How about giving to charity?

What's good for your community is good for you, your family and your estate.

It is the dream of many Canadians to provide a bequest to their favorite charity-church, school, hospital etc. To make this dream a reality, we earmark the "hard" assets in our estate (stocks, bonds, mutual funds) for donation to the charity.

While this strategy can make sense, it can also create challenges for both the donor and the ultimate beneficiaries of the estate. For the donor, donating assets may affect financial flexibility and freedom throughout his or her lifetime. Many would like to use of their money for other purposes, and don't want to tie up their assets.

On the other hand, we still want to provide for the people we love, such as our children and grandchildren. However, when you allot hard assets for your favorite charities, fewer assets are available for distribution among the people you love.

What is the solution?

One answer is to consider using a life insurance policy in the amount deemed appropriate as a gift. This technique could be the most cost- efficient option to make that charitable gift, retain flexibility of capital, and provide for your loved ones.

How does it work?

The donor (or donors, as many gifts of life insurance are purchased by couples and the gift matures on the death of the surviving spouse) buys an insurance policy and names the charity as either the owner or irrevocable beneficiary. An irrevocable beneficiary means that you cannot change the beneficiary as you can with a normal insurance policy. The gift to the charity is then immediate and the benefits guaranteed provided the policy remains in force.

The donor is entitled to a charitable tax credit for the premiums paid on this policy as long as they are paid. When the life (or lives) insured under the policy has passed away, the gift matures and goes directly to the charity named as beneficiary.

Depending on the family situation, the current tax credits may allow a donor to reduce taxes, allowing more after-tax income to the donor and family.

Example:

Mr. and Mrs. Jones would like to leave $100,000 to the local hospital in gratitude for their work in helping Mrs. Jones recover from a serious illness. He is 48 and she is 46. They purchase a universal life insurance policy for $100,000 so that the insurance benefit will be paid on the last of the two to die. They make five annual contributions to the plan. Assuming a 4 per cent rate of return, their annual contributions will be $2,226. This results in a federal charitable tax credit of $615.74. Depending on their overall tax bracket, combined federal and provincial tax credits could amount to 50 per cent of their overall annual contribution. If the donors are in a 46 per cent tax bracket, the net after-tax cost to provide their charity with a $100,000 bequest will be approximately $5,000.

A deferred gift

In this alternative case, the insurance policy is not donated to the charity until it matures - following the death of the insured - and the amount of the charitable tax credit is based on the amount of life insurance paid to the charity.

Either the charity or the donor's estate may be named as beneficiary of the policy. When the beneficiary is the charity, the life insurance proceeds are paid directly to the charity. When the beneficiary is the estate, life insurance proceeds are paid into the estate and the executor(s) will make the donation in the appropriate amount as specified under the terms of the deceased's will.

This option allows the donor to create an additional asset within the estate that may be distributed to the beneficiaries, including the charity or charities as directed under the terms of the will. This arrangement allows the donor to achieve a number of goals: a charitable bequest, a charitable tax credit, and capital distributions to children or grandchildren or others.

Using the same example outlined above, Mr. and Mrs. Jones decide not to take the credits today, but rather the charitable donation credit for the total amount of the life insurance benefit donated when they have both passed away. Assuming Mrs. Jones lives to 86, the donation amount will be $107,148, resulting in a federal charitable tax credit of $31,048.92. Combined federal and provincial credits could amount to 50 per cent of the total amount donated, depending on their tax bracket. This credit can be used to offset estate settlement costs such as probate fees, taxes on RSPs or RIFs and other assets to allow a maximum distribution of estate assets to the beneficiaries.

To determine which approach is right for you and your family or how you and your family can achieve a better financial position by helping your favorite charity today, contact our office for an initial consultation.