Many individuals have realized their charitable aspirations by donating a life insurance policy to the charity of their choice. In situations where that donation is a Universal Life policy, the use of a Shared Ownership strategy could prove to be a viable investment for the donor.
Shared Ownership refers to an arrangement involving cash value life insurance policies such as Universal Life. Universal Life combines life insurance with an investment fund which grows tax deferred until the cash value is withdrawn. If the cash value is paid out at death, the growth is tax free.
Under Shared Ownership, the life insurance and the cash value would have different owners and beneficiaries and would be structured as follows: Read more
If you are interested in creating a legacy at your death by making a charitable donation, you may wish to investigate using life insurance for that purpose. There are different ways you can structure life insurance for use in philanthropy. The most common are:
Getting an Existing Life Insurance Policy
If you currently own a life insurance policy, you can donate that policy to a charity. The charity will become owner and beneficiary of the policy and will issue a charitable receipt for the value of the policy at the time the transfer is made, which is usually the cash surrender value of the existing policy.
There are circumstances, however, where the fair market value may be in excess of cash surrender value. If, for example, the donor is uninsurable at the time of the transfer, or if the replacement cost of the policy would be in excess of the current premium, the value of the donation may be higher. Under these conditions, it is advisable for the donor to have a professional valuation of the policy, done by an actuary, prior to the donation. Read more
By J. Denise Castonguay
Most successful business people feel a strong desire to give back, but what is the best way to make a meaningful contribution? Is setting up a foundation better than giving direct to a charity? If so, what is involved and what are your options?
Setting up a foundation gives you much more control than simply donating to charity. Even if you are very committed to a charity, charities change over time, and so may your interests or priorities. With a foundation, you can manage how your donation is spent, and can create a legacy of charitable giving for many generations. (If you want philanthropy to be a family tradition, you will need to accommodate different choices from other family members.)
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 receipt 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 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 at 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 to the estate the capital donated.
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 me.