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Charitable Giving Using Life Insurance Policies
Tue, 2010/09/14 - 2:54pm | by Mike Holmes
Winston Churchill once said, “We make a living by what we get, but we make a life by what we give.”
While most individuals would like to be able to give a large donation to their favourite charity, quite often the reality is that income and other financial obligations make it difficult to do so.
Today, there are a number of ways to use life insurance as a means to create a sizable charitable gift, while taking advantage of additional tax-saving benefits. The following are two examples of how a donation can be made to a registered charity using a new or existing life insurance policy.
Designate a Charity as the Beneficiary
By designating a charity as the beneficiary of a policy, the charity will receive the proceeds of the life insurance upon the death of the insured. The benefits are paid directly to the charity by the insurance company. A tax receipt will be issued to the donor’s estate for an equivalent amount and can be applied as a tax credit to the donor’s final income tax return (in the year of the donor’s death) by executors of the estate. Any remaining credits or balance can be applied to the preceding tax year.
Following this strategy allows the insured to retain full ownership and control of their policy with the ability to change the beneficiary if necessary (i.e. the policyholder can change their beneficiary from an individual(s) to a charity or vice versa). This strategy also allows the donation to remain private if it is made outside of the donor’s will.
Designate a Charity as the Owner
Another option includes purchasing a new life insurance policy and designating a charitable organization as the owner and beneficiary. Using this strategy, the donor will pay the policy premiums each year and be issued a charitable tax receipt for the same amount, providing the donor with tax savings. Upon the death of the insured, the charity will receive the insurance proceeds, an amount that is generally higher than the premiums paid.
To donate an existing policy, a donor can make an absolute assignment (transfer of ownership) of their policy to a charity. Once the policy is donated, the change is permanent and the charity will be deemed the new owner with full control of the policy. The donor will continue to receive ongoing tax credits for the insurance premiums. Each year, tax receipts will be issued to the donor in the amount of insurance premiums paid. However, unlike the previous example, upon the death of the donor there will be no additional or retroactive tax credits applied to the donor’s estate.
In the event that the policy has a cash surrender value, accumulated dividends and/or interest, the donor may be eligible for charitable donation tax credits based on the value of the donated policy. The decision to designate a registered charity as the beneficiary and/or owner of a new or existing insurance policy should be discussed with the appropriate professionals before being implemented as there could be positive or negative tax consequences.
Life insurance policies, new or existing, are one way to leave a charitable legacy as part of an individual’s financial and estate plans.
The information contained herein has been provided by Odlum Brown Financial Services Limited, a wholly-owned subsidiary of Odlum Brown Limited which offers clients life insurance products, retirement, estate and financial planning services. For more information, please contact Bruce McFarlane, Vice President, Branch Manager, Director, Portfolio Manager, Odlum Brown Limited at 250-952-7778 or firstname.lastname@example.org.
This article is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. Many factors unknown to Odlum Brown Limited may affect the applicability of any matter discussed herein to your particular circumstances. You should consult directly with your financial advisor before acting on any matter discussed herein. Individual situations may vary. Member-Canadian Investor Protection Fund