Charitable Giving: Estate Planning

Net income limits

When thinking about making charitable donations, it is important to note that a tax credit can be claimed for charitable gifts up to 75% of the donor's net income for a regular year. However, if the gift is made in the year of death (or the year preceding death), the net income limit increases to 100%.

By using insurance, people can make a significant contribution to their favourite charity at a minimal cost, in many cases while also receiving a tax credit that can be used to offset current income. This strategy appeals to donors who would like to be major contributors, but who do not have the necessary capital resources for a large donation.

Assigning ownership of insurance policies to a charity

Before going ahead with this strategy, it is important to make sure that the charity of your choice is allowed and willing to own life insurance policies.

There are a couple options when considering this strategy. You can either irrevocably assign an existing policy to a charity, or purchase/allow the charity to purchase a new policy on his or her life, with the charity assuming ownership of the policy.

Whole Life Policies:

You may also assign a whole life policy to a charity. A tax receipt will be received immediately upon assignment as the cash value in the policy is considered a charitable gift. You will also receive a receipt for any premiums paid after the policy is assigned or any money donated to the charity for the purpose of paying those premiums. If future premiums are paid out of the policy cash value through a policy offset, no tax receipt will be issued.

The cash value of an older policy may very well exceed the donor's adjusted cost basis for that policy which means that you will be considered to have cashed in the policy for the cash surrender value under the deemed disposition rules, which could result in taxable income. However, this could be offset by the tax credit for the donation.

Term Life Policies:

Where there is a term life policy already in place, you may assign ownership of the policy to the charity. With this strategy, there is no immediate tax receipt because there is no cash value in a term policy and therefore no gift at the time the policy is assigned. However, if you continue to pay the premiums on the policy or donate money to the charity for the purpose of paying those premiums, the charity will provide you with a tax receipt for the amount of the premiums paid.

Similarly, a taxpayer can allow the charity to establish a new term life policy on his or her life. If the taxpayer pays the premiums directly on that policy or donates money to the charity for the purpose of paying those premiums the charity will provide him or her with a tax receipt for the amount of those premiums. He or she can claim a tax credit on the value of those receipts.