There are three main methods by which a donor can gift life insurance to a charity. First, the donor can make a bequest of the proceeds of a life insurance policy through his or her Will. Second, the charity may be named as beneficiary under a policy owned by the donor. Third, the donor can donate a newly acquired policy, or an existing policy, during his or her lifetime. The first two of these methods involve a charitable donation at death. The following section outlines the tax treatment of such donations.
Tax treatment of charitable donations at death
For deaths on or after January 1, 2016, where a gift is made by a Will, by a direct designation (under a life insurance policy, RRSP, RRIF or TFSA) or by the estate, the gift is deemed to be made by the estate (and no other taxpayer) at the time the property is transferred to the charity (and at no other time). Basically, the executor of an estate will have the flexibility to allocate the donation among any of:
- The taxation year in which the donation is made
- The last two taxation years of the deceased individual against 100% of net income.
Bequest of policy proceeds
An individual can donate life insurance proceeds through his or her Will. The individual owns the policy during his or her lifetime and the individual’s estate will be the beneficiary of the policy. The individual’s Will would indicate that a gift of an amount equal to the life insurance proceeds will be paid to a charity named in the Will.
Donor-owned policy with the charity as a beneficiary
If a donor owns a policy and names a charity as the beneficiary, he/she will not qualify for a charitable donation tax credit for premiums paid. However, a charitable donation tax credit will arise at death.
A charity can acquire a life insurance policy under which the donor is the life insured and the charity is the beneficiary. An individual can designate a charity as the owner of an existing life policy, or a new policy, and receive tax credits for premiums paid during their lifetime. For existing policies, an additional credit is available for past contributions to the policy.
It is essential that clients or donors who want to consider giving a life insurance product to a charity consult their financial advisor in order to better outline their goals and establish which strategy would be best for them. A great example of a client/advisor partnership is the story of Marie-des-Anges Loyer, who met her personal philanthropic goals through the strategy we developed together.
Charles Brophy CLU, CFP
Brophy Financial Planning