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Charitable Insurance

An excellent tax strategy for your estate.

Is it one of your desires to create a charitable gift through regular accumulation, and have that gift donated at death?

Many people are unaware that:

• They can obtain a tax deduction today for certain gifts to be donated later at death.

• Insurance can create a much larger gift than assets saved in non-registered accounts.

An Insurance policy can be purchased with the intention of having the proceeds paid to a charity. If this is done through a Will, then 100% of the donation is deductible in the final tax return, is not creditor proof and is subject to probate fees. If the charity is named as beneficiary and the policy is assigned to the charity when it is issued then each premium paid is treated as a donation and is eligible for a tax credit. The proceeds are creditor proof and not subject to probate fees. Any form of life insurance qualifies, but Universal Life makes sense for individuals with excess assets to prepay premiums.

Canadians may donate up to a maximum of 75% of taxable income in any one year to qualify for charitable donation tax credits. Over payments may be carried forward for up to 5 years. The 1996 federal budget increased the limit on charitable donations to 100% of an individual’s net income in the year of death and in the immediately preceding taxation year. The 75% limit remains in effect for other years except where appreciated capital property is gifted. In this case, the donation limit equals 100% of the net income that arises as a consequence of the gift.

POLICY OWNERSHIP AND BENEFICIARY CONSIDERATIONS

There are a number of options available and each has a valid use depending on the objectives of the donor. To get the annual tax credits for the premiums establish the charity as the owner and beneficiary of the policy. The donor, who is the life insured, then gifts a sum equal to the annual premiums to the charity (mindful of the 75% of taxable income rule) who then pays the premiums to the insurer.

A common variation of this method is to set up the policy on the donor’s life with his/her ownership (or use an existing policy) and then make an absolute assignment of the policy to the charity. The donor then continues to pay premiums to the insurer and receives a tax receipt from the charity once proof of payment of the premium has been furnished to the charity. At the date of assignment, the liquid value of the policy, plus the premium for that year will be eligible for treatment as a charitable donation.

For maximum flexibility, the policy can be owned by the donor and the charity named as beneficiary. An advantage is that the donor retains complete control of the policy and can change his/her mind; cash it in, etc. A disadvantage is that premiums are ineligible for tax credit.

A variation on this theme is to have the estate as beneficiary and the Will direct executors to pay policy proceeds to one or more charities. In such cases, where the proceeds flow through the estate, a tax credit will be allowed (up to 100% of income) for the year of, and the year preceding, the donor’s death.

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