GIVING THROUGH
LIFE INSURANCE...
by John Jordan, CFP
How
it Works
Life
insurance is an economical vehicle for giving a larger and more
lasting gift to a charity than might otherwise be possible, without
drawing on your assets now or depleting your estate. There are
several ways of leaving a legacy through life insurance as outlined
below. By giving through life insurance, you can
make a significant future gift with only a small annual or monthly
outlay.
Life insurance
is a particularly effective gift because of the leveraging effect.
As long as the charity is named as the beneficiary under the policy,
the proceeds will not form any part of the donor's estate and there are no
probate, legal, or other administration fees. Your gift will
then go to work at the charity quickly. You may also use an
insurance policy to replace a cash gift that you make today. If you
choose to make a large cash donation to a charity now, a policy can
be used to replace those assets in your estate. Your gift will
earn tax credits, which can be carried forward for the next 5
taxation years. This tax saving can be used toward the premium
for the insurance.
What
to Do
There
are three ways to give.
-
You can give an insurance policy you already
own to the charity;
-
You may take out a new policy and give absolute
ownership to the charity; or
-
You
can name the charity as the beneficiary of an insurance policy while
you remain as the owner.
If you give absolute assignment to the
charity of your life insurance policy, whether it is either a new or
existing policy, you will receive a donation receipt for the
premiums paid each year. No receipt is issued for the death
benefit. If you donate an existing policy that has cash
surrender values, there may be tax implications upon gifting this
policy. The donation receipt will be issued for this value
that would offset any tax owing.
If you name the charity as beneficiary
of the death benefit and remain as the owner of the policy, no
receipt is given for the annual premiums but a receipt is issued
back to the estate in the year of death for the amount given through
the policy. This receipt is then used to offset taxes owing on
such assets as RRIFs or capital assets that are subject to capital
gains tax. If structured properly, taxes owing in the estate
can be significantly reduced or even eliminated. The receipt
can be carried back 1 year if the whole receipt cannot be utilized
in the year of death.
Benefits
to You
-
You
receive a tax receipt, significantly reducing the cost of the policy
(provided that the charity is the owner and beneficiary of the
policy).
-
You pay for
the gift in small installments over several years.
-
Your gift doesn't reduce
the amount of money in your estate available to your family.
-
Most or all of taxes owing in the year
of death may be eliminated if structured properly.
-
Since the charity is named directly as
the beneficiary, the proceeds cannot be contested and will remain
confidential.
To
Illustrate
Mike
and Anita Langford, both aged 65, are concerned with the amount of
tax that will be payable to CCRA (formerly Revenue Canada) in their
estate. They would like to preserve as much as possible for their
family, but wonder how they can leave money for both their family
and a planned gift to the university they both attended. They have
designated in their will to leave $75,000 (which is set aside in
T-Bills) to the university. They hold about $350,000 in registered
assets split between them, which have a potential tax liability of
approximately $162,435.
After
exploring various scenarios with their professional advisors, they decided
to use the $75,000 to purchase a Universal Life insurance policy for
$300,000. By designating their family as the beneficiary of the insurance
and leaving their RRIFs to the university, they have preserved their
estate and magnified their gift almost 5 times. The estimated death
benefit of $374,025 (assuming 7% return on the investment account in the
plan) in 20 years, will pass to their family tax free and the RRIF will
pass to the university tax free.
To keep our
example simple, we will assume that the second death of Mike and Anita
occurs in 20 years and they still have $350,000 in their RRIF.
The gift to
the university upon both deaths will offset the all tax owing on their
RRIF. The result, their family will receive the total insurance benefit
(estimated at $374,025) tax-free preserving the estate and the university
will receive the $350,000 RRIF with no tax. CCRA will receive nothing.
Mike and Anita must update their Will to reflect their current wishes.
Assuming
a 46.41% marginal tax rate, an interest bearing investment would have to
achieve an 18.16% annual rate of return before tax to equal the insurance
death benefit in 20 years.
|
|
Bequest through Will |
Gift of RRIF |
|
Gift after 1st Year (in the event of both deaths)
|
$75,000 |
$350,000 |
|
Gift at age 85 (in the event of both deaths) |
$75,000 |
$350,000 |
|
Annual Tax Payable on Interest Earned |
Yes |
No |
|
Tax receipt in estate |
$75,000 |
$350,000 |
|
|
|
Amount left to Family |
Amount left to Charity |
Amount of Tax Paid |
|
Estate Before... |
$222,372 |
$75,000 |
$127,628
(after
charitable gift) |
|
Estate After.... |
$374,025 |
$350,000 |
$0 |
|
Difference |
$151,653 |
$275,000 |
($127,628) |
|
|
|
Toll Free:
(866) 272-3112
