Gift life insurance, get tax credits

In 2012, one of our clients stopped by the office to review her financial situation. She was a bright, diligent woman who was financially literate and had done very well for herself. With her assets past the $1-million mark, she was ready to retire.

But at 55 years old, she was reluctant to start the estate planning process. So I briefly probed her about her wishes, and documented the conversation.

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Unfortunately, we never had the chance to get her to sign any formal documents. The next morning, I received a phone call from her husband, saying his wife had suffered an aneurysm the night before and was in the hospital. Later that day, I got the shocking news that she’d passed.

After allowing two weeks for emotional wounds to heal, we started sorting out her complicated estate. We worked alongside the family to accelerate the process. We received the letter of probate within three months—all without a will. That was because we had documentation from the conversation the day before she passed, and had filed with an authority outside of Toronto (in this case Oshawa, Ont.). Toronto has a higher volume of applicants, and it can take six to eight months to get a probate letter. Lastly, we assisted the estate administrator by filing the client’s last tax return, estate tax return and helping distribute her assets.

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With the estate settled, we created a new financial plan for the husband. He was in a comfortable position, with a large RRSP and an overfunded insurance policy. The policy was joint and last to die. Since they didn’t have any dependants, the husband didn’t see the need to keep the policy. Still, we reviewed all options before allowing it to lapse. He had two main options. He could take the cash surrender value from the policy and let it lapse. Or, he could take out the cash surrender value of the policy, and donate the policy to a charity for a tax receipt. When removing the cash value from the policy, you have to consider tax implications and the possible increase in their incomes.

Once we confirmed it made sense to lapse the policy, I suggested he donate it to a charity based on fair market value. This way, he could get tax credits.

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The challenge was to find a charity that fit his guidelines. Not all charities understand or are equipped to receive gifts of this nature. And there are few that are willing to issue a receipt for a policy or pay the premiums—both of which are key.

The husband felt a close association with the Markham-Stouffville Hospital in Ontario, the Canadian Cancer Society and environmental/conservation groups. So we consulted with several charities in these areas, gauging interest to see if this type of gifting fit into their long term plans.

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Our first attempt to donate the policy was with a hospital in the Markham, Ont. area. Although the hospital’s charity was willing to accept the gift, it did not agree to take over paying premiums, which were $2,600 annually. And if you donate a policy and agree to pay the annual premiums, you’ll be issued a receipt as well.

After consulting with other charities, we came across the Toronto-based Biosphere Conservation Foundation, which helps protect land along the Bruce Trail. They understand this type of gifting, were willing to take ownership of the policy, pay premiums and issue a tax receipt for fair market value (which was obtained from an actuarial firm).

Since we were not familiar with the charity, we did some research. We accessed CRA’s database to confirm the charity was in good standing. It was. Then we asked the husband if he’d like to proceed. He did.

We filed his tax return, and when CRA asked him for proof of receipt, we provided it to the agency. The success of this donation means the husband will be tax efficient for the next six years, and we’ll pull funds from his registered savings account to utilize the charitable receipt.

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By taking cash from him RRSP pre-retirement, it will increase his income. There’s a 30% withholding tax for RRSP withdrawals that exceed $15,000. But the money we pull from his RRSP will be tax efficient, since the tax credits from the donation will cover the taxable portions.

Also, on October 18, 2014, the Biosphere Conservation Foundation named a piece of its property after the client’s late wife. Family, the board of directors, and I gathered at the site to commemorate her legacy.

The situation was a win-win for all. As gifting insurance policies becomes more mainstream, look to add value to any clients who want to lapse policies. Investigate the procedure and find willing charities that fit your client’s needs.

Mebs Dhalla is a financial advisor with HollisWealth. He’s been using his 25 years of industry knowledge to effectively use insurance products.

This article was prepared solely by Mebs Dhalla who is a registered representative of HollisWealth TM (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and IIROC). The views and opinions, including any recommendations, expressed in this article are those of Mebs Dhalla alone and not those of HollisWealth. Brokerage services provided by HollisWealth are provided through Scotia Capital Inc. Insurance products provided by HollisWealth are provided through HollisWealth Insurance Agency Ltd. HollisWealth and the Scotiabank companies don’t provide income tax preparation services, nor do they supervise or review other persons who may provide such services. TM Trademark of The Bank of Nova Scotia, used under license.