Client Transfers Life Insurance to 501c3 Charity

[Richcpaman]

Taxpayer has fully paid up life insurance.  He paid $4,200 in cash premiums in the 70's for the policy, and then the cash buildup took over.  In 2015, the taxpayer donated the policy to a 501c3, which was properly acknowledged by the 501c3. 

Cash value of the policy is $42,000 and Death Benefit is $52,000.

What can the taxpayer deduct in 2015?

What if the 501c3 immediately redeems the policy for the cash value?  What can the taxpayer deduct?

TIA,

Rich

 

 

[kcjenkins]

Have not researched this, but my SWAG is the cash value at the time of the donation.  

[jklcpa]

Also unresearched, but I think it may be at the lesser of FMV or adjusted cost basis of the policy. Adjusted basis is the premiums paid less any dividends and withdrawals.

Unsure about if the charity cash out of the policy.

I found several articles on the topic, but they don't specifically cover if the policy is immediately cashed out.

[jklcpa]

A couple of articles:

http://www.dfhlaw.com/turbocharge-your-charitable-gifts.php

http://www.kiplinger.com/article/retirement/T034-C000-S004-donate-life-insurance-to-a-charity-or-college.html

http://www.forbes.com/sites/northwesternmutual/2014/03/31/creating-a-charitable-legacy/#1d6203f65e5f

[jklcpa]

Sorry for the separate posts. I've been sitting here thinking about why this would be different than a donation of appreciated securities that would be deducted at FMV.

Also unresearched - I believe the difference is that the appreciated securities would be a donation of capital gain property whereas the life insurance policy would be a donation of ordinary income property. If the policyholder cashed in that policy, the amount received in excess of basis would be taxed as ordinary income. 

[Richcpaman]

The treatment of the donation is pretty straight forward, you get the basis in the policy as a deduction.

I was hoping for something that might support the "Appreciated Asset" treatment if the 501c3 sold the policy for cash value after receiving it.  Most examples I see have the Cash value far below the face value, so it makes sense for the 501c3 to wait for the donor to die to collect.  In this case, the death benefit decreases each year, and the amount realized to the 501c3 is less and less as time passes.

Rich

 

[jklcpa]

Rich, the only reference I saw to cash value is that if the charity cashes in or is expected to do so relatively quickly, then the cash value can be used as FMV. That was from pub 561.