Hidden Treasures

Tucked away in dusty lockboxes and file cabinets are old life insurance contracts that have not seen the light of day for years. Why pull them out and review their provisions now? Tax circumstances change; and while life insurance is usually free of income tax, it often creates an estate tax liability. To be safe, eliminate the insurance from the estate’s inventory of taxable assets. In another classic oversight, too often the policy designates beneficiaries who may no longer be part of the family or who have predeceased the insured or the contract’s owner. Take that inventory and use a little proactive planning to avoid costly mistakes.

Once unearthed, make a decision about these policies. Besides updating ownership and beneficiary designations, consider a donation to charity. Does family financial security still require the policy? If so, adding a charity to the beneficiary designation would be an easily modified and revocable way to set aside something as a philanthropic legacy. Even naming a charity to receive just 10% or 20% of the policy’s proceeds is a great way to create a meaningful gift without adversely affecting the family’s interests. After a few more years pass, a donor can reassess needs and later adjust the beneficiary designations or choose to donate the entire policy.

What works? Is there a veteran’s policy or an old whole or universal life insurance contract in that pile of paperwork? A policy acquired to reduce risk when there was a mortgage on the house and worries about getting kids through college may be an ideal gift now. Classic giving opportunities for insurance exist when the mortgage is paid, the kids are grown, and those risks that the insurance originally covered no longer apply. Even employer sponsored term contracts can work if the donor chooses a charitable beneficiary, and while there may not be an income tax deduction, significant support with a tool that ultimately endows your charity on a limited budget still works for almost anyone. These are painless gifts. Giving an obsolete life insurance contract does not negatively affect the donor’s cash flow; instead, it offers the charity an opportunity to receive needed funds that bypass delays in probate and family turmoil.

Outright gifts of a cash value type life insurance policy to a tax-exempt organization may generate an income tax deduction. While deduction calculations and rules can be complex, in order to qualify, the donor gives up legal ownership and allows the charity to become the irrevocable beneficiary. However, be careful if the policy has outstanding loans or if the cash value will not sustain the policy after the charity accepts it, as the gift may prematurely collapse. As with the gift of any asset, seek qualified guidance to be sure that it works properly.

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Vaughn W. Henry
Henry & Associates
Gift and Estate Planning Services
22 Hyde Park Place
Springfield, IL 62703 USA
Phone: (217) 529-1958 Fax: (217)529-1959
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CONTACT US FOR A FREE PRELIMINARY CASE STUDY FOR YOUR OWN CRT SCENARIO or try your own at Donor Direct. Please note -- there's much more to estate and charitable planning than simply running software calculations, but it does give you a chance to see how the calculations affect some of the design considerations. This is not "do it yourself brain surgery". When is a CRUT superior to a CRAT? Which type of CRT is best used with which assets? Although it may be counter-intuitive, sometimes a lower payout CRUT makes more sense and pays more total income to beneficiaries. Why? When to use a CLUT vs. CLAT and the traps in each lead trust. Which tools work best in which planning scenarios? Check with our office for solutions to this alphabet soup of planned giving tools.

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