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Life Insurance

Sometimes donors may reach a point where life insurance no longer has the financial significance for their family that it once did. In that case, donors may wish to make a gift of the policy to the Foundation.

There are two ways to do this. Depending upon state law, donors may make the Foundation the owner of the policy. This allows the donor an immediate income tax deduction equal to their tax basis in the policy (usually the total of the premiums they have paid). If they continue to pay the premiums on such policies, they will be entitled to a charitable contribution deduction for the premium payments up to 30 percent of their adjusted gross income. Or they may wish to contribute the amount of the premiums to the Foundation. The Foundation, in turn, could pay the premiums. As long as the Foundation is not under any obligation to pay the premiums, the donor will be entitled to a charitable contribution deduction for the premium amounts up to 50 percent of their adjusted gross income.

Donors also may name the Foundation as the beneficiary of their policy. Because the designation is not irrevocable, it cannot be counted for any immediate income tax savings. However, at the donor's death, their executor may take a federal estate tax charitable deduction for the entire amount.

Example: Years ago, Mrs. Carpenter named her daughter the beneficiary of a $40,000.00 whole life policy. Now, she wishes to donate the policy to the Foundation. The present value of the gift (policy) is $20,000.00, she has paid $18,000.00 over the years in premiums, and the annual premiums are $1,600.00. Having assigned the policy to the Foundation, Mrs. Carpenter is entitled to take a charitable contribution deduction of $18,000.00. Because she continues to make the premium payments, she may also deduct the $1,600.00 each year. In addition, the $40,000.00 of insurance proceeds the Foundation receives will not be taxed in Mrs. Carpenter's estate at her death.

Life insurance interacts well with other gift mechanisms. For instance, donors can use all or part of their Charitable Remainder Trust or Annuity Income to establish an irrevocable life insurance trust. The trust can purchase insurance on the donor's life - perhaps in an amount equal to the charitable gift - and the donor can name family members as beneficiaries. This way, donors can make a charitable gift and replace the assets with life insurance for the benefit of their loved ones.

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