Legacy Planning Using Life Insurance

Next in our series on Philanthropy, we will go over how using Life Insurance can be a great tool in not only legacy planning, but tax planning as well!

In Canada, incorporating life insurance into legacy planning can offer several tax benefits, particularly when the policy is designated to benefit a charitable organization. Many Canadians have Life Insurance policies that they may not need anymore, or are considering getting for the purposes of donating/gifting to a charitable organization. There are multiple ways that Life Insurance policies can be used for philanthropic purposes, each with their pros and cons, and also multiple ways that tax advantages can be had by using these strategies.

Dollar for dollar invested, using a Life Insurance policy vs donating cash will provide significant benefits and enhancements to what is actually received by the organization receiving the funds, as well as potentially what is received as a tax benefit for you.

Here are the key tax advantages of donating life insurance as part of legacy planning:

1. Charitable Donation Tax Credit:

How you set up the strategy will determine how the tax benefits are received, and this will be based on what your needs or objectives are.

1) Take out a new policy with the charitable organization as the owner - You’ll receive a charitable tax receipt for the cash value of the policy and for any premiums you pay.

2) Name the charity as the beneficiary of an existing policy that you may have - This is a good option if you already have a policy that you may no longer need, for whatever reason - At the time of your death, the charity will receive the policy proceeds and your estate will receive the tax benefits. You do not receive tax benefits for any premiums paid, since you are still the owner of the policy.

3) Transfer ownership of an existing policy to the charity and receive a charitable tax receipt for the cash value of the policy. If you owe annual premiums on the policy, you’ll still pay them, but you’ll also receive tax receipts in the amount of your payments.

When you designate a Life Insurance policy to a charitable organization, either during your lifetime or as part of your estate planning, there will be tax benefits to you. Depending on how the strategy is set up, the tax benefits to you can be immediate, ongoing, or at the time of death, and can vary in how much the benefits are. For example, if the strategy is set up to have the benefits realized at the time of your death, this credit can offset taxes owed by your estate, potentially reducing or eliminating the tax burden on your estate completely.

2. Estate Tax Benefits:

Life insurance proceeds paid directly to a designated charitable beneficiary are generally not subject to probate fees or estate administration taxes (often referred to as estate or succession duties in some provinces). This can result in significant savings, as these fees are typically based on the total value of the estate and can be substantial.

3. Elimination of Capital Gains Tax on Policy Donations:

If you donate a life insurance policy to a charitable organization during your lifetime, you can eliminate the capital gains tax that would otherwise be payable if you were to cash in the policy and donate the proceeds. This is because the donation is considered a gift of property to a qualified donee, which includes registered charities in Canada.

4. Flexibility in Estate Planning:

Designating a charitable organization as the beneficiary of a life insurance policy provides flexibility in estate planning. It allows you to support a cause that you care about deeply while potentially reducing the overall tax liability of your estate. You can also adjust the beneficiary designation over time if your charitable intentions change.

5. Creation of a Charitable Legacy:

By donating a life insurance policy to a charitable organization, you can create a lasting charitable legacy that reflects your values and supports causes that are important to you. This can be particularly meaningful if you do not have substantial liquid assets to donate during your lifetime but have an existing life insurance policy.

6. Simplicity and Privacy:

The process of designating a charitable organization as the beneficiary of a life insurance policy is generally straightforward and can be done through simple beneficiary designation forms provided by your insurance provider. It also allows you to maintain privacy, as details of the policy and beneficiary designation do not typically become public record.

Considerations:

While donating life insurance can offer significant tax benefits, it's essential to work closely with your financial advisor/planner or estate planner to ensure that your charitable intentions are clearly documented and aligned with your overall estate planning goals. It's also important to choose a reputable charitable organization that aligns with your values and meets the eligibility criteria set out by Canada Revenue Agency (CRA) to receive charitable donations.

In summary, donating life insurance as part of legacy planning in Canada provides a tax-efficient way to support charitable causes, offering benefits such as charitable donation tax credits, estate tax savings, and the elimination of capital gains tax. Whether your objective is to get tax benefits up front, annually or at the time of death for your estate, there are strategies available for you. This approach allows individuals to leave a meaningful charitable legacy while optimizing their estate's financial outcomes.