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§ 17.3 CHARITABLE GIVING AND INSURANCEtax liability. An illustration of this is a tract of raw land that originally cost verylittle but has grown substantially in value. Another example is highly appreciatedsecurities that pay little or no dividends. If the individual were to sell suchproperty, he or she would have to pay capital gains tax on the gain (the differencebetween the original cost and the current fair market value of the property).If this individual made an outright gift of the property to a public charity,the donor’s federal income tax charitable deduction would be based on the fairmarket value of the property. 17 The capital gains tax would be avoided. In general,regarding this gift, the individual could deduct an amount up to 30 percentof his or her adjusted gross income, 18 with any excess carried forward up to fiveimmediately succeeding years. 19 The tax savings may offset the gift cost; thedonor’s estate is reduced by the amount of the contribution, so the estate taxburden is reduced.One major deterrent to a gift of this nature is that the property itself is contributedto charity and is not passed on to the donor’s heirs. Life insurance cansolve this problem, however, and make it possible for the donor to make a currentgift of the property to charity. The individual in this situation can make taxfreegifts (up to $11,000 per year per donee 20 ) of part or all of the tax savings.Adult heirs (assuming they have an insurable interest) can purchase life insuranceon the donor’s life in an amount equal to or greater than the value of theproperty given to charity. The cost of the insurance is paid by the tax-free giftsthey received from the donor.Two purposes are served by this approach. First, the heirs receive the same(or approximately the same) economic benefit (by means of life insurance) thatthey would have received if the gift had not been made. Second, neither theproperty given nor the life insurance purchased on the life of the donor by theheirs will be included in the estate of the donor.The same result can be achieved by the donor’s creation of an irrevocablelife insurance trust. The donor makes tax-free gifts of the tax savings to an irrevocabletrust for the benefit of his or her heirs. The trust purchases life insuranceon the donor with the money received from the donor. At the donor’sdeath, the insurance is paid to the trust free of income or estate taxes, and itreplaces the property given to charity by the donor. (The insurance may beincludible in the decedent’s estate if the death occurs within three years of thetransaction.)The donor, however, may need income from the property during lifetime.This can be accomplished by the creation of a charitable remainder trust. 21Instead of making an outright gift of property to the charity, the donor transfersthe property to a charitable remainder trust. During the donor’s lifetime, thedonor retains the right to a certain amount of annual income, but at the donor’sdeath the amount remaining in the trust is paid to the charitable organization ororganizations that are the remainder interest beneficiaries. The annual amount17 See § 4.2.18 See § 7.6.19 Id.20 IRC § 2503(b). See § 8.2(h).21 See Chapter 12. 533