Equitable Financial Life Insurance Company and its affiliates do not provide tax, accounting, or legal advice or services.