Charitable Life Insurance
Over the years people use this valuable tool to protect their families against financial hardship “if” they passed away prematurely. But those who understand that they “will” die at some point in time understand the financial value of Life Insurance.
It is a tool, which if planned properly can give a gift far greater than you could ever given on your own, or even through your will.
The tax treatment of life insurance for a charity is very unique, and there are three ways you can utilize this tax efficiency.
The first way to utilize the tax efficiency may be to claim the tax deduction on an annual basis for the premiums you pay. This means that the full value of the life insurance premiums you pay on an annual basis will be treated as a charitable gift. This can reduce the amount of taxes you owe in other areas of your family’s financial plan as long as you continue to pay the premiums.
The second way to look at the tax efficiency of life insurance would be if your estate chose to receive one final tax deduction on your death in the amount of the insurance. So if you have a $100,000 death benefit paid to a charity or charities, your estate would receive a tax receipt for $100,000 upon your passing. This is an incredibly powerful way to “prepay” some of your final tax obligations, and support your favourite causes financially for years after you are gone.
The third way to use Life Insurance for charitable giving is by using a policy you already own that has cash value in it. When you gift this policy to your favourite charity or charities and it has an accumulated cash value in it, you will be given a tax receipt for its current adjusted value. This way the charity can either use the cash value for any emergencies they may have in the near future, or wait until you pass away for a larger benefit.
All three of these situations are unique, based upon the donor, and need to be discussed further to maximize the value and benefit to all.
A story about how this works;
Tom and Sharron are very active in their lives. They live in Canada 8 months of the year, and down in Florida for the other 4 months of the year. Tom has built a very successful business over the last 35 years and intends to continue on “working” forever. He has a true passion for his business and has a succession plan in place to transfer the business to his children once he passes. Sharron is a part time nurse, and is very active in the family business and following Tom on his adventures.
They are very philanthropic by nature, as they believe they have received more than they need in life, and are blessed with their family. They normally participate in all the charitable events in their city, they contribute regularly to their church, and they have a special place in their hearts for the Maternity ward at the local hospital, where all their children and grandchildren have been born. They both like the feeling they get when they give, as well as the preferential tax treatments they receive on their monetary gifts. They feel that the government is systematically withdrawing support for some of the greatest causes, and believe that they can make a difference with their gifts. But they wanted to give more as a final bequest to their favourite charity, something that would inspire their children and grandchildren the importance of giving.
We decided to look at Life Insurance to give one big gift to the Charity when they were no longer here to support them anymore. They talked to their Hospital, and for a set amount of money they would have a room named in their honour upon their passing, something their kids and grandkids would see for years to come. They also talked with their Church and knew that if they also allocated the other half of the Life insurance benefit to the church, they could help finance projects such as renovations and additions that would be needed in the future. When we looked at some numbers we determined that they could buy roughly $100,000 of benefit for every $100 they spent per month based upon their age.
It was an incredible way to plan large gifts with minimal cost. Tom and Sharron also had the ability to determine how they would like to receive the taxable benefits of their gift. They could either receive the tax deduction for the cost of the insurance on an annual basis, or they could choose to have the estate receive one big tax deduction when the charities receive the $100,000.
By carefully planning his future taxing obligations of the business and his estate, he is able to prepay many of his obligations today for pennies on the dollar. And they will be doing something that they can be proud of for years after they are gone, and by setting an example for their kids and grandkids about the importance of giving.