Charities are looking for more help today than ever before. If you are planning to donate to charity now or at any time of the year, you have various options. While you can simply donate money to a charity of your choice, using life insurance as part of giving plans can provide benefits and, when properly structured, can provide additional flexibility. Here are some valuable tips on how to work with your licensed insurance professionals, as well as qualified legal and tax advisors, to consider life insurance as a way to make charitable donations.
Consider the following:
Make a qualifying charitable distribution, then use the tax savings to purchase life insurance.
The SECURE Act eliminated the possibility of extending an inherited IRA for a beneficiary's life. However, it has expanded what is called Qualified Charitable Distribution (QCD). If you are at least 70 and a half years old, the QCD allows you to make an annual donation of up to $100,000 to a charity directly from the IRA, perhaps without requiring a withdrawal as a tax receipt.
If you want to leave a bigger charitable legacy, you can use the money you've saved in taxes to purchase a permanent life insurance policy for the benefit of loved ones, 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, in addition to the normal life insurance policy death benefit for your beneficiaries.
Leave your IRA account to a charitable remainder trust at death
By leaving the IRA in a Charitable remainder trust (CRT), you can effectively extend your IRA over your beneficiary's life, and you can also provide a substantial benefit to a charity. The CRT must distribute a percentage of the trust assets (5% -50%) to one or more of its beneficiaries during their lifetime or for a maximum period of 20 years. After this time, the trust ends, and the rest of the assets go to charity.
Buy life insurance with after-tax IRA distributions and use a charitable donation to reduce inheritance tax.
You may need to take distributions from your IRA or 401(k) due to your age, even though you don't need to withdraw funds. You can bequeath an inheritance for your children or grandchildren by purchasing life insurance and adding it as a beneficiary. After your death, they will receive the benefit, and if your inheritance plan also includes charity donations, it may reduce or eliminate wealth tax.
Name a charity as the beneficiary of your current life insurance policy.
If you have family members who are not dependent on inheritance, you can name a charity as your life insurance policy's beneficiary. This way, after your death, the charity can receive a substantial benefit.
A donation of a paid-up life insurance policy to the charity
If you have a life insurance policy that you no longer need, you can change it to a paid-up status and donate it to a charity of your choice. They can continue to maintain the policy and receive death benefits in the future at no cost to the charity. They can cancel the policy or take out a cash loan, and you will receive a tax deduction for the policy's cash value.
Remember that loans and withdrawals reduce the cash value of the policy and death benefits and increase the chances of the policy expiring; therefore, careful planning is required for the charity to explore this approach. If the policy matures, is surrendered, lapses, or converted to a modified endowment, then the loan balance at that time will generally be considered distributed and taxable under the general cash value distribution rules of the policy.
Donate a policy directly to a charity
You can also donate a policy you still pay to a charity. The basis of your policy or the accumulated premiums you have paid will equal the value of the gift, although future premiums will also be considered donations to the charity. For charitable donations to an IRC Section 501(c)(3) public charity, the charitable deduction is limited to 60% of adjusted gross income (AGI). For a premium paid in cash in 2020 or 2021, it's up to 100% AGI. For all cash payments after 2021, the amount is 60% of the AGI for cash contributions to a public charity. For a donation to a private charity, the amount is limited to 30% AGI.
Create 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 foundation's premiums as a donation, and the foundation uses that money to pay the premium. In the end, you will also receive death benefits.
If you are a member of the charity's board of directors, the charity may purchase life insurance on your behalf to provide funds and protection against loss.
Charity board members can help you provide additional funding for your charity by allowing it to purchase life insurance for the life of a board member. The board member may make income tax-deductible monetary donations to the charity in an amount equal to the annual policy premiums. This can help the charity protect itself in the event of the member's death, providing a substantial death benefit. After all, a board member could have been a major contributor to fundraising, administration, or the charity could have received special recognition for growing contributions.
Conclusion
Talk to the right professionals to find out about your plan. There are many ways to use life insurance to benefit a charity. However, some of these ideas are quite complex. You may want to discuss with your finance, tax, and legal professionals how to create the right plan for your situation and make sure that you fully understand the implications.
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