A nonprofit institution that already owns insurance on the life of a qualifying donor can discuss with that donor the benefit of the institution’s seeking a life settlement solution to help with current cash needs.
• A qualifying donor (age 65+) who is being solicited by a nonprofit organization for a capital or endowment campaign gift can review his or her insurance portfolio with a view toward seeking a life settlement and making a gift of the cash proceeds, or giving the policy to the nonprofit organization, which will seek the life settlement on behalf of the donor. Since making a gift of the policy or of the cash proceeds after the policy is sold will produce different tax consequences for the donor, advice from a tax practitioner should always be sought in advance.
• The following examples suggest life settlement strategies that maximize the gift- giving potential of life insurance and assure that the donor and the nonprofit institution get the most out of life.
Example 1. A small museum is the owner and beneficiary of a $500,000 life insurance policy given by a member. The donor made the gift of the new whole life policy when he was age 65. Each year, over and above his gift to the annual fund, the donor makes a gift to the museum to cover the cost of the premium on the policy. The donor is now 75.
The museum is in a financial crunch and needs to generate cash to cover the costs of capital improvements to the campus. However, it is also looking to its long-term future and to growing its endowment for which the donor made the gift of the life insurance policy. The Business Development Chair meets with the donor and suggests a way to solve the immediate needs of the museum while being mindful of its longer-term needs.
A) Let the museum seek a life settlement (a sale) of the policy and use the proceeds to meet current cash needs. Depending on the health of the insured at the time the offer is made and several other determining factors, an offer might be at least three times the cash surrender value of the policy.
B) Because the donor has been making annual gifts of $15,000 each year to cover the cost of the premiums, ask the donor to consider continuing to make the same payments on a new policy to replace the one that the museum sold. Of course, the amount of the death benefit and whether the donor is even insurable will depend on his health at the time of the new application. Although the new death benefit will most likely be less than the original because the donor is older, it will help offset the difference between what the museum realized “up front” on the sale of the policy and what it would have received if the policy had not been sold.
Example 2. The same museum offers a charitable gift annuity program to encourage its more senior members, who might need additional current income, to make a planned gift that meets that objective while helping the institution build its endowment fund. Traditionally, donors have made gifts of cash, appreciated securities, and real estate to fund a charitable gift annuity.
In the course of a meeting with a 75-year-old prospective donor, the museum’s planned Business Development Chair learns that the donor wants to increase his annual income and is interested in a charitable gift annuity. Although the member has already divested almost all his appreciated securities, he does own a life insurance policy that is no longer needed and, in fact, the insured does not want to continue paying the premiums on the policy. How could a life settlement help the museum secure a much needed charitable gift and meet the donor’s need for more income?
A) The donor can use life insurance as a gift to fund a charitable gift annuity.
B) Depending on whether the donor seeks the life settlement and makes a gift of the proceeds, or makes a gift of the policy and lets the museum seek the life settlement, there will be different income tax consequences. In either event, the donor is eligible for a charitable income tax deduction in the year the gift is made.
C) Although the amount of the life settlement offer will differ, depending on the age and health of the donor as well as other factors, the amount realized will in most cases be two to three times the cash surrender value of the policy.
D) The general benefits to the donor are: (1) turning an unproductive asset into an asset that produces a new source of predictable, guaranteed, high-yield income; (2) saving money by not having to pay an annual premium on the policy; (3) generating a charitable income tax deduction; and (4) making an important charitable contribution to the museum.