For the individual who would like to make a substantial bequest to his or her favorite charity, but does not have sufficient assets to fulfill this desire, a charitable plan consisting of a life policy should be considered.

The insured can transfer an existing life policy to the charity or contribute the funds necessary to purchase a new policy. Additional tax deductible contributions can be made to help the charity pay the annual premium. This not only spreads out the amount to be givin, but allows one to experience the feeling that comes from sharing with others on a more frequent basis.

If circumstances change, the insured can discontinue making the gifts and the charity will either continue the payments or surrender the policy for the cash values.

Note: Merely naming a charity as a beneficiary of a policy will not produce an income tax deduction, since the owner (insured) still has the power to surrender the policy. IRC Sec.170(f)(3)

The income tax deduction is limited to the lessor of:

A. Donor's cost basis (premium paid less dividends received in cash and policy loans outstanding); or

B. The policy's value, which varies with type of policy.

1. Ordinary Life: The interpolated terminal reserve (roughly cash value) plus any pre-paid premium.

2. Paid-up Policy: Present cost of a comparable policy at the donor's currenmt age.

3. New Policy: The gross premium just paid.

4. Term Insurance: The portion of premium that is still unearned by the insurer.

Note: Revenue Ruling 59-195 approves the use of the applicable regulations for estate (Reg. Sec. 20.2031-8) and gift tax (Reg. Sec. 25.2512-6) to be used for determining the income tax deduction.

This document was last modified on April 29, 1997

Copyright ©1996, The Jacobs Company, All Rights Reserved