Charitable Life Insurance Trusts

A CHARITABLE LIFE INSURANCE TRUST (CLIT) is an irrevocable tax-exempt Trust with a charitable organization as the ultimate beneficiary. The Trust is the owner and beneficiary of life insurance policy or policies, usually on the lives of the individuals (donors) establishing the CLIT. Although it is generally assumed that life insurance death benefits are free from federal estate tax liability, the reality is that these proceeds are included in the policy owner’s estate (said to be the “Incidents of Ownership” of the policy), and therefore may be subject to federal estate tax considerations. Since the Charitable Life Insurance Trust (and not you as the donor and “insurable interest” on the life insurance policy) owns the policy, the insurance proceeds will not be included in your federal gross estate.

A Charitable Life Insurance Trust is an excellent estate-planning tool to divest yourself of life insurance policies that are no longer needed for wealth replacement protection and strategies, or, due to the ownership registration of them, expose your estate to the federal estate tax liability. You can establish a Charitable Life Insurance Trust by either donating existing life insurance policies to the Trust or by donating cash to the Trust and having the Trustee apply for the insurance on your insurable life. In either case, you will be allowed to take an immediate income tax deduction in the year that you “make the gift” to the Trust. If you donate existing life insurance policies, your income tax deduction will be calculated on a special internal value (the “interpolated value”) of the life insurance contract. The insurance company will calculate this for you. If you donate cash, you may take an immediate tax deduction on your itemized deduction tax form for the actual cash amount donated. Two forms of life insurance contracts are typically donated: Whole Life and Universal Life Insurance policies.