The Guidelines on Gifts of Life Insurance to Charitable Institutions are designed to provide clear direction for state insurance department personnel who may encounter questions or concerns regarding charitable gifts of life insurance policies. These guidelines explain the concept of charitable gifts of life insurance, insurable interest, and the legal and tax implications involved. They serve as a framework for understanding how such gifts can be made and ensure that both donors and charities adhere to state regulations.
- 1. What is a Gift of Life Insurance?
- 2. What Are Charitable Institutions?
- 3. How is a Gift of Life Insurance to a Charity Accomplished?
- 4. Why Has There Been Increased Interest in Gifts of Life Insurance to Charitable Institutions?
- 5. What is Insurable Interest?
- 6. Meeting the Insurable Interest Requirement in Charitable Gifts of Life Insurance
- 7. Other Considerations for Donors
- 8. Statutory Language for Clarifying Insurable Interest in Charitable Gifts
- 9. Conclusion: The Growing Role of Charitable Gifts of Life Insurance
This post will delve into the details of these guidelines, discussing the essential considerations, legal requirements, and how charitable institutions can benefit from receiving life insurance gifts.
1. What is a Gift of Life Insurance?
A gift of life insurance refers to the transfer of a life insurance policy from the policyholder (donor) to a recipient. This gift can be made to any entity, including charitable institutions, and once the transaction is complete, the ownership of the policy and all its associated rights, such as the ability to change the beneficiary, are transferred permanently to the recipient.
The donor, in this case, gives up their rights to the policy, which means the charity or recipient becomes the new owner and is entitled to any proceeds from the policy. This transfer can be made as an irrevocable assignment, meaning that the donor cannot reverse the transfer once it has been made.
2. What Are Charitable Institutions?
In the context of these guidelines, charitable institutions refer to nonprofit, tax-exempt organizations, typically engaged in activities such as:
- Religious
- Charitable
- Scientific
- Literary
- Educational purposes
- The prevention of cruelty to children or animals
These institutions must be organized and operated exclusively for these purposes. Some examples of qualified charitable institutions include foundations, churches, schools, and scientific organizations. These organizations are eligible to receive life insurance gifts under the guidelines.
3. How is a Gift of Life Insurance to a Charity Accomplished?
A gift of life insurance to a charity can be made in one of two ways, each of which has specific legal and practical considerations:
- Gifting an Existing Policy:
The donor can transfer the ownership of an existing life insurance policy to the charity. This is typically done through an irrevocable assignment where the charity becomes the new owner of the policy. In this scenario, the donor’s rights to the policy, such as changing the beneficiary or surrendering the policy, are permanently relinquished. - Purchasing a New Policy:
The second method involves the donor either purchasing a new life insurance policy or authorizing the charity to purchase the policy on their behalf. In this case, the insured individual consents to having the charity as the owner and beneficiary of the policy. This method is often used when the donor wants to provide a specific benefit to the charity in the future.
Both methods have specific tax and legal implications, which will be discussed further below.
4. Why Has There Been Increased Interest in Gifts of Life Insurance to Charitable Institutions?
The growing interest in charitable gifts of life insurance largely stems from a Private Letter Ruling issued by the Internal Revenue Service (IRS) on December 6, 1990. The ruling initially suggested that federal income, gift, and estate tax deductions may not be allowed for gifts of life insurance to charities if the donor’s state did not recognize that charities had an insurable interest in the life of the donor.
This ruling caused significant concern among both donors and charities, as it meant that tax benefits for such gifts could be jeopardized. However, following an amendment to New York state law, which specifically authorized insured individuals to transfer life insurance policies to charities, the IRS revoked its earlier ruling on November 27, 1991. This revocation alleviated much of the concern surrounding charitable life insurance gifts, allowing the practice to continue with more certainty.
5. What is Insurable Interest?
Insurable interest is a key concept in life insurance policies. It refers to the interest that the policyowner has in the continued life of the insured individual. In essence, for a life insurance policy to be valid, the owner must have a reasonable expectation of deriving some financial benefit from the continued life of the insured.
- For the insured individual: The insured always has an insurable interest in their own life, meaning they can freely designate beneficiaries, including charitable organizations, to receive the policy’s death benefits.
- For someone other than the insured: Insurable interest is typically based on a family relationship (such as a spouse or child) or a reasonable expectation of financial or economic benefit from the insured’s continued life.
Charitable institutions have been granted insurable interest in the context of life insurance gifts. In many states, charitable organizations that have an ongoing relationship with a donor (e.g., through donations, gifts, or volunteer work) can qualify as having an insurable interest in the donor’s life. Additionally, some state statutes explicitly allow charities to own or purchase life insurance policies on the life of an insured individual with their consent.
6. Meeting the Insurable Interest Requirement in Charitable Gifts of Life Insurance
Many states’ laws explicitly recognize that charities have insurable interest in the lives of the individuals who wish to donate to them. In states where the law does not specifically mention this, charities may still be able to demonstrate that they have an insurable interest based on their relationship with the donor.
For instance, a charitable institution may show that it has an ongoing connection to the donor through previous donations or volunteer work, which may give the charity a reasonable expectation of benefiting from the insured’s continued life.
Furthermore, in some states, laws have been amended to explicitly allow charities to own or purchase life insurance on an insured individual’s life with their consent. This ensures that the life insurance policy is enforceable and provides the intended charitable benefit upon the donor’s passing.
7. Other Considerations for Donors
There are several important factors that donors should consider before making a gift of life insurance to a charity:
- Estate Planning: Donors should ensure that gifting life insurance to a charity does not jeopardize their estate plan, especially if the policy is meant to cover immediate family or business needs.
- State of Health: The donor’s current health and their ability to obtain other insurance coverage should be taken into account. A donor may wish to consult with a tax expert or estate planner to understand the potential tax implications of the gift.
- Longevity of the Charitable Institution: Donors should consider the financial stability and longevity of the charity to which they plan to make the gift. It is important to ensure that the institution will remain viable when the life insurance benefit is paid out.
8. Statutory Language for Clarifying Insurable Interest in Charitable Gifts
In some cases, states have enacted laws to explicitly clarify the concept of insurable interest in the context of charitable gifts of life insurance. These laws aim to eliminate confusion and establish clear guidelines for both donors and charitable institutions.
For example:
- Colorado House Bill 1031 (1992): This law allows any organization meeting the requirements of Section 170 of the Internal Revenue Code to purchase or own life insurance policies on insured individuals who provide written consent.
- Tennessee Senate Bill No. 2336 (1992): This legislation provides that charitable organizations, as defined in Sections 501(c)(3) and 170(c) of the Internal Revenue Code, may own or purchase life insurance on an insured individual with their consent.
These statutes help ensure that charities are legally recognized as having insurable interest and can proceed with life insurance gifts without encountering legal barriers.
9. Conclusion: The Growing Role of Charitable Gifts of Life Insurance
Gifting life insurance to charitable institutions is a growing area of interest due to its ability to provide significant benefits to both the donor and the charity. By transferring a life insurance policy to a charity, donors can create a lasting legacy and support the causes they care about while also reaping potential tax benefits.
Charitable institutions benefit by receiving a guaranteed financial contribution upon the donor’s passing. As more states recognize the importance of insurable interest for charities and adopt legal provisions to facilitate these donations, we expect the practice of gifting life insurance to continue to grow.
For donors considering this option, it is important to carefully weigh the potential tax implications, the health of the insured, and the stability of the charity to ensure that the gift fulfills their intended purpose. Seeking professional advice from tax experts, estate planners, or legal counsel is crucial to understanding the full benefits of making a charitable gift of life insurance.
