The 63 20 Corporation Charitable Giving Strategy

A charitable giving strategy that utilizes a closely held corporation and a life insurance policy offers a method for business owners to facilitate a significant future gift to a charitable organization. This structure uses corporate funds to pay for a life insurance policy on the life of a key shareholder, with the ultimate goal of transferring the policy and its eventual death benefit to a qualified charity.

This arrangement allows a donor to leverage their corporation’s financial capacity to fund a substantial contribution that might be impractical from personal assets alone. The corporation handles the premium payments, while the shareholder orchestrates the gift. The structure is governed by specific tax rules that define how the components interact and the conditions under which tax benefits are permitted.

Core Components of the Strategy

The Closely Held Corporation

The foundation of this charitable strategy is a closely held corporation, where the donor is a majority or sole shareholder. The corporation’s primary function is to be the source of funds for the life insurance premiums. By having the corporation make these payments, the shareholder avoids using personal, post-tax dollars to fund the policy, as the corporation pays the premiums directly to the insurance carrier.

The decision for the corporation to pay these premiums must be formally documented and is structured as a benefit to the shareholder. The payments are not a direct corporate charitable contribution but part of a plan initiated by the shareholder for personal philanthropic goals.

The Qualified Charity

The beneficiary of this strategy is a qualified public charity, recognized under the Internal Revenue Code. This organization becomes the irrevocable owner and beneficiary of the life insurance policy. The charity must agree to accept the gift of the policy and understand its responsibilities as the new owner, including the right to receive the death benefit upon the insured’s passing.

For the strategy to be valid, the charity must have full control over the policy once it is transferred. The organization can choose to hold the policy until maturity or surrender it for its current cash value.

The Life Insurance Policy

A permanent life insurance policy is the asset at the center of this transaction. Unlike term insurance, a permanent policy builds cash value over time, making it a tangible asset that can be gifted. The policy is taken out on the life of the shareholder, who is the insured individual and initial owner before irrevocably assigning the policy to the charity.

The shareholder transfers all rights and ownership of the policy to the charity. The value of the gift is realized by the charity either through the policy’s cash surrender value or the full death benefit paid out upon the shareholder’s death.

Requirements for Tax Deductibility

For the shareholder to receive a charitable tax deduction, the arrangement must comply with Internal Revenue Service (IRS) guidelines. The primary requirement is that the donor must relinquish all control and ownership over the life insurance policy. This means the shareholder cannot retain any “incidents of ownership,” which include the right to change the beneficiary, borrow against the policy’s cash value, or surrender the policy.

The transfer to the charity must be absolute and irrevocable. The recipient organization must be a qualified public charity, such as a church or school, not a private foundation. The charity must be the sole owner and beneficiary, and any arrangement where the donor’s family or another private entity retains an interest in the policy proceeds would invalidate the gift.

A clear plan must be established from the outset, documenting the intent to gift the policy to the charity. This agreement should outline the roles of the shareholder, the corporation, and the charity, providing evidence that the premium payments are part of a pre-arranged charitable plan.

The charity cannot be under any obligation to pay the premiums if the corporation stops making them. The charity must have the freedom to either surrender the policy for its cash value or find another way to continue the premium payments. Failure to adhere to these conditions can result in the disallowance of any charitable deductions.

Tax Implications for the Donor

When a corporation pays the premiums on a life insurance policy for charitable purposes, the economic benefit of those payments is considered taxable income to the shareholder. The IRS treats these premium payments as either a constructive dividend or additional compensation. The classification depends on the shareholder’s relationship with the corporation and how the payment is documented. In either case, the shareholder must report this amount as personal income.

To offset this additional income, the shareholder may be entitled to a personal income tax charitable deduction. This deduction arises because the shareholder is deemed to have received the economic benefit from the corporation and then personally contributed that amount to the charity.

For gifts of life insurance policies to a public charity, the deduction is limited to 50% of the donor’s adjusted gross income (AGI). If the value of the contribution exceeds this limit, the excess amount can be carried forward for up to five subsequent tax years. The deduction for the initial transfer of the policy is the lesser of its fair market value or the donor’s cost basis.

For deduction purposes, the policy’s fair market value is its cash surrender value. For ongoing premium payments, the deduction is equal to the amount of the premium treated as income.

The Implementation Process

The first step in implementing this strategy is to create a formal plan. The shareholder and the corporation must document the arrangement, clarifying that the corporation will pay premiums on behalf of the shareholder as part of a charitable giving plan. This written agreement is the foundational document for the entire transaction. The process involves several steps:

• Select a qualified public charity and secure its agreement to participate. The charity must be willing to accept ownership of the life insurance policy and understand its rights and responsibilities.
• Apply for a permanent life insurance policy on your own life. The shareholder is the initial owner of the policy, and the application will proceed through the normal underwriting process.
• Execute an irrevocable transfer of ownership to the selected charity once the policy is issued. This is accomplished by completing an absolute assignment form provided by the insurance company, which legally transfers all “incidents of ownership.”
• Obtain a qualified appraisal if the policy’s value exceeds $5,000 at the time of transfer. An IRS form for noncash charitable contributions must also be filed with the donor’s tax return.
• Begin making the premium payments from the corporation directly to the insurance company. Each year, the corporation will report the premium payment as a taxable benefit to the shareholder, who may then claim a corresponding charitable deduction, subject to AGI limits.