August 5, 2022
  • August 5, 2022

Four Ways to Help Your Favorite Charity With Life Insurance

By on November 18, 2021 0


I still remember my conversation many years ago with an insurance advisor who later became a good friend. He sold me different types of insurance and said, “Okay, Tim, who deals with life insurance, home insurance and auto insurance. Now how about alien abduction insurance? “

“Um, I’m going to go home and talk to Carolyn about it, and then I’ll get back to you,” I said.

“It’s okay Tim, you’re going home, and if you’re still here this morning, call me.”

You have to love the creativity and persistence of a good insurance professional. Today I want to talk about some creative ways to use life insurance – maybe a policy you already own – to help your favorite charities.

Name a charity as the beneficiary. You can purchase a policy that you currently own or will purchase and name one or more charities as the beneficiary of the policy. You will not be entitled to a donation tax credit for annual policy premiums, but your estate will be entitled to a tax credit for the value of the death benefit when the proceeds are paid to the charity. charity after your death. Typically, this donation credit can be used to reduce taxes owed in the year of your death, the year before your death, or in the estate itself (and can be carried forward up to five years in the estate).

Make a donation by will. Likewise, you purchase an insurance policy that belongs to you and name your estate as the beneficiary of the policy. Then, leave instructions in your will for your executor to donate the proceeds to charity once received by your estate. This can work if you are unsure of which charities to help and want to leave that decision up to your executor. The problem, however, is that insurance benefits could be added to the value of your estate subject to probate fees in provinces or territories that levy this type of tax. Also, if the insurance is paid to your estate, it could be the subject of a creditors claim or litigation if someone disputes your will. So this idea is not often recommended.

Transfer a policy to a charity. You could transfer ownership of an existing life insurance policy to a charity. The charity will become the owner and beneficiary of the policy. Upon your death, the charity will receive the insurance proceeds. When you transfer the contract, you will be considered to have assigned the contract at its present value, which is generally the cash surrender value (CSV) under our tax laws. If it is higher than the adjusted cost base (ACB) of the policy (you will need to find the ACB from the insurance company), this will trigger a policy gain which, unlike a capital gain, is taxed as a regular income. . The good news? You will also be entitled to a donation tax credit for the fair market value (FMV) of the contract on the date of transfer.

Interestingly, this FMV could be higher than the police CSV – and sometimes a significant amount if, for example, your life expectancy is shortened. Thus, you could benefit from a tax credit for donations which goes well beyond the simple compensation of the taxable gain on the policy and could also offset the tax on other income. You will need an actuary to determine the policy’s FMV before making the transfer. I should mention that it is possible that our tax law considers the FMV of your policy to be the same as the CBR if the policy was acquired less than three years before the transfer to the charity, or less than 10 years. prior to the transfer when it is reasonable to conclude that one of the primary reasons for purchasing the policy was to later donate the policy to a charity.

Finally, if you will not be entitled to a donation tax credit for the amount of insurance proceeds paid on your death with this idea, you will be entitled to a donation tax credit for the premiums you pay. every year in the name of charity.

Buy a policy for a charity. Like the last idea, the charity will be the owner and beneficiary of the policy. But you won’t have a potentially taxable policy disposition or police FMV donation receipt like with the last idea. But like the last idea, you will be entitled to a donation tax credit for all the premiums you pay each year on behalf of the charity. You will not be entitled to a donation tax credit for insurance proceeds paid on your death.

Tim Cestnick, FCPA, FCA, CPA (IL), CFP, TEP, is author, co-founder and CEO of Our Family Office Inc. He can be reached at [email protected].