Most of us have a favorite charity and some even have several they contribute to regularly. These may include churches or places of worship, medical facilities, nursing or assisted living homes, schools or alma maters or other organizations worldwide.
The idea of lots of people each giving a little can have a huge impact on others.
Here is a very enlightening article about college endowments. I think you will be surprised in the numbers.
Giving to your charity has several benefits including:
- Personal satisfaction, knowing that you have worked hard and have made a good living and having the desire to give back to those less fortunate is personally rewarding
- The recognition that comes with a charitable donation can range from a simple thank you letter to your name being prominently displayed on a building usually makes one feel honored and appreciated
- Possible tax saving due to the current income tax deductions allowed can be sizeable now and reduce your estate value later
One of the most efficient ways to give to your charity is with the proceeds from a life insurance policy. A life insurance policy is bought and paid for by you for pennies and the charity receives the dollars of the death benefit at the time of your passing.
How Can Life Insurance Be Given to a Charity?
Make a Charity the Beneficiary of an Existing Policy. If you have a life insurance policy you no longer need, you can name the charity as the beneficiary of the policy, meaning that the charity will receive the policy’s death benefit after you die. While there are no current tax benefits to this approach, the value of the policy will be removed from your estate for federal estate tax purposes.
Make a Charity the Owner and Beneficiary of an Existing Policy. Instead of simply naming the charity as beneficiary of an existing life insurance policy, you transfer full ownership of the policy to the charity. The charity will then receive the policy’s death benefit after you die. In addition to removing the value of the policy from your estate for federal estate tax purposes, this approach also provides you with current federal income tax deductions.
Help a Charity Purchase a New Insurance Policy on Your Life. If you wish to make a substantial future gift to a charity at a relatively low cost to you, another alternative is to consider purchasing a new life insurance policy and name the charity as the policy owner and beneficiary. You then arrange to pay the premiums through gifts to the charity. This approach provides federal income tax deductions and the policy proceeds are not included in your estate for federal estate tax purposes.
Important Note: Most states through their “insurable interest” laws allow a charity to be the owner and/or beneficiary of an insurance policy on a donor’s life. Since state laws do vary, however, it is important to consult with a professional advisor before making a gift of life insurance to a charity.
And finally, The Wealth Replacement Trust. There can be significant tax advantages in giving appreciated assets to a charity. Examples include real estate and securities.
If you were to sell an appreciated asset, the gain would be subject to capital gains tax. By donating the appreciated asset to a charity, however, you can receive an income tax deduction equal to the fair market value of the asset and pay no capital gains tax on the increased value.
For example, Donor A purchased $25,000 of publicly-traded stock several years ago. That stock is now worth $100,000. If she sells the stock, Donor A must pay capital gains tax on the $75,000 gain.
Alternatively, Donor A can donate the stock to a qualified charity and, in turn, receive a $100,000 charitable income tax deduction. When the charity then sells the stock, no capital gains tax is due on the appreciation.
When a donor makes substantial gifts to charity, however, the donor’s family is deprived of those assets that they might otherwise have received.
In order to replace the value of the assets transferred to a charity, the donor establishes a second trust – an irrevocable life insurance trust – and the trustee acquires life insurance on the donor’s life in an amount equal to the value of the charitable gift.
Using the charitable deduction income tax savings and any annual cash flow from a charitable trust or charitable gift annuity, the donor makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums. At the donor’s death, the life insurance proceeds generally pass to the donor’s heirs free of income tax and estate tax, replacing the value of the assets that were given to the charity.
These are the most common ways of using a life insurance policy to benefit a charity. Of course, another way you can support them is with your time. Time is money and yours is very valuable.
If you want to make a huge impact on your charity but only have limited resources, go and volunteer. They need letters mailed, phone calls made, warehouses stocked and cleaned, meals delivered etc…
If you want to help influence the direction the charity heads, consider being on the board. Your ideas and input may help solve the next big challenge they come up against. It probably won’t pay anything, but your influence and commitment to their success can be even more rewarding than any income.
If you want to find out how to make a large financial donation to your favorite charity, please give me a call and we will discuss all the options and help you leave a legacy to those in need. If you have enjoyed this or know someone that could benefit from reading it, please share it with them. I appreciate your time and hope you have found value in this today.
Now for the disclaimers: I am not a tax specialist or even pretend to be. We would want to consult with your tax preparer to verify the benefits and consequences of a donation to a charity.