1. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 1  What is it?  Transfer of cash, or other property to charitable, religious, scientific, educational or other organizations  May result in favorable income, gift, and estate tax consequences for the donor  Life insurance  Used as a direct means of benefiting the charity  Used as a way for the donor to give other assets during lifetime or at death without reducing or denying the financial security of his family  Strategies using life insurance:  Donation of existing policies to charity  Purchase and donation of a new policy to charity  Disposition by will of a policy on another’s life to charity

2. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 2  What is it? (cont'd)  Life insurance (cont’d)  Strategies using life insurance (cont'd)  Contributions of cash, used by the charity to purchase life insurance on the donor  Naming a charity as a revocable or irrevocable beneficiary of one or more life insurance contracts  Contribution of an asset other than life insurance  Generates an income tax deduction to donor  Tax savings gifted to donor’s children  Children use cash to buy life insurance on donor’s life

3. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 3  When is the use of such a device indicated?  To benefit charities for reasons other than tax savings  To generate tax savings and create more income and capital at the same time a charity is benefited  When the client does not mind incurring some expense to accomplish the goals mentioned above  What are the requirements?  Gift must be made to a “qualified” charity  Organization operated exclusively for religious, scientific, educational or literary purposes  No earnings may benefit private shareholders  No disqualification of organization’s tax exemption for political backing of candidate seeking office

4. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 4  How it is done – an example  Strategies  Charity named as recipient of dividends, which when paid, generate an income tax deduction for the client  Client names charity beneficiary of a new policy, which is paid for from the dividends on an existing policy  Charity named as contingent beneficiary of a life insurance policy. Should the primary beneficiary predecease the client, the charity will receive the proceeds.  Charity named as beneficiary of a currently owned or newly acquired policy  No current income tax deduction  Federal estate tax deduction for the full amount of the proceeds  Absolute assignment of a currently owned policy

5. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 5  How it is done – an example (cont'd)  Strategies (cont'd)  Naming the charity as the revocable beneficiary of the clients group term insurance  Client avoids income tax on the economic benefit  Property can be donated to charity and the life insurance used to replace the wealth that otherwise might have been received by the children  Tax implications  Current income tax deduction for transfer of a cash value life insurance policy  Limitations:  Maximum deduction limited by a percentage of donor’s adjusted gross income  Gift must be total and absolute

6. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 6  Tax implications (cont'd)  Gifts of partial interest deductible only if:  Remainder interest in a qualified charitable remainder unitrust or annuity trust  Remainder interest in a pooled income trust  Charitable gift annuity  Remainder interest in a personal residence trust  Qualified conservative easement  Undivided portion of the taxpayers entire interest in property  Guaranteed annuity interest or unitrust interest in a charitable lead trust

7. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 7  Tax implications (cont'd)  Merely naming charity as beneficiary will not result in an income tax deduction  Charity must be given entire interest in the policy  When all incidents of ownership are transferred to the charity  Transfer treated as a gift of “ordinary income” property  Donor must reduce his contribution amount by the gain he would have realized had he cashed it the policy or sold it  Deduction equal to the lower of:  Fair market value of the policy  Donor’s cost basis

8. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 8  Tax implications (cont'd)  Premiums generally deductible on policies contributed to or owned by a charity  Premiums paid in cash directly to charity  Up to 50% of the taxpayer’s adjusted gross income  Premiums paid directly to the insurer  Up to 30% of the taxpayer’s adjusted gross income  No federal gift taxes on gifts of life insurance to charities  Exception:  Gifts of less than entire interest in policy  Split-dollar policies  Where charity has no insurable interest in the insured’s life  If client holds any incidents of ownership in the policy at death  Proceeds are in the insured’s estate and subject to the federal estate tax

9. Charitable Uses of Life Insurance Chapter 28 Tools & Techniques of Life Insurance Planning 28 - 9  Tax implications (cont'd)  If client assigns all incidents of ownership in a life insurance contract to a charity  If client survives three years, then policy proceeds excludible from donor’s estate  No tax paid by charity upon receipt of either a lifetime gift or a bequest of a policy at death  Premium payments by a charity on a policy it owns and is the beneficiary of will not generate a gift tax to the original donor of the policy  Income earned by a charity on assets it owns generally will not be subject to income tax  However policy loans financing the purchase of income producing investments may be considered unrelated business taxable income and result in a tax to the otherwise tax- exempt charity