Donating old policy can benefit charity, donor

September 1, 2008

If you determine that the life insurance you bought years ago is no longer needed to provide for a surviving family, it can be canceled or given to your favorite charitable not-for-profit entity.

Q. Now that I have retired from my practice, I may not need the life insurance I purchased when my kids were younger. Is there a way I can use my policies for charitable gifts as opposed to making cash donations during my retirement years?

Therefore, it is not surprising that most individuals purchase life insurance early in their careers before they have accumulated substantial assets. As time passes, their assets grow, and those original needs, such as education funding, are handled through savings or investments; therefore, the need for life insurance may be drastically reduced. When this situation occurs, it's time to re-evaluate life insurance needs.

With this unique strategy, the donor benefits both from a current income tax deduction and a feeling of satisfaction from having given a much more substantial gift of death benefits at some point in the future. The charity benefits from receiving a large lump sum at the time of the donor's death. If the charity's needs are more short term, it would have the ability to surrender the policy as the new owner of the policy and receive any cash value associated with it. The amount of the current income tax deduction is based on a number of factors and is limited to the lesser of:

For those who are not comfortable relinquishing ownership of a policy, another option would be to name the charity as the beneficiary of an existing policy. While this option does not provide the donor with a current income tax deduction, it does provide the donor with greater flexibility, such as retaining the right to change the charitable beneficiary to another entity or individual and having the ability to access any cash value within the policy. The tax advantages of this strategy are deferred until the donor's death, when there may be estate tax benefits based on the size of the estate.

Now may be a good time to assess your financial situation to determine whether your old life insurance policies are still needed for their originally intended purpose. Whether you transfer ownership of the policy or change the beneficiary to a charitable organization, you have the ability to give a gift that has a substantial impact on many.

Q. I understand the popularity of 529 plans to fund a college education, but are any tax-free benefit plans available to pay for private elementary school?

A. While 529 plans are intended to fund college costs only, tax-free withdrawals from a Coverdell Education Savings Account (ESA) can help pay for a child's elementary and secondary school expenses in addition to college expenses. Besides tuition, elementary and secondary school expenses include tutoring, room and board, computer costs, Internet access, and certain other costs. In addition to the ability to fund these expenses on a tax-free basis, an ESA's other main advantage is that you can have control over how the account is invested.

Unfortunately, not everyone is eligible to invest in an ESA. The ability to make ESA contributions begins phasing out at adjusted gross income (AGI) levels of $190,000 for married couples filing jointly, and is fully phased out at $220,000. For single tax filers, the phase-out begins at $95,000 AGI, and is fully phased out at an AGI of $110,000. If your income prevents you from contributing to the ESA, other individuals, such as grandparents, whose AGI may fall within the limits, may make contributions for the child's account.

Non-deductible annual contributions of up to $2,000 can be made to an ESA, generally until a child reaches age 18. Any earnings left in the ESA when the beneficiary turns 30 will be subject to taxation, although a new beneficiary who is under age 30 and who is a member of the family or extended family can be named to maintain the ESA's tax-advantaged status.

Joel M. Blau, a Certified Financial Planner, is president of MEDIQUS Asset Advisors, Inc. in Chicago. He can be reached at 800-883-8555 or blau@mediqus.com
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