Thursday April 18, 2024
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4.4.2 Premium Payment Deductions
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Premium Payments to Charity - 60% AGI Limitation
In some situations, a donor may transfer a life insurance policy to charity with the hope that charity will not surrender the policy. With respect to the remaining annual premiums, the donor will typically continue to make those payments. Specifically, the donor will make cash contributions to the charity each year, so that charity may maintain the policy.
It is important to remember that charity is not obligated to pay the premiums or keep the policy. In fact, the charity owns the policy outright and may elect to surrender the policy at any time. However, in most cases, the charity will honor the donor's wish. In this case, the charity will use the cash contributions to pay the premiums on the policy. Therefore, as long as the donor continues to contribute cash each year, the charity may pay the policy premiums.
As a result of these yearly cash gifts, a donor will be entitled to an additional charitable income tax deduction each year. Because it is a cash gift, the deduction will be subject to the 60% of AGI limitation.
Example 4.4.2
Isaac Insurance gave Great Charity a life insurance policy earlier this year. The policy will pay $500,000 upon Isaac's death. The policy's premiums each year are $15,000. Isaac wants Great Charity to hold the policy until his death. At that time, Isaac wants the $500,000 to fund an endowment within Great Charity. While completely within its discretion, Great Charity decides to hold the policy. However, it does not want to be responsible for the annual premiums. Thus, Isaac informally agrees that each year he will contribute $15,000 to Great Charity. The annual gift is unrestricted.
As a result, Great Charity feels comfortable holding the policy. In addition, Isaac will receive a $15,000 charitable deduction each year that he makes the contribution to Great Charity. If the gift is made in cash, it will be subject to the 60% AGI limitation. If the gift is made with appreciated stocks, it will be subject to the 30% AGI limitation.
Premium Payments to Insurance Company - 30% AGI Limitation
Because the charity owns the policy outright, charity could (while unlikely) elect to surrender the policy at any time. Therefore, in some cases, a fearful or control-oriented donor may prefer to make the premium payments directly to the insurance company and remove the charity from the premium paying process. In that case, the donor will be entitled to a charitable income tax deduction each year that he or she pays the insurance premium on the policy now owned by the charity.
For cash gifts, the deduction normally is subject to the 60% of AGI limitation. However, this direct payment plan may subject donors to the lower 30% AGI limitation. See Reg. 1.170A-8(d). Specifically, the donors' direct payment of the premiums may be deemed as a contribution "for the use of" charity rather than "to" charity. The 60% AGI limitation only applies to contributions "to" charity. See Sec. 170(b)(1)(A).
In some circumstances, a donor may fully deduct each year's premium payment under either AGI limitation rule. Therefore, the lower AGI limitation may not pose a problem. However, if the 60% AGI limitation is preferable, a donor should make gifts to charity each year equal to the policy's premium payments.
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