If you have a desire to make a donation to your favourite charity, you might want to investigate how significant bequests can be made using life insurance on your life. Generally, strategies utilizing life insurance for charitable purposes fall into two categories:
- The charity owns the policy;
- The donor owns the policy.
Charity Owns the Policy
If you purchase a new life insurance policy and transfer the ownership of the policy to the charity that is also named as beneficiary, you will receive a charitable tax receipt for the premiums you pay each year. Upon your death, the charity will receive the face amount of the policy, but there will be no further tax receipts for the proceeds which are received by the charity tax-free.
If you have an existing life insurance policy that has an accumulated cash surrender value, you can transfer the ownership of the policy to the charity. In this case, there may be income tax to pay upon the transfer if the value exceeds the adjusted cost base of the policy; however, this will be offset by the charitable tax receipt issued by the charity for the cash value of the policy. In some circumstances, the charitable receipt could be higher than the cash surrender value and this is especially true if the donor is not of good health. After the transfer has been made, the donor will continue to receive charitable tax receipts for the ongoing premiums that he or she pays.
Donor Owns the Policy
One of the simplest methods of using life insurance for charitable purposes is to name the charity as the beneficiary of a policy you own. Although you won’t get a receipt for the premiums you pay, there will be a charitable deduction for the death benefit when the proceeds are paid to the charity upon your death. This tax deduction can be applied by the estate in the year of death and, if it is more than the income earned in the year of death, the excess can be carried back to the preceding year.
In certain situations, a donor may wish to replace an asset they have donated to a charity. For example, donating registered plans such as an RSP or RRIF upon death will result in income tax being paid, but will be offset by the charitable donation receipt. The tax-free proceeds of the life insurance policy will then replace the capital donated to the estate.
A variation of the above is to donate a significant asset or lump sum to a charity and use the charitable donation credit to assist in paying for a life insurance policy to replace the capital donated.
One of the big advantages for charitable-minded individuals in using life insurance is that it results in a much larger donation than might be otherwise possible. There are also more sophisticated and complex strategies that can be structured using life insurance. If you would like to investigate these, please feel free to contact us.
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