Gifting life insurance

By Steve Savant

Before addressing the policies issues, review the donor’s intent to give. Some people insist on their gifts being used right away to help with operating budgets. Charities prefer that as well unless they are far sighted and have their budgets under control.

Other donors like the idea of leaving an endowment fund that distributes grants to charities annually from its earnings to their charities. And some like both strategies.

Studies show that people who make endowments then have a vested interest in seeing the charity succeed and continue on. This frequently results in the endowment donor increasing their operating budget gifting, instead of cutting back as charities tend to fear.

One way to set up an endowment is to gift life insurance to a foundation account that supports a specific charity. Typically 5 percent of the invested accounts are distributed annually as grants to charities. If the account is managed to grow, even in the face of these distributions, then grants increase over time as well.

For example, if the account earns 8 percent in a diversified portfolio of stocks and bonds and pays only 5 percent per year, then that leaves a 3 percent growth rate. Some foundations allow investment advisors to manage the endowment funds as long as the donors or their heirs continue to want them to do that for them.

When you have a gift of a new life policy it is best to give cash to the charity and have them buy the policy. Make sure the state they are in allows a charity to have an insurable interest in the donor or the insurance company may refuse to issue one. Cash gifts have the added advantage of requiring no appraisal of the gift.

There are hundreds of thousands of life insurance policies sitting in drawers neglected. People keep paying premiums on them long after the original reason for owning them are gone. In many cases they have substantial cash values. And in many cases rolling the money to new contracts could yield better results.

You may find you have clients that no longer need their life policies sitting in a drawer. One opportunity for them to consider is to give the policy to a charity. They will get a deduction equal to the fair market value of the contract if they do. Or, if they are insurable you may be able to do a tax-free 1035 exchange into a new policy that works better for gifting.

For example, moving the cash from an old policy into a new one with a guaranteed UL policy may provide a lot more insurance or allow the premium to be fully paid up. Or, if the client wants to keep paying the premium to the charity as a cash gift after the policy is gifted they would get an annual deduction for that cash contribution. The charity can then keep the policy in force until the donor dies and creates an endowment for the charity.

Life insurance policies are not cash gifts and as such may be subject to requiring an appraisal to be deductible. The deduction from the gift could be used to fund an SUL for the kids if the client is interested in replacing the gift for the benefit of the kids. There are the basics.