When most people think about the value of their estate, they sometimes forget that the face value of life insurance is included. Even if you have designated beneficiaries (those who will receive the proceeds directly from the insurance company at your death), it is still included in your estate, if you are the owner of the policy. This is important to know when planning for the disposition of your estate. There are several ways to still allow those that you love to receive the benefits and it not be counted among your estate assets.
Valerie RumboughOne way is to set up a life insurance trust. You actually give the policy to the trust, along with funds to continue making the insurance premiums. If you have named family and/or friends as the beneficiaries of the trust, you may have gift tax issues, so be aware of this when considering this option. Many people consider leaving a portion of their life insurance policy to their church or other charity.
This is easily done through a beneficiary designation form, rather than using a trust. The life insurance will still be in your estate, but there will be an immediate deduction for the amount going to charity. If you are at the point in your life where your family isn’t dependent upon the proceeds from your policy, you can give the policy to your church or other favorite charity. By transferring ownership of the policy to the charity, you receive an immediate charitable deduction for the residual value of the policy (not the face value).
If you continue to make premium payments for the policy, you will also receive a charitable deduction for those payments. Then, when you pass away, the charity immediately receives a substantial gift from you, and none of it is counted in your estate. This will only work for whole life policies, however.
Because term life policies “go away” once the premiums are not paid anymore, they cannot be used in this situation. If you are interested in transferring ownership of your policy to your church or other charity, contact a CPA, financial planner, or the Baptist Foundation for advice that fits your situation specifically. Life insurance actually makes a great gift to a charity, because they receive a benefit that many times far exceeds the amount you have invested into it.
– Rumbough, CPA, CFP, is chief operations officer with the Baptist Foundation of South Carolina. Contact her at 800-723-7242. In accordance with IRS Circular 230, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.