Using life insurance for charitable giving

(December 2005) Many of your clients may not be aware of the opportunity to make charitable donations through new or existing life insurance policies. Beyond providing significant financial support to the recipient, a gift of insurance provides an advantage in tax and estate planning since the donation may be structured in such a way as to provide tax credits accruing to the donor during their lifetime, or to their estate at death.

Gifts of Life Insurance Owned by the Donor

Bequest in a Will: An individual can bequest a permanent life insurance policy to a charity through their will. The individual’s estate would be named as the beneficiary of the policy, and the will would stipulate the donations to be made to one or more charities. Upon the individual’s death, a tax-free payment would be made by the insurance company to the estate, and these funds would in turn be used to make the charitable donations based on the directions in the will.

The charity would issue a donation receipt to the estate for the amounts received. The tax credits resulting from the donation would be used to reduce the tax liability of the deceased for the year of death, benefiting their estate.

Charity Named as Beneficiary: As an alternative, a charity can be designated as the beneficiary of a life insurance policy. Upon the individual policy holder’s death, a tax-free payment would be made by the insurance company to the charity, which would issue a donation receipt to the estate for the amount received. Under this structure the insurance proceeds would not form part of the donor’s estate, therefore probate fees would not apply to the proceeds.

Assign Ownership to a Charity: Another option would be for the individual to make a gift of an existing insurance policy to a charity. Where this occurs, the charity would name itself as the beneficiary of the policy, and issue a donation receipt to the individual donor for an amount equal to the cash surrender value of the policy (minus any loans made on the policy). In the case that the individual continues to pay premiums on the policy, the charity would issue a donation receipt annually to the individual for the annual premium amounts paid. No donation receipts would be issued to the estate upon the individual’s death.

Gifts of Life Insurance Owned by the Charity

An individual could apply for a new life insurance policy on their life, or on the life of the spouse, with the estate as the beneficiary. Once the policy has been issued, the individual will transfer ownership of the policy to the charity, which will then change the beneficiary designation from the estate to the name of the charity. The individual pays the premiums on the policy, and the charity will issue a donation receipt each year to the individual for the annual premium amounts paid.

When the individual dies, the insurance proceeds are paid on a tax-free basis to the charity. Note, however, that the charity does not issue a donation receipt to the estate for the insurance proceeds, as this is not considered to be a charitable gift.

Alternative Use of Life Insurance

You may have clients who would make substantial charitable donations upon their death, either by making bequests in the will or by naming a charity as the beneficiary of an RRSP or RRIF, but whose desire to leave a significant inheritance for their heirs may discourage such a gift.

An effective solution in this case is often for the individual to proceed with their charitable contributions through bequests or by naming the charity as the RRSP or RRIF beneficiary, and to purchase a life insurance policy naming the heirs as the beneficiaries to satisfy their desire to leave some financial resources for their heirs. Upon the donor’s death, the insurance proceeds are paid on a tax-free basis to the heirs, and are not subject to probate fees.

In the preceding article in this series, the tax tip related to “Insuring Success” stated that the insurance premiums that are paid by the individual are considered to be charitable donations. Please note that this applies only where the ownership of the policy has been transferred by the individual to the charity. Where the individual retains ownership of the policy, the charity will issue a donation receipt in the name of the deceased when the charity has received the insurance proceeds.

The final article in this series will review other types of charitable gifts, including the donation of publicly-held securities, charitable remainder trusts, and charitable gift annuities.

Dave Ablett is manager, advanced financial planning support for Investors Group and he is an expert in charitable giving, taxation and retirement planning.

(12/02/05)