Charitable Gift

Most often when we donate money to charities, we do it in the form of a direct contribution. Typically, someone knocks on your door or solicits you through the phone. Sometimes, we give a little by leaving our change at the cash register or even by attending a fundraiser of some sort.

Charitable gifting with affordable whole life insurance is much different. The most attractive advantage using life insurance is that it allows one to make a much larger gift to a charity.

When using life insurance for charitable gifting, it is important to consider different strategies and the different tax benefits. I offer three strategies in which to help charities with gifts of life insurance:

Designate a charity, beneficiary of a life insurance policy.

charitablegiftThe most straightforward approach is to buy a life insurance policy where you are the owner of the policy and you designate the charity as the beneficiary. In this strategy, you would maintain control of the policy, but the charity collects the insurance proceeds upon your death. The death benefit qualifies as a tax credit on your final income tax return. In this strategy, the premiums for the life insurance contract are not eligible for a tax credit. Since there is a direct beneficiary designation, the life insurance death benefit would bypass the estate and avoid any probate fees. If you have an existing life insurance contract, you can simply change the beneficiary to your charity of choice.

Advantage to the Charity:

  • The qualified Charity acquires a Capital Asset in the form of cash upon your death.
  • No delay, in receiving funds.

Advantage to You as a Donor:

  •  Not subject to probate fees.
  • The death benefit generates a tax credit against final tax liabilities.
  • The Gift is confidential.
  • Makes you the donor feel fulfilled and as a responsible member of society.

Name your estate as the beneficiary.

This strategy is similar to the first scenario in that you are the owner of the policy. However, instead of naming the charity as the beneficiary, you name your estate as beneficiary and simply leave instructions in your will that the proceeds of the life insurance policy will be paid to your choice of charities. Again, the life insurance premiums would not be eligible for a tax credit. However, the death benefit would qualify as a donation giving your estate a tax credit on the final income tax return. It is important to note that the proceeds would not be protected from probate fees, as the death benefit becomes part of the estate.

Advantage to Charity:

  • Charity acquires a Capital Asset in the form of cash upon your death.
  • The death benefit generates a tax credit against final tax liabilities.
  • The Gift becomes public knowledge upon probate.
  • Makes you feel fulfilled.

Advantage to You:

  • Tax credits for any cash value at time of transfer.
  • Tax credits for all future premiums.
  • Makes you feel fulfilled.

Transfer ownership of the policy to the charity.

lifeinsgiftWith this strategy, if a life insurance contract is set up so that the charity is the owner of the life insurance policy, the premiums for the contract will qualify for a tax credit. As you gave up ownership of the policy, the future death benefit will not qualify for a tax credit. An existing life insurance policy with cash values, gives you the option to transfer ownership to the charity and name the beneficiary as the charity. A tax credit is available for any cash surrender value that exists at the time that the policy is transferred. In addition, a donation tax credit will also be available for future payments of life insurance premiums.

Since an actual disposition has occurred at the time of transfer, there may be a tax liability if the cash surrender value exceeds the adjusted cost base of the policy. You will need to weigh the tax credit against the tax paid as a result of disposition. Also, since you’ve relinquished control, you will no longer have any rights (such as the right to change the beneficiary) in the policy.

Advantage to Charity:

  • Charity acquires a Capital Asset in the form of a life insurance policy.
  • Increases future endowment funds.

Advantage to You:

  • Tax credits for any cash value at time of transfer.
  • Tax credits for all future premiums.
  • Makes you feel fulfilled.

 

 

RRSP RRIF Tax Protector

Covert a term life insurance policy equivalent to the value of your RRIF or RRSP, and designate the charity as beneficiary of the RRIF or RRSP. On your death, the charity issues a charitable tax receipt which offsets the tax impact of the RRIF proceeds.

Advantage to Charity:

  • Charity acquires a Capital Asset in the form of cash upon your death.
  • Increases future endowment funds.
  • Tax credits upon death to offset tax liability of your RRSP or RRIF.
  • Makes you feel fulfilled.

Advantage to You:

Wealth Replacement Insurance.

This is a creative strategy which allows you to donate a large asset or lump sum of money to charity. In return, you receive a charitable credit for the donation which results in tax savings for the year the donation is made. You can then invest these tax savings in an insurance policy (say a converted term insurance policy, so no medical) that potentially results in enough proceeds to replace the value of the gifted property.

Let's look at an example of the last method.

Mrs. Jones own a piece of land that originally cost her $100,000. It is now worth $300,000. She donates the land to charity and receives a donation receipt for $300,000, which will equate to tax savings of approximately $138,000 (assuming a 46% marginal tax rate).

Mrs. Jones incurs a taxable capital gain on the disposition of the land of $100,000 (50% of $300,000-$100,000) resulting in tax payable of $46,000. However, the net tax savings of $92,000 could be used to fund a life insurance policy on Mrs. Jones producing a potential tax free death benefit for her heirs in excess of her original donation.

Many people are unaware of the increased contribution they can make to charities by using more creative methods of giving. Careful planning can result in larger amounts being available to meet your philanthropic goals and help others in need.

Which solution is best for you?

Every situation is unique to your circumstance. In most cases, you would choose 1st strategy over the 2nd if confidentiality is important to you simply for the fact that you gain the benefit of probate fee protection. The outcome of both of these scenarios is very similar.

Other than that, the two most crucial issues are control and when you want the tax credits.

Considerations:

Control over the policy

With strategy 1 or 2, you maintain control, as you remain the owner of the policy. As the owner, you can change beneficiaries whenever you want. In strategy 3, you relinquish your control when you make the charity the owner of the policy.

Tax

It is important to determine when you want to utilize the tax credits. If you want to have tax credits every year while you are alive, you will need to take a hard look at strategy 3. You give up the control but you get to use the premiums in paying less tax every year. However, if you have a significant amount of accrued tax liabilities in the estate, you may be better off saving the tax credits for the future by using strategy 1 or 2.

There is no right or wrong and the decision depends on your personal needs. You should seek independent advise.~


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