Revocable Beneficiary Designation
If the donor wishes to maintain ownership over a life insurance policy, he or she may merely designate a charity as the beneficiary of the policy. In other words, the donor will retain full control of the policy during his or her lifetime and charity will receive the insurance proceeds at the donor's death. This is a common situation for donors who wish to maintain utmost flexibility and control.
Unfortunately, the donor will not receive a charitable income tax deduction for this future gift, because he or she has not made an irrevocable charitable contribution. Generally, the tax code requires an irrevocable transfer under state law of cash or property for a deductible gift. Since the donor retains ownership of the policy and may elect to change the beneficiary in the future, a charitable income tax deduction will not be allowed.
Irrevocable Beneficiary Designation
There is no deduction even when the beneficiary designation is irrevocable. While the future gift to charity is irrevocable, the partial interest rules deny a charitable income tax deduction on such transfers. A donor who desires a charitable deduction must irrevocably transfer all rights and incidents of ownership in the policy to charity, not just the future right to receive the death benefit.
4.4.3 Example
Irene Insured loves XYZ Charity. In order to benefit it upon her death, she names XYZ Charity as the beneficiary of her $1 million life insurance policy. Even though revocably naming XYZ Charity as policy beneficiary does not qualify for a current income tax deduction, XYZ Charity wants to "count or recognize" this future gift. Some charities measure this gift by doing a "future value to present value" computation. This computation is performed in the "calculator" section of Crescendo.
In short, XYZ Charity takes the future value of the $1 million and determines its present value using Irene's life expectancy and an assumed discount rate (e.g., 5%). Based upon her age, Irene has a life expectancy of 25 years. Therefore, using a 5% discount rate, the present value of the $1 million policy is $295,303. As a result, XYZ Charity may elect to use $295,303 for recognition purposes.
Charitable Estate Tax Deduction
There is a positive tax aspect to naming charity as beneficiary of a life insurance policy. Upon the death of the donor, the donor's estate will be entitled to a charitable estate tax deduction for the amount transferred to charity. See Sec. 2055(a). Accordingly, the value of the life insurance policy should not be subject to any estate tax.