INVESTMENTS

Tax Savings on Life Insurance Gift 

Years ago, you may have purchased life insurance to protect minor children or your company in the event of your untimely death. Now, your business is thriving, your children are independent and you don't need the policy.  

Yet if you simply drop it, you may be hit with a tax bill. One way around that is to name your favorite charity as irrevocable beneficiary — you can collect a sizable tax deduction for the charitable donation. Generally, the deduction is equal to the premiums you paid minus any dividends you received. After this type of donation, you can pay the amount of the ongoing premiums to the qualified charity and the charity can maintain the payments.

Then, you can take subsequent deductions for your donations and the charity will receive the proceeds after your death.

How it works.

Suppose you paid $75,000 in premiums on a $750,000 life insurance policy. You no longer need the coverage so you give the policy to your favorite charity. You can deduct the $75,000 previously paid. Depending on your income, however, you may have to spread the deductions over several years. In addition, let's say the premiums on the policy are $7,500 annually. You can make a $7,500 donation to the charity each year, which is tax deductible, and the charity can pay the premium. When you die, the charity gets the $750,000.

Caveats.

Charitable gifts of life insurance can pose problems if they aren't structured properly. Take these precautions: 

• Don’t retain any ownership rights. If you want the right to change the beneficiary, you won't qualify for an income tax deduction. 
• Don’t pay ongoing premiums to the insurance company. If you do, your income tax deduction can't exceed 30 percent of your income. If you write checks to the charity instead, as described above, you can deduct up to 50 percent of your income.
• Remember that noncash gifts require appraisals for deductions over $5,000. If you donate a valuable policy, you should obtain an appraisal from a qualified agent or broker. This is only necessary for the initial donation of the policy. Ongoing contributions to pay the premiums are treated as cash donations to the charity.

When you donate a life insurance policy to charity, you get more than a current income tax deduction. The donation removes the policy from your taxable estate and no gift tax must be paid. (This applies up until the year 2010, when estate taxes are scheduled to be repealed.)

As with all financial and tax arrangements, however, this can be complicated and you should consult your tax or financial adviser or tax consultant to ensure the paperwork is correct and you've met all the requirements.