Holy Rosary Foundation

Planning Gifts of Life Insurance - Current Deferred Contingent and Split Interest


Many years ago when Dr. Mimms was just a budding young surgeon and father, he decided to purchase a life insurance policy on his life "just in case." At that time, he had two children and a very large mortgage. Therefore, he sought some financial protection should anything happen to himself, since he was the only income earner and his wife stayed at home to raise their children. Consequently, he purchased a $1,000,000 policy with annual premiums of $10,000.

Now the Mimms' financial picture is quite different. They have an estate of $4 million which consists of a $1.25 million home, $2.5 million IRA and $250,000 of various assets. Both of their daughters' schooling expenses have been set aside in education savings accounts. Finally, through the use of credit shelter trusts, bequests, and testamentary charitable remainder trusts, their estate plan was arranged so that no estate tax would be payable at either death. The Mimms, both 75, are very philanthropic and want to make a substantial gift to their favorite charity upon their deaths. However, they also would like additional income for their lifetimes because "you never know."


Can the Mimms transfer their insurance policy in exchange for a charitable gift annuity? What are the benefits and tax consequences of making such an exchange?


An outright gift of an insurance policy will produce a charitable income tax deduction equal to the lesser of the policy's value (i.e., interpolated terminal reserve value or replacement cost) or their basis in the policy (i.e., premiums paid). After contacting the Mimms' insurance company, it was determined that their policy is worth $400,000. The Mimms have paid premiums for 25 years. Thus, their basis in the policy is $250,000 (25 x $10,000 annual premium). In many cases, the donor's premiums paid for the policy will be less than the policy's value.

If the Mimms transfer their insurance policy in exchange for a $400,000 two-life gift annuity, their charitable deduction would be approximately $85,000. Pursuant to Sec. 170(e), the Mimms charitable deduction was reduced for the ordinary income component of the property. This deduction will fortunately be limited to the 50% AGI limitation (not the 30% limitation), because there is no capital gain element involved in the charitable deduction. Therefore, it is treated similar to a cash-type of gift. Based upon the joint ages of 75 and a 7% annuity payout, the Mimms' gift annuity also would provide approximately $460,000 of income during their lifetimes. Finally, the Mimms' favorite charity would receive about $300,000 when the gift annuity ends.

The Mimms love the tax and charitable benefits of the plan. As a result, they transfer all ownership and rights in their policy to their favorite charity in exchange for a gift annuity. This was accomplished by contacting the insurance company and filling out the proper change of ownership forms provided by the insurer. Once the charity is the owner of the policy, the charity may hold or surrender the policy. In this instance, for liquidity and diversification purposes, the charity elected to surrender the $400,000 policy and reinvest the funds. In the end, Dr. Mimms' "just in case" plan provided additional income, excellent tax savings and a substantial gift to his favorite charity. In other words, the gift annuity solution met all of the Mimms' financial and charitable goals!

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