Question

Sorely is an insurance agent and he meets with his client, Latoya, for an annual review. Latoya owns a whole life insurance policy with a face value of $250,000, an adjusted cost basis (ACB) of $44,000, and a cash surrender value (CSV) of $68,000. The annual premium on her policy is $8,000. Latoya tells Sorely that she would like to make a charitable donation to her favourite charity. Which of the following statements about charitable donations is CORRECT?
a) If Latoya assigns the policy to a charity, she will receive a tax credit based on a $44,000 charitable donation in the current year.
b) If Latoya assigns the policy to a charity, she will receive a tax credit based on a $68,000 charitable donation in the current year.
c) If Latoya names a charity as beneficiary, she will receive a tax credit based on a $250,000 charitable donation in the current year.
d) If Latoya names a charity as beneficiary, she will receive a tax credit based on a $318,000 charitable donation in the current year.

Answer 1

Per IRS, the maximum allowed deduction for a donation of Life insurance policy is limited to the lesser of:-

a.) Donor's basis in the life insurance policy - $44,000

b.) Fair value of the life insurance policy - $68,000

Based on the above explanation, Latoya would be eligible to receive a tax credit upto $44,000 since it is the lesser amount among the two . Hence, Option A is the correct answer.

Option B is incorrect because, the amount of tax credit a donor can claim is limited to the lesser of the donor's basis vs the fair value of the insurance policy.

Option C is incorrect because $250,000 is the face value of the insurance policy and is irrelevant in determining the deduction that Latoya can claim.

Option D is incorrect because $318,000 is an incorrect amount based on the above calculation and hence is incorrect.