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People give gifts to charities for a variety of reasons, and one common method of making such gifts is through life insurance. There are two basic ways to make charitable gifts of life insurance, the first of which is to make an outright gift of a policy on the life of the donor. The value of the policy at the time of the gift is generally deductible, with certain restrictions. The charitable organization (the donee) is the beneficiary of the policy. The donor may also give the charity enough cash each year to pay the policy's premium; if such is the case, the cash gifts are generally tax-deductible. When this method of giving is used, it's important that the donee also be given all rights of ownership. If the donor retains any control whatsoever over the policy, the tax advantages (i.e., the deductions) are forfeited.
In the second common method of making charitable gifts of life insurance to organizations, the donor can retain ownership of the policy, designate the charity as the beneficiary, and continue to pay the premiums. The amount of the proceeds will be included in the donor's estate, but will nonetheless be distributed as a charitable deduction. An advantage of this method of giving is that the donor retains the right to change beneficiaries should it become necessary or desirable. The principal disadvantage is that premium payments are not deductible on the donor's federal income tax return.
Gifts to individuals
It must be taken into consideration that anyone who makes a gift of a large amount may be subject to a gift tax levied by the IRS. One of the most common methods of making a gift of life insurance to someone other than a charity is to just give a policy to the donee. If the gift involves the transfer of all ownership rights from the donor to the donee, then the gift will probably qualify for a 'present-interest' (one in which immediate rights to the property is given to the donee, as opposed to a 'future-interest' gift) gift tax exclusion, and the donor will not incur any gift tax liability. This is true unless the replacement value of the policy, which is usually roughly equal to its cash value, is more than $12,000 (or more than $24,000 given by donor and spouse combined) – the annual exclusion limits as of this writing. Of course, this threshold may be adjusted by the IRS in future years. The donor must also consider all other gifts of present interest made to the donee during the year in order to determine whether the $12,000 threshold has been reached.
Another very common method of giving life insurance to an individual is to make a gift of the premiums on the insurance. For example, a new son-in-law takes out a life insurance policy and his father-in-law (the donor) gives him the money to pay the premium. The policy belongs to the son-in-law, who is the donee of the amount of the premiums. As long as the amount of premium paid by the donor – along with all other gifts made during the same year to the same donee – is equal to or less than the applicable annual gift tax exclusion, the donor should not incur any federal gift tax liability. The donor (or donors) may continue to make a tax-free gift of the insurance premiums up to the exclusion limit year after year for as long they desire, and the recipient will not have to pay income tax on the gift.
