Funding a Charitable Life Estate Plan Using Life Insurance

No crystal ball can reveal what will ultimately happen with the house part of your estate. Although, the
house is often a donor’s largest asset in his or her estate, its value can fluctuate depending on factors beyond
a donor’s control. One way to plan around this uncertainty is to create a “charitable life estate”
complete with enough life insurance to replace the “would be” value of the home.

What is a “Charitable Life Estate”?

A charitable life estate involves gifting a residence (house or farm) to a qualified charity. The donor gifts the
property to the charity but retains the right to live on the property, usually until death.
After the donor’s death, the charity takes ownership of the property. (1)

How does a Charitable Life Estate with life insurance work?

The donor (or donors) gifts the house or farm to charity. (2) The charity takes title to the property subject to the donor’s life estate. The donor executes and records a deed giving them the right to continue to live on the property until death. The donor continues to pay all costs, maintenance, taxes and insurance on the property.

At the time of the gift, the donor may wish to purchase life insurance to replace the value of the gifted
property (either at current appraised value or at the estimated fair market value based upon the life
expectancy of the donor). Under the insurance contract, the donor would be the insured and the children
and/or other heirs would become the life insurance benefciaries. The policy proceeds would replace the value
of the home that was gifted to charity.

The purchasing of life insurance would also present an opportunity, if the donors were so inclined; to quantify
an inheritance by choosing a specifc dollar amount of guaranteed coverage. This is like creating an estate plan
“around the house value” by laying the groundwork for an inheritance that is not subject to the uncertainty of
the donor’s home value.

In the year of the gift, the donor will receive a charitable deduction on their individual income tax return for
the “present value of the remainder interest” given to charity.(3) Before this happens, the property will need
to be appraised and the remainder value calculated (many accountants use a simple software calculation) to
determine the actual charitable deduction amount. (4) Additionally, the donor’s estate may receive a charitable estate tax deduction (5).

Upon the death of the donor, the charity will own the property outright - heirs need not be concerned with
selling or dividing up the home or farm. As benefciaries, they will receive the life insurance proceeds income
and possibly estate tax-free. (6)

Charitable Life Estate and Life Insurance

Why someone may want to add life insurance to a Charitable Life Estate plan?

The Charitable life estate with life insurance has several advantages:
• For the charitably inclined, a charitable gift is made without “disinheriting” the heirs.
• Under current gift and estate tax law, gifts made to charitable organizations in excess of the current annual exclusion are offset by a 100% charitable gift tax deduction; hence, no gift tax will be due.
• Flexibility and control in creating “the amount” of inheritance to children and other heirs by purchasing
the exact desired amount of life insurance (thereby avoiding the uncertainty of leaving to the dependants and heirs whatever the house value happens to be at the donor’s death).
• If the gift meets the current IRs laws and regulations, the donor (client) receives an immediate income tax deduction (in the year the house or farm is gifted);
• The residence (and any future appreciation) is removed from the donor’s estate, potentially avoiding estate taxes and fees; additionally, the replacement life insurance can be placed in an irrevocable trust to avoid being part of the donor’s estate; (7)
• A forced ‘fre sale’ of the home may be avoided.
• life insurance provides funds (cash) to pay the heirs a set amount not tied to the market value of the
property.

Some things to consider

• Creating a Charitable life estate is a legal transaction and requires legal expertise to be properly
implemented.
• The annual charitable deduction on an individual’s income tax return may be limited. The deduction can,
under current law, be carried forward for the next fve years. (8)
• If replacement life insurance is to be purchased, the donor must be insurable and will need to have funds
available to pay the insurance premiums.
• If there is a mortgage or lien on the home, it could result in taxable income to the donor.
• If the client becomes disabled, or for some other reason can no longer live in the home, there are various options available, including, gifting their life estate to the charity and taking another income tax deduction, exchanging the life estate for an annuity income stream, or even renting the property (continuing until death of the original owner).

In summary:

A Charitable life estate combined with life insurance can simplify the estate administration process, give a
signifcant gift to charity, and maintain and quantify an inheritance for children and other heirs

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(1) I do not give legal, tax, or estate planning advice nor create legal documents, other then the required life insurance documents. The information given here reflects my understanding of current laws and regulations and is subject to change. I Advise people to contact their legal, tax, or estate planning advisor(s) regarding their specific situation.
(2) It is advisable that prior to gifting, all insurability requirements and payment obligations be determined and accepted by the donor.
(3) Before this happens, the property will need to be appraised and the remainder value calculated (many accountants use a simple software calculation) to determine the actual charitable deduction amount.
(4) Additionally, the donor’s estate may receive a charitable estate tax deduction.
(5) Upon the death of the donor, the charity will own the property outright - heirs need not be concerned with
selling or dividing up the home or farm. As beneficiaries, they will receive the life insurance proceeds income
and possibly estate tax-free.
(6) Charitable Life Estate and Life Insurance
(7) Prior to applying, please confirm that the specific Insurance product does, in fact, support third party ownership.
(8) Based upon interpretation of current tax laws, which are subject to change.