Vail Daily column: A case for charity | VailDaily.com
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Vail Daily column: A case for charity

Charles Smallwood
My View

Have you entertained the idea of leaving a sizeable gift to charity after you pass away? Consider using your life insurance policy to support your favorite cause. Here’s how:

• Name the charity as the beneficiary of your life insurance policy so the death benefit automatically gets paid to them.

Pros: The policy proceeds, while includible in your estate at your death, will qualify for the estate tax charitable deduction to the extent the policy proceeds are paid to a charity.

Cons: While a beneficiary designation is simple, private and requires little documentation, it is important to understand that because you retain control of the policy, you will not be able to take any income tax deductions during your life.

Where future premiums are required, your payments can be structured to qualify as charitable deductions for income tax purposes. The charity benefits since it has control of cash values and dividend rights, and receives the death benefit free of federal income, gift and estate taxes.

• Donate your life insurance policy to charity.

Pros: This approach allows you to make your donation by transferring all rights of ownership in the policy to the charity. Where future premiums are required, your payments can be structured to qualify as charitable deductions for income tax purposes. The charity benefits since it has control of cash values and dividend rights, and receives the death benefit free of federal income, gift and estate taxes. Probate and other administrative costs and delays are also avoided.

Cons: As the donor, you lose control of the policy.

• Help the charity purchase a new policy. Under this approach, the charity names itself as owner and beneficiary and is responsible for making premium payments. Of course, you can assist them in the process by making cash contributions equal to or greater than the needed premium dollars on an annual basis.

Pros: If structured properly, then an annual charitable deduction should be available, subject to the general limitations placed on charitable contributions.

Cons: The charity is not obligated to maintain the policy nor are you obligated to continue premium contributions. If this plan is intended to serve as a future endowment, then both parties must understand their roles if the plan is to be successfully brought to completion.

• Gift assets to the charity and replace family wealth through a wealth replacement trust.

Pros: By directing the tax savings generated by your charitable gift to the purchase of a life insurance policy, you can donate your assets to charity and still provide a benefit to your heirs.

Cons: You’ll need to make sure the life insurance is owned by your heirs or by an irrevocable life insurance trust to ensure that the policy proceeds will not be included in your estate at your death and that your heirs will receive the entire death benefit without losing some of it to estate taxes.

Charles Smallwood is a financial advisor with The Prudential Insurance Co. in Edwards. He can be reached at charles.smallwood@prudential.com, at 970-432-0045 and 970-390-1249. Prudential Financial, its affiliates and representatives do not render tax or legal advice. An individual’s particular circumstances should be discussed with a personal tax or legal advisor.


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