Giving Life Insurance to Charity

Speaker 1 (00:00):

Giving life insurance to charity. What you need to remember, life insurance and its tax issues are complicated enough, but when you throw charity into the mix, it can get downright diabolical. It’s not as much that the rules are so complex, it’s that they don’t make sense to the typical taxpayer or donor. Something that becomes quickly apparent when I get brought into situations like this are that most people don’t understand the quote, special rules regarding giving life insurance to charity. I also discover that the charities themselves are seldom bringing these issues to the policy owners. The bottom line is that when donating life insurance policy to charity, the deduction is limited to the lesser of the fair market value or the basis in the contract. You may have noticed I didn’t mention anything about cash value. That’s because generally speaking, it is a data point that doesn’t matter. 

Speaker 1 (00:56):

Let’s assume we’re talking about a well seasoned whole life policy, a quarter million dollar death benefit, a hundred thousand dollars cash value, but a $10,000 basis, which represents the total premiums paid over the life of the policy. Most taxpayers believe that the a hundred thousand dollars cash value is the amount that’s gonna be deductible, but unfortunately, they’d be mistaken. Where cash value might have a play is when cash value is less than the basis, and then that would likely be the maximum deduction. Another surprise facing donors is the requirement to have a formal appraisal for donations worth more than $5,000. This can be irritating when the number is obvious, but an appraisal is still required, so it becomes very important to find an economical appraisal source for these purposes. We can help you with that. 

Speaker 1 (01:50):

Given these issues, it might make sense to do a thorough analysis before the gift is made to determine if gifting the policy is even a good idea. What if the policy is worth significantly more than the cash value of a life settlement? I worked a situation where a million dollar policy with almost no cash value netted a half a million dollars to the policy owner. There is no conceivable benefit to donating the policy rather than selling the policy and donating the funds to charity. It’s also a good idea to understand how a charity is going to handle a donated policy. Some will hold ’em in force and some will summarily cash ’em out. If that was true, then why would a donor ever take a hit on the deduction if the policy isn’t gonna stay enforced anyway, the moral here is to put analysis before action. This applies to just about anything I can think of regarding life insurance and action before analysis. When donating life insurance policies can create extra heartache. As usual, feel free to call or email with questions, and don’t forget to check out the website, the blog, or the advisor resource site. Have a good day.

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