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For many, charitable giving is an important part of life that provides organizations with funding to accomplish their goals and assist people in need.
According to the National Philanthropic Trust, Americans gave over $373 billion in 2015—a 4.1 percent increase from 2014. There are now more than 1.5 million charities operating in the U.S.
Whether your favorite charity is the Montrose Center, Lazarus House, Equality Texas, or another organization, there are a number of ways to give—and some strategies that can significantly enhance your contributions.
For some, writing a check is the preferred method of giving to charity. This can provide the organization with funds for immediate use, and create a tax deduction for the donor.
Life insurance is another tool used for charitable giving. People can name organizations as beneficiaries of life-insurance policies that often yield much larger donations than out-of-pocket contributions could provide.
When you name a charitable organization as a life-insurance beneficiary, you pay the premiums on the policy, and at your death the proceeds go to the organization. Because death benefits to charities are not taxable, they can use the full amount of your donation for their needs. In addition to the benefits that the charity receives, you as the policyholder are allowed a tax deduction for the premiums you pay.
To utilize this method of charitable giving, you’ll typically be required to sign over your rights to the life insurance policy to the charity, which means you won’t be able to make changes to the policy—including the named beneficiary—once it’s in force.
You may also be able to add a rider to your policy that lets you designate 1 or 2 percent of the death benefit to a charity, after the bulk of the proceeds have gone to your other beneficiaries.
If you’re a board member for a charity and meet certain conditions, the organization itself may purchase life insurance coverage on you for up to $2 million. This is similar to the way companies take out life insurance on owners, partners, or key executives whose loss could cause the organization substantial financial hurdles.
Should you wish to add your personal donations to a charity that has purchased insurance on your life, you may make tax-deductible monetary gifts equal to the policy’s annual premiums.
While death-benefit proceeds can provide a charity with a lump sum, there are other ways in which life insurance can be used for charitable donations.
For instance, if you have a dividend-paying “whole life” insurance policy, you could assign the dividends to the charity rather than receiving them yourself. If you choose to donate this way, you can typically take an annual tax deduction for the dividend amount.
Another strategy is to establish a trust that owns the life insurance policy and designates the charity as the beneficiary. A “charitable remainder trust” generates a potential income stream for you and/or other beneficiaries, with the remainder of the assets going to charity.
Alternatively, a “charitable lead trust” is designed to reduce beneficiaries’ taxable income by first donating a portion of the income to charity and then, after a set period of time, transferring the remainder to the beneficiaries. Charitable lead trusts are commonly used to reduce or eliminate estate taxes.
There are numerous ways you can contribute to your favorite charitable organizations, and as you can see, a strategy that includes life insurance can end up having many moving parts.
Because of that, it’s important to obtain financial, tax, and legal advice prior to purchasing life insurance. It can also be highly beneficial to work with advisors who are knowledgeable about planning strategies for those in the LGBTQ community.