By Randy Neumann
The recent economic turmoil has forced many of our favorite charities to cut back on the valuable services they provide.
In many cases, they receive subsidies from the state or federal government and, if you
don’t live under a rock, you know what’s happening there. Simply stated, they need our help. Now!
Fortunately, private donations can make up the difference. Donors are coming to
the rescue of these organizations with life income gifts and gifts of life insurance – financial moves that have perks for the giver as well as the receiver.
Let’s begin with gift annuities. A life income gift, also known as a gift annuity, offers
the charitable donor some substantial benefits. A gift annuity is a simple agreement with a charitable organization by which you make an irrevocable gift of cash, appreciated securities or real estate. In return, you and/or one other person you select receive a fixed annual income the charitable organization is obligated to pay you.
Usually, some of this income is tax-free. If you make a cash gift, part of the fixed income payments will be taxed as ordinary income and the remainder will be untaxed. If you contribute securities or real estate you have owned for a year or more, percentages of the income you receive may be taxed as ordinary income or capital gains, while some of it may not be taxed.
You may also claim an income tax deduction in the year you establish the gift annuity, and if you fund your gift with an appreciated asset, you may eliminate a portion of
your capital gains tax.
As a gift annuity can be immediate or deferred (i.e., income payments to you can
start this year or in a future year), you have potential for enhanced annual income later in life if it is funded today with low-yielding assets.
Life insurance is another way of gifting to a charity. Many people have insurance
policies that they took out in the past for which there is no longer a need. A gift of life insurance will be welcomed by a charity, as it is self-completing – the funding objective linked to the gift is fulfilled when the donor passes away.
If you make yearly planned gifts to a non-profit, you can assign a percentage of your
annual donation to a life insurance policy, therefore guaranteeing the perpetuation of
Actually, life insurance gifts can be given in several different ways. Here are just a few
of the options:
You can gift a life insurance policy you now own to a charity. You can donate a new policy you buy, or have the charitable organization purchase a policy on your life and pay the annual premiums. You may claim an income tax deduction in the year you do
You can name a charity as the primary beneficiary of your policy. While that move
won’t bring you an income tax deduction this year, it will bring you a federal estate tax deduction for the full amount of the proceeds payable to the 501(c) (3) – the IRS’ name for a charitable organization.
You can assign policy dividends to a charity. This creates a deduction as dividends
are paid. You can also amplify the magnitude of your contribution: The dividends can be used to purchase a new policy, with the charity as irrevocable owner and beneficiary.
Have you accumulated a great deal of assets in a deferred compensation plan or a supplemental retirement plan (SERP)? If so, you face the chance that your heirs might
receive only about a quarter of that wealth after income and estate taxes. Some executives and business owners in this situation have exchanged a SERP, or deferred comp plan for a split-dollar life insurance policy, which allows them legally to avoid the above mentioned income and estate taxes while directing substantial wealth to charities. (Split dollar means that there are multiple beneficiaries).
There are four things to remember with life insurance gifts:
1) If you want to receive an income tax deduction in the year you make the gift, the
gift has to be irrevocable – you must surrender ownership of the policy.
2) If you make an irrevocable life insurance gift within three years of your death, the amount of the gift will be included in your gross estate.
3) There is a ceiling on the annual charitable deduction you can take. It is 30% of your adjusted gross income (AGI) for gifts to private nonprofit organizations and 50% if the non-profit is a public organization.
4) Remember, you can carry excess deductions on charitable gifts forward for up to five tax years.
With summer and fall being ideal times to revisit your tax strategy, you might want to
look into these useful ways of gifting to your favorite charity(ies).
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 12
Route 17N, Suite 115, 115, Paramus, 201-291-9000.