Family Finance

Life … and death decisions
Insurance planning and charitable giving

The question of one's own mortality is rarely a favorite topic of conversation, but an insurance strategy can provide dramatic benefits to those who are planning their charitable legacy.

You can make a charitable contribution, using securities, cash and other assets. But have you ever considered using your life insurance as a way to leave a lasting legacy while still receiving significant upfront or deferred tax benefits.

Making the right choice

While the charity typically receives the death benefit from the policy upon the death of the donor, there are two fundamental choices when it comes to receiving a tax benefit when donating life insurance. The first choice creates an immediate opportunity for tax relief during the donor's lifetime; the second choice defers the tax relief, benefiting his or her estate at death.

Choice 1: Upfront tax relief

By assigning permanent ownership of a life policy to the charity, the donor can receive an immediate tax receipt for the fair market value of the policy, along with tax receipts for any subsequent premium payments.
At the death of the donor, the full death benefit is paid to the charity (with no additional tax benefit to the estate of the donor).

Sample case study: Bob Andrews

Bob Andrews, 50 year-old father of two teenage boys and successful veterinarian, decides to make a large deferred contribution to his favourite charity. After careful consultation with his wife and their financial advisor, he decides to donate his existing whole life policy to the DogsRBest Foundation. The policy has a current fair market value of $250,000 (as determined by an independent actuarial calculation) and a death benefit value of $500,000. Bob assigns full ownership of the policy to the charity and receives an immediate tax receipt for the fair market value ($250,000). He also receives ongoing tax receipts for any future premiums paid on the policy. The tax credit from the donation generates immediate tax savings for Bob. On his death at 85, the policy pays the death benefit of $500,000 and increases capital for the ongoing preservation of the endowment fund that he created at the Foundation.

Choice 2: Deferred tax benefit

In the second option, the donor names the Charity as beneficiary of the policy but doesn't assign ownership (this leaves the door open to change their mind, if their circumstances change). No tax receipts are issued during the donor's lifetime for the fair market value of the policy or any future premium payments, but on the death of the donor, he or she will receive a tax receipt for the full death benefit of the policy. This strategy can provide significant deferred tax savings on the terminal tax return.

Sample case study: Gloria Hubble

Gloria Hubble, renowned heiress of the Portobello Bakeries empire, decides to name The Kids Can Bake Foundation as beneficiary of her life insurance policy. Gloria decides not to assign ownership of the policy to the Fund so doesn't receive any tax benefit at the time of her decision or during her lifetime. However, on her death at age 83, the policy pays the death benefit of $500,000 to the Foundation which can then begin creating scholarships for future bakers. Her estate receives a tax receipt for the full death benefit of the policy.

Tax incentives for testamentary donations

As a result of changes to the Income Tax Act over the years, testamentary donations (typically through wills, insurance policies or retirement plans) have the power to assist in dramatically reducing taxes payable during one's lifetime or upon death. It is essential for individuals to consult legal and tax advisors when considering making this type of donation.