How You Can Use a Life Insurance Policy for Charitable Donations

You already know that having the proper life insurance policy also means having long-term financial protection, but what you might not know is that those policy proceeds can be used for charitable donations as well.

In a guest column in the Lafayette Advertiser, life insurance professional Georgianna Latino notes that policyholders can name selected charities as beneficiaries of their policies – and benefit from tax deductions as well.

Latino details how your life insurance policy can benefit a favored charity. For example, policies that are no longer needed can be transferred to a charity. The transaction is exempt from the federal gift tax, and she adds that those who itemize their returns are eligible for a tax deduction.

Latino added that people can consider designating the charity as a beneficiary, which allows the beneficiary to maintain full control over the death benefit.

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If the insured wishes to maintain control over the policy after they have passed, they may consider creating a charitable trust.
The details describing a charitable trust are included in section 4947(a)(1) of the Internal Revenue Code. While such a trust is not tax exempt, all of the unexpired interests of it are devoted to one or more charitable purposes.

A charitable trust, an irrevocable trust established for a charitable purpose, enjoys varying degrees of tax benefits depending upon the venue in which it’s set up.

In the U.S., these trusts can be set up inter vivos (during the donor’s life) or as a part of a will, a testamentary trust. In the United States, there are two main types of charitable trusts – the “lead” trust where a charity is paid first and after the trust ends the rest goes to beneficiaries such as heirs. The second type is a “remainder” trust where charity is paid after the trust is terminated and after beneficiaries have received payments. These payments may be a fixed amount annuity trust or a percentage of the total principal which is called a unitrust.

Parents who have a child with a disability can ensure that the inheritance they leave for their child doesn’t affect their child’s eligibility for social assistance programs via what’s known as a “Henson” trust.

Building your own trust or foundation can provide peace of mind in a number of ways, but the key is in making certain the trust is set up correctly to serve its desired purpose.

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