Life Insurance policies can be used for charitable giving purposes and can provide an individual or their estate with tax advantages.
There are two ways that life insurance policies can be gifted:
(1) Charity Owns the Policy: In this scenario, the donor, during his or her lifetime, will transfer ownership of the life insurance policy to the charity which is also named as beneficiary. This will result in either of the following:
a. If the premiums of the life insurance policy are fully paid:
a.i. The donor will receive a charitable receipt for the fair market value of the policy at the date of transfer. There are different ways in which the Income Tax Act calculates fair market value and a tax specialist should be consulted.
a.ii. There may be income tax implications to the donor at the time of transfer, depending on how the fair market value and cost of the life insurance policy is determined under the provisions of the Income Tax Act. If the fair market value exceeds the cost of the life insurance policy, the donor will have to include the difference into income.
a.iii. The charity will receive the proceeds on the death of the donor. Since the charity is the owner, there is no charitable receipt issued to the donor’s estate for the value received by the charity on the death of the donor.
b. If the premiums of the life insurance policy are not fully paid:
b.i. The donor will receive a charitable receipt each year for annual premiums paid after transfer of the policy;
b.ii. The charity will receive the proceeds on the death of the donor. Since the charity is the owner, there is no charitable receipt issued to the donor’s estate for the value received by the charity on the death of the donor.
(2) Donor Owns the Policy: The donor will only name the charity as a beneficiary under the life insurance policy and the donor will retain ownership:
a. The donor’s estate will receive a charitable tax receipt for the amount received by the charity on the death of the donor.
The decision of the donor to retain ownership of the life insurance policy or to transfer ownership to the charity of the life insurance policy depends on the donor’s tax situation and when they need the charitable receipt. If the donor can benefit more from the charitable receipts during their lifetime, transferring ownership to the charity is something that should be explored. If the donor needs the charitable receipt to offset capital gains that will occur at death, then the donor should look the option of just naming a charity as beneficiary on a life insurance policy.
Maria Kinkel is a lawyer and partner with the firm MHN Lawyers LLP, Simcoe, Ontario and director with Parkview Meadows.
The material presented in this article is intended for information purposes only and does not constitute legal advice.