“We make a living by what we get, but we make a life by what we give.” – Winston Churchill
What is planned giving?
To a charity it means seeking non-traditional financial arrangements with donors to provide a stable and predictable flow of funds.
To a donor it means including charitable donations in his/her overall financial security plan. Planned giving using life insurance allows you to decide how your estate will be distributed.
Planned Giving using life insurance:
- can make a difference
- can create a significant legacy with a modest annual financial outlay
- can make a personal tie to an organization
- is a tax-effective component of proper estate/tax planning
- eliminates the need to use other estate assets to fund the donation
Using Federal Charitable Giving Rules
- charities may be named beneficiaries under a life insurance policy, entitling the donor to a donation receipt
- avoids probate taxes (Estate Administration Tax) and creditor claims on the estate
The donor may receive
- an annual tax receipt for future required premiums (if a new policy)
- a receipt for the existing fair market value, if any, at the time the existing policy is assigned to a charity, and an annual receipt for future required premiums
Tax rules for individuals
Entitled to non-refundable, non-transferable federal tax credit of:
- 16% of the first $200
- 29% of any amount over $200 to a maximum of 75% of net income and provincial tax and surtax savings
- testamentary gifts, limit is 100% of income in final year and preceding year
Income tax on death
On death of the surviving spouse:
- RRSP/RRIFs are collapsed and brought into income of last surviving spouse
- all capital property is deemed disposed of at fair market value
- capital property includes shares, cottage, property, antiques etc.
What is taxed at death?
- all income for the year
- all RRSP/RRIFs (can be transferred tax free to a surviving spouse)
- 50% of capital gains
- RRSPs to dependent children
- $750,000 capital gains exemption on business shares and farm property
- life insurance proceeds
Options in Distributing Your Assets
Life insurance can be used
- to make gifts to your favourite charity
- to leave a legacy to your heirs, or
- to fund taxes owing to Canada Revenue Agency (CRA)
Advantages to donor
- contribution level can be designed to meet cash flow of donor
- donor can make a substantial gift without depleting your estate
- donor is recognized today for a substantial future gift
- tax credits can be matched to needs of donor
Advantages to charity
- additional source of funding – does not replace current giving
- plans for future substantial donations
- provides funds for capital projects
- avoids delays due to probate and estate litigation
- allows charity to compete for donor dollars
Strategies Using Life Insurance
Methods to fund a charitable bequest or donation using life insurance:
- funding a bequest through a will
- charity-owned insurance policy
- donor-owned insurance policy
1) Funding a bequest through a will
- donor owns an insurance policy and names his or her estate as beneficiary
- donor makes a bequest in his or her will in favour of the charity
- provides lump sum on death to charity by payment of premiums
- bequest is not subject to disbursement rules
- allows flexibility – donor can change his or her mind and designate a different charity or beneficiary
- large tax credit in year of death, with one-year carry back
- no current tax credit available
- tax credit on death may not be utilized
- subject to creditor claims, Estate Administration Tax and estate litigation, since insurance passes through estate
2) Charity-owned policy
- charity owns insurance policy and is the beneficiary
- donor pays premiums
- premiums result in current tax credits
- charity has certainty of death benefit
- death benefit and premiums receipted not subject to disbursement rules (if 10-year direction or trust is used)
- ease of arrangement
- gift not subject to creditor claims or probate fees
- donor has no rights under policy
- if donor defaults, charity may have to pay premiums or allow lapse and take cash surrender value
- if donor changes his/her mind about supporting, charity may not give the policy back
3) Donor-owned policy
Donor owns policy and names charity as the beneficiary
- previously not recommended
- recent federal budgets have changed this outlook
- under current Canada Revenue Agency rules you may name the charity as beneficiary and get full donation tax credit and avoid probate and creditors
Now or later?
You now have some choices:
1) taking the tax receipt on the donations paid now
2) purchasing a life insurance policy and taking the tax receipt on the premiums paid now
3) purchasing a life insurance policy, waiting until death, and taking the tax receipt for the amount of the insurance proceeds on your final tax return
Which is best?
- Do you want to maximize the gift that your charity can receive?
- Do you need the tax credit today?
- Can you use the full deduction if taken at death?
- Do you want flexibility in naming which charity receives the donation?
- Do you want to retain control of your capital in a tax-advantaged insurance program?
- Remainder Trusts
- Eliminate or reduce taxes in the year of death
- Estate Replacement
1) Remainder Trusts
- gift of an annuity for residual interest
- promised today but completed in the future
- receipted amount based on projected value of gift at the time of death
- projected value is based on current market value of gift, age, interest rates
- the older you are the larger the gift
Although a charitable foundation carries on its own fundraising activities, its purpose is to make donations to other charities. The reasons taxpayers choose to create charitable foundations include:
- to perpetuate the family or corporate name
- to involve other family members in a structured program of charitable giving
- a taxpayer’s specific goals may be better structured through a foundation rather than making annual donations
- wanting the giving to continue after his or her death
- may not wish to see a major gift “disappear” into the charity’s operating budget
- foundations employ professional money managers to manage funds, taking this responsibility away from the philanthropist
3) Eliminate or reduce taxes in year of death
- utilize increased donation limit in year of death (and preceding taxation year) – up to 100% of net income
- death benefit from life insurance policy gifted to charity to eliminate or reduce taxes
4) Estate Replacement (an example)
- give an asset away to a charity or foundation
- receive a donation receipt to generate a tax refund
- invest tax refund in a life insurance contract to provide estate replacement
Donors want to donate to charity. Charities depend on these donations. There are methods to significantly increase the value of these donations without increasing costs through effective planned giving programs. Life insurance products are key to helping both donors and charities achieve their respective goals.
Are you ready to speak with a licensed Life Insurance Advisor?