Church Gift Deduction Rules – Part I

May 5, 2009 by  
Filed under Fundraising

bills150x131Are you considering making a gift to your church? If so, you need to be aware of a number of factors, some of which are new as a result of the Pension Protection Act of 2006. In summary, they are:

  • IRS approved charities.
  • Allowable income tax deductions for various categories of gifts.
  • The substantiation of value rules for each type of property given.
  • The penalties for overvaluation.
  • How to deliver the gift and when it is deemed a completed gift.

In this post, I will cover the deduction allowed for the most common categories of gifts. In a follow up post, I’ll go over the treatment of less common gifts.


This is the most straightforward. Whatever you give, you can deduct. However, each category of gift has its own limitation based on your adjusted gross income (AGI) and the type of charity (public or private family foundations). The limit for cash contributions to a public charity is 50% of AGI. Churches are public charities.

Stocks, Bonds, Real Estate

If the asset has been held for more than a year, the deduction is the fair market value. However, for real estate, there are some situations that may limit the deduction to the cost basis.

If the asset has been held for less than a year, it would produce ordinary income, not a capital gain, if sold. Therefore, the deduction is limited to the cost basis. Other examples of deductions limited to the cost basis are works of art donated by the artist and inventory.

As an example of a gift of inventory, my church has an annual shoe drive to benefit children. If the owner of a shoe store donated 50 pairs of shoes, the deduction would be limited to the cost basis, not the retail price.

Series E and EE Bonds

Series E bonds cannot be transferred to a charity during the owner’s lifetime. You would first have to cash in the bonds, pay the tax on the gain (which has been deferred similar to an annuity) and then contribute whatever is left over.

Planes, Trains and Automobiles

There are new rules, which became effective January 1, 2005.

If the charity doesn’t have a use for the donated vehicle and sells it, the deduction is whatever they get for it or the fair market value, if lower. However, if the charity fixes it up, uses it or plans on giving the vehicle to a needy person, you can deduct the fair market value.


Bear in mind, I am not a tax authority. Before you make any gift, you should consult with a qualified tax professional. Furthermore, some gifts may not be acceptable to the church or have to pass through a review process (life insurance is a good example). Therefore, in these situations bring the church into the gifting process early on as well.

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Charitable Gifts of Life Insurance – What’s Deductible?

May 1, 2009 by  
Filed under Featured

warmsmile150x131Gifts of life insurance to charity are popular. However, the transaction is a bit more complicated than it might seem at first blush. 

There are caveats. Do some things wrong and adverse tax consequences and/or penalties could apply.

In this post, I will examine what is deductible in three different life insurance policy gift scenarios.

Meet Jane

Jane was widowed at an early age. Her husband left her with two children. He also left her financially secure by virtue of having bought a sizable life insurance policy after their children were born.

After her husband’s death, Jane followed his planning and bought several life insurance policies, naming her children as beneficiaries.

Fast forward 20 years. Her two children are now grown, out of college and have successful high-income careers of their own.

Consequently, Jane has concluded that the life insurance policies have served their purpose and are no longer needed. She wants to give the policies to the church where she and her husband attended in his memory.

First Steps

The first thing Jane needs to do is to make a copy of her policies and obtain an “in-force ledger statement” (IFL) on each policy from the respective insurance companies. The IFL projects the values of a policy from today forward, using the current dividend scale/interest rate.

Second, she needs to meet with the church’s planned giving resource professional and give him/her this information. Not all churches accept gifts of life insurance. Those that do generally have a Gift Acceptance Policy. The type, status and characteristics of her policies will be compared to the criteria set forth with regard to life insurance gifts.

Jane has three types of policies. Let’s take a look at how each is valued for charitable tax deduction purposes and see what her tax deduction and best option is for each policy.

Policy #1: Paid up

This policy was purchased 18 years ago from a highly regarded mutual company. Jane elected to pay a level premium and have the dividends buy more insurance each year (called “paid up additions”). Two years ago, the death benefit had grown to one and a half times the original face amount.

Jane met with her agent and she helped her with the paperwork to discontinue her premium payments and take a paid up policy.

The resulting death benefit was less than the total death benefit the policy had grown to over the 18 years, but still a little greater than the original face amount. The death benefit, after electing the paid up policy, would continue to pay dividends, which buy more insurance each year.

Her charitable tax deduction for the gift of this paid up policy is the lesser of her cost basis, essentially the total premiums she has paid in this case, or the policy’s “replacement value.”
Replacement value is defined as the premium she would have to pay at her age for a single premium policy with the same death benefit. This premium can be easily obtained from the insurance company.

Policy #2: On-going Premiums

Jane is still paying premiums on this policy. The charitable tax deduction is the lesser of her cost basis or the “interpolated terminal reserve” plus any unearned premiums.

The interpolated terminal reserve is a value close to the cash value, and is the value required by the IRS. This number is also easily obtained from the insurance company. It is calculated by actuaries, incredibly smart mathematicians.

Policy #3: Group Life Insurance

Jane is the head of the HR department for a large local company. The company provides a $50,000 group life insurance plan for all employees. In addition, there is a supplemental plan for department heads and above equal to three times salary. As such, Jane has $350,000 of group term life insurance.

There are no income tax ramifications for group term life policies up to $50,000. However, for amounts greater than $50,000 the government requires including in taxable income their view (the Table I cost) of the value of the excess amount.

On the advice of her astute life insurance professional, Jane elects to change the beneficiary on her group life policy and name the church as the beneficiary of the death benefit in excess of $50,000.

This move erases her requirement to include the Table I cost in her income each year. Therefore, she has made a $300,000 charitable gift possible for which she is paying nothing. Very cool.

Furthermore, she can change the beneficiary; the election is revocable. Nor can the government recapture the tax she would have been paying on the Table I costs during the time the church was the beneficiary. Of course, group term life is only in effect during a person’s employment.


There are more factors to assess when contemplating a gift of life insurance to a church or charity. However, this should get you thinking. Are you in a situation where a life insurance gift would be beneficial to you and your church? If so, get the ball rolling by setting up a meeting with your insurance agent and the church’s legal advisor.

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Robert Cavanaugh, Platinum Author