Purchasing life insurance for estate liquidity reasons is a standard practice. But did you know that, with proper structure, life insurance can help create a zero-tax estate plan when the policy is gifted into a donor-advised fund (DAF)?* Gifting a life insurance policy into a DAF helps a donor achieve greater charitable good than the typical method of gifting – which is by cash or marketable securities.

4 Ways to Gift Life Insurance

Gifting life insurance is worth considering. To help you make the greatest charitable impact, here are 4 ways to do it:

1. Direct Donation of Existing Policy

Donors with policies acquired for other reasons may not need the coverage and can gift the policy directly into a DAF. Examples include:

  • Mortgage/debt risks
  • Education policies for children
  • Survivor income security
  • Veterans’ policies

According to IRS regulations, the DAF administrator must become the owner and sole beneficiary of the life insurance policy.

However, determining the accurate value of that deduction requires an appraisal. Cash-value policies (i.e., whole-life policies) are valued at the lesser of fair market value (FMV) or their cost basis. How is the value determined exactly? This is where a qualified appraiser is required to determine an accurate value. It’s an invaluable step to get the most of your policy’s value.

2. Direct Donation of Dividends

The annual dividends of the policy can be assigned into a DAF. This eliminates out-of-pocket contributions while still creating a deduction as dividends are paid.

3. Establishment of a Charitable Rider

A charitable rider is an addition to a life insurance policy that would pay a specific percentage of the face value of a policy to a specific qualified charity. Charitable riders usually have no additional cost and do not reduce the cash value/death benefit of the policy, nor do they increase the premium.

4. Altering the Primary/Contingent Beneficiary of Life Insurance Policy

Although this route will not create a current income tax deduction, it does create a federal estate tax deduction for the full amount of the proceeds payable into the DAF, regardless of policy size.

Does it make sense to purchase a new policy for the purpose of charitable gifting? Possibly – if the individual is healthy and can pass an insurance physical, it may make sense to purchase new life insurance for the purpose of donating to charity. The death benefit could fund a special project or donor’s lifetime gifts forever through their DAF.

 

Contact American Endowment Foundation or call 1-888-966-8170 with questions about turning life insurance into a DAF.

*Note: The content here is solely for informational purposes. AEF does not provide tax or legal advice. Please consult with your own financial advisor and legal counsel regarding your specific situation.