Charitable giving through life insurance has often been used in combination with estate planning. However, you do not have to have a large estate to make a significant contribution to a 501(c)(3). Relatively small premiums paid into a life insurance policy can produce substantial gifts to charities. Though you can name a charity beneficiary on a term life insurance or permanent life insurance policy, to ensure that the policy will be in force at the time of your death you should use a universal life or whole life insurance plan.
- 501(c)(3) DEFINITION:
The Internal Revenue Service (IRS) defines 501(c)(3) as: ‘Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals are eligible to file Form 1023 to obtain recognition of exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code.’ It states that they include churches, hospitals, qualified medical research organizations, schools, colleges, universities, and organizations that receive substantial support from grants, governmental units, and public gifts.
There are numerous rewards to giving to charity through life insurance. According to a Harvard Business School paper, Feeling Good about Giving (2009), ‘…helping others increases well-being… Additionally, some experimental work hints at a causal relationship between giving and happiness… our own recent research suggests that altruistic (unselfish charitable) financial behavior, such as gift giving and charitable donations, may promote happiness.’ Other benefits include contributing to the ongoing status of the donee organization; creating or continuing a family legacy; and tax deductions.
INCOME TAX DEDUCTIONS:
According to IRS Topic 506 – Charitable Contributions, ‘Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A. To be deductible, charitable contributions must be made to qualified organizations… For a contribution of cash… or other monetary gift, you must maintain as a record of the contribution a bank record or a written communication from the qualified organization… You must fill out Form 8283 …if your deduction for a noncash contribution is more than $500…” In order to receive the tax benefit of your charitable contribution, your total Schedule A ‘itemized deductions (including certain medical expenses, taxes paid, interest paid, gifts to charity, and unreimbursed employee expenses)’ must exceed your ‘standard deduction (2011: single – $ 5,800; married filing jointly – $ 11,600).’
ESTATE TAX DEDUCTIONS:
The applicable exclusion for Gift and Estate Tax for 2012 is $ 5,120,000 (applicable credit = $ 1,772,800) per individual or $ 10,240,000 per married couple. However, unless Congress acts otherwise, in 2013, the gift and estate tax exemptions are scheduled to revert to $ 1,000,000 per person. If your estate is worth more than $ 1,000,000 and you are concerned about how federal estate taxes, probate cost, state inheritance taxes (if you are thinking of moving, note many states do not have inheritance taxes), and other cost may erode your property which would otherwise flow to your beneficiaries and heirs, then you should consider estate planning. You should research or ask your accountant, lawyer, and or financial planner about using: Charitable Remainder Trust; Charitable Annuity Trust; and Charitable Giving Life Insurance through Irrevocable Life Insurance Trust, Charitable Giving Life Insurance Riders, Survivorship Life Insurance, Universal Life Insurance, or a Whole Life Insurance policy.
The fact that you read this article shows that you not only care about being a good steward over your property, but that you think about how you could benefit others by planning ahead. For more information see the article: Estate Planning and Conservation.