Don’t Need Life Insurance for Taxes?  Give Policies to Charity

Thanks to the $5.34 million estate tax exemption, it’s estimated that fewer than 4,000 estates per year will be subject to tax.  Clients who purchased life insurance for the primary purpose of covering estate tax obligations may be looking for other options for the policies.  Two charitable options exist:

Name charity the death beneficiary – No income tax deduction is available, because the gift is considered revocable, but the owner can make a larger gift than might otherwise be possible.

Transfer ownership of the policy to charity – The donor is entitled to an income tax charitable deduction for the value of the policy.  Generally, the deduction is equal to the lesser of the donor’s basis in the policy or the replacement cost, in the case of a paid-up policy [Reg. §25.2512-6(a)], or the interpolated terminal reserve for policies that still have premiums due. 

Donors should be aware that a qualified appraisal is required if the deduction exceeds $5,000.

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