Navigating Generosity: Life Insurance & Charity

Hands Holding Black Heart | Estate Lawyer | Myatt & Bell

By: The American Academy of Estate Planning Attorneys
Many people might think it is beyond their means to leave a testamentary charitable gift (a gift made after you die) and would be surprised to learn that you don’t have to be wealthy to leave behind a substantial charitable legacy. One way to accomplish this is with an

Irrevocable Life Insurance Trust (ILIT)

All you need is enough income to set aside extra money each month. The great news about this approach is it comes with estate and income tax benefits.

The process begins when you establish an ILIT – an Irrevocable Trust designed for the management of a life insurance policy. You designate your chosen charity as beneficiary of the Trust, and you fund the Trust in one of two ways:

  • By transferring an existing life insurance policy to the Trust; or
  • By transferring money to the Trust so the Trustee can purchase a new life insurance policy

The Trustee manages the Trust, using funds you transfer to the Trust to pay policy premiums. When you die, the charity you have designated as a beneficiary receives the policy’s death benefit.

The tax consequences vary based on how you choose to fund the trust.

Existing Life Insurance Policy

Depending on your circumstances, transferring an existing life insurance policy to an ILIT might come with a few drawbacks. When you transfer a life insurance policy to an ILIT, it is subject to the three-year rule, meaning the policy’s death benefit is removed from your estate for tax purposes only if you die more than three years after the date of the transfer. If you pass away within three years, the value of the death benefit is counted as part of your taxable estate. However, at your death, your estate would receive an offsetting states tax charitable deduction because the death benefit is going to charity. You would also receive a charitable income tax deduction for the value of the life insurance policy transferred to the Trust.

New Life Insurance Policy

When you use an ILIT to purchase a new life insurance policy, there is no three-year rule – that policy’s death benefit is never treated as part of your estate for tax purposes.

Whether you transfer an existing insurance policy or you use the Trust to buy a new policy, you receive a charitable deduction for the funds you transfer to the ILIT to maintain the premiums.

Contributing to your favorite charity while gaining tax benefits is a great estate planning strategy; however, in determining whether or not an ILIT is the best way for you to accomplish this depends on your particular circumstances. Contacting an experienced estate planning attorney can help you evaluate the options available to you and in order for you to choose the best course of action.

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