Investment Basics: A Win-Win Legacy Strategy

April 24, 2018

Here's a strategy for helping yourself and a favored, qualified philanthropy.

Imagine how you would feel if you could leave a large gift to a charity you've long supported without depleting the assets you've set aside for your and your family's future. You probably can leave that legacy by using life insurance to facilitate your charitable gift. Here's how.

Name the Charity as Beneficiary

The simplest way to make your gift may be to name the charity as the beneficiary of your life insurance policy. Since you maintain ownership, you also retain the flexibility to change the beneficiary later on if you want to. You won't be able to claim an income tax deduction for the charitable gift, and the insurance proceeds would be includable in your gross estate for tax purposes. But, your estate typically would be able to claim an estate tax charitable deduction for the amount of the policy proceeds the charity receives at your death.

Give a Policy to the Charity

If you give an existing life insurance policy as an outright gift to a charity (the charity becomes owner and beneficiary of the policy), you may be able to claim an income tax deduction for your contribution and for any gifts of cash made to the charity to be used for premium payments after making the policy gift. However, an outright gift of an insurance policy is irrevocable. That means you won't be able to change the beneficiary of the policy once you've made the gift.

Give Through a Charitable Remainder Trust

Life insurance can be used to "replace" money distributed to charity through a charitable remainder trust. Let's say you create a charitable remainder annuity trust (CRAT) during your lifetime and fund it with $500,000 in property. The trust pays you 5% of the trust's initial value each year. At your death, the trust's property passes to the charitable beneficiary. You can use some of the income you receive from the trust to buy an insurance policy on your life and name your children as the policy's beneficiaries. The income-tax-free policy proceeds could wholly or partially replace the money the CRAT will distribute to charity at your death.

Before making a charitable gift of life insurance, be sure to talk with your attorney about how your gift would fit in your overall estate strategy. Your financial professional can help you and your attorney implement any such gift you decide to make.