The Joy of Planned Giving

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For centuries, people have made efforts to help the less fortunate. The singer of U2, Bono, has been involved in many issues throughout the years and supports erasing Third World debt to wealthy countries. Michael Jordan is involved with a variety of charities including the Boys & Girls Club of America, UNCF/College Fund, Special Olympics and organizations that support children and families. Bill and Melinda Gates focus on areas dedicated to improving people’s lives by advancing health and learning efforts in the global community.

You do not have to be famous and wealthy to get involved — everyone can! For a small monthly, tax-advantaged donation of $25 to $100, you can help a child through an NGO such as World Vision. There are many such Non-Government Organizations (NGOs) that help people worldwide when and where disaster strikes.

Planned Giving

Planned giving raises funds through a program of arranging regular systematic donations to serve the interests of a registered charity that best suits the personal, financial and tax situation of an individual donor. Via planned-giving programs, registered charities seek to attract substantial gifts by presenting potential donors with information and advice. You can include the following is your planned-giving program: bequests, annuities, life insurance policies, and residual interests or charitable remainder trusts. Segregated funds work well because they can guarantee the invested capital (plus any growth) upon the death of a donor.

Charitable remainder trust.

A charitable remainder trust involves transferring property into a trust whereby the donor retains a life interest in the property but makes an irrevocable gift of the residual interest to a registered charity. A registered charity can issue an official donation receipt for the fair market value of the residual interest in the property at the time that the residual interest vests to the charity.

How to donate a life insurance policy to a charity.

When an individual absolutely assigns a life insurance policy to a registered charity and makes the charity the registered beneficiary of the policy, the charity can issue an official donation receipt for the cash surrender value of the policy at the time of donation and for the subsequent payment of premiums.

RRSP as an enduring property.

Under the Income Tax Act, a charitable donations tax credit can be claimed on a deceased individual’s return for a donation via a direct distribution of his or her proceeds to a qualified donee who is the designated beneficiary of a registered retirement savings (or income) plan (RRSP/RRIF), a registered retirement income fund (RRIF), or a life insurance policy. Under the Act, a gift received by a registered charity by way of direct designation is a gift of enduring property.

Donating a Registered Pension Plan (RPP).

An individual can designate a registered charity as their beneficiary of a registered pension plan. A charity can issue an official donation receipt for lump-sum pension benefits paid to the charity.

Note: Ask your Advisor if any legislation has changed this.

Charitable Giving using Life Insurance

Charity

David Toycen is a man that understands the importance of charity. As the president for World Vision in Canada, he oversees helping children in need and works for justice on their behalf on a global scale. The author has had the privilege of meeting David at a convention on Social Justice and shares his wisdom:

Generosity is for everyone. All it takes is a willing spirit and the courage to be used for something greater than ourselves. The Power of Generosity, Dave Toycen. Pres. World Vision, Canada, (Harper Collins Publishers, 2004)

Permanent life insurance is a cost-effective way to make a much larger contribution to the charity of your choice than would otherwise have been possible. You may choose to give a new policy or an existing policy that you no longer feel you need to an organization that helps impoverished children of the world and potentiate their lives, or help students in a seminary finish their degree or help fund research for the cure for cancer. Determine what charity aligns with your life purpose and will bring you the most satisfaction.

There are two effective methods to achieve this. One is an outright gift of a life insurance policy, making the charity the owner of the policy. The second is gifting the proceeds of the death benefit while you retain ownership

1. Making the charity the owner of a life insurance policy

This strategy also side-steps potential problems that can occur if such a bequest is made via your estate.

  • You purchase a policy on your life, making the charity the owner and beneficiary.
  • Only the charity can change the beneficiary.
  • The charity as the established owner of the policy mitigates any dispute over ownership by other heirs once you die.
  • You make donations to the charity that then pays the premiums.
  • You can receive a tax break for the premiums you’ve paid via the charity.
  • The charity receives all of the death benefit proceeds when you die free of tax.
  • The entire benefit cannot be contested, taxed, or claimed by your creditors.
  • The capital death benefit guarantees payout to the charity, and in some cases the death benefit may grow over time. The death benefit is paid tax-free to the charity of your choice.

The tax benefits while you are alive When the charity owns the policy, under Canadian tax legislation, you can receive a tax break for the premiums that you’ve paid during your lifetime, insofar as they are made after the charity owns the policy. In addition, you can receive a tax receipt for the fair market value of any cash value of the policy when you donate an existing policy. There are no further tax deductions in your estate (on your last tax return done by your executor after your death).

2. You own the life insurance policy

In this strategy, you own a life insurance policy on your life, while the charity receives the full proceeds of the policy upon your death.

  • You own the policy.
  • You have access to any cash value of the policy, if necessary.
  • The charity is the beneficiary though you can change it.
  • Other claimants such as a creditor may challenge the right to the proceeds.
  • Tax benefits impart to the estate (your final tax return) for the full amount of the policy proceeds after your death.

As the owner of the policy, you can change beneficiaries at any time and have full access to any accrued cash value over your lifetime. The proceeds from the death benefit are not subject to probate, nor estate administration fees, nor will the gift be on the public record.

When a charity is the designated beneficiary of a life insurance policy on your life, the charity receives the proceeds of the death benefit upon your death. When the tax-free benefit is paid to the charity as the beneficiary, it does not generate a disposition to your estate (as it would on an owned asset such as a gifted cottage that has accrued value over time). This means that there is no capital gains tax on life insurance to affect your estate upon your death. The death benefit is simply paid out tax-free to the charity as the designated beneficiary.

The tax benefits to your estate after your death The charity will issue a charitable receipt for the entire amount paid to them in the year of your death. The entire capital created at the time of your death referred to as the death benefit will account as a charitable donation on your final tax return prepared by your executor.

Note: You do not receive the tax receipts while alive for the ongoing premiums or for any cash values accrued when you use this second method because you retain ownership.

Gift-of-insurance-policy

Essentially life insurance can be part of an ongoing charitable gift plan, or offer your estate a significant tax break when the death benefit pays out to the charity.

David Toycen sums up the importance of our gifts to charity: If I am generous to someone, that person will likely be generous to someone that person will likely be generous to someone else. There is an argument to be made that the universe was created to operate this way. The Power of Generosity, Dave Toycen. Pres. World Vision, Canada, (Harper Collins Publishers, 2004)

Ask your life insurance advisor to guide in setting up a life insurance policy strategically to enable the best possible tax savings.

Glen Jackman is President of One Global Child, a private charity to help assist children of the world in distress.

Designating your charitable contributions

A charitable contribution is a gift, and, like any gift, is an irrevocable transfer of a donor’s entire interest in the donated cash or property. Hence the donor’s entire interest in the donated property is transferred, and it is for the most part (except for “designated” uses) impossible for the donor to recover the donated property.

Undesignated contributions Most charitable contributions are undesignated, meaning that the donor does not specify how the contribution is to be spent. An example would be a church member’s weekly contributions to a church’s general fund or a contribution to the United Way or World Vision. Undesignated contributions are unconditional gifts and there is absolutely no legal obligation to return undesignated contributions to a donor under any circumstances.

Designated contributions A donor can make a “designated” contribution to a charity, where the donor designates how the contribution is to be spent. Where such contributions are held in trust for a specific purpose, and insofar as the charity honors the designation, or plans to do so in the foreseeable future, it has no legal obligation to return a donor’s designated contribution.

Where designated contributions will not be used for the specified project, and donors can be identified, they should be asked if they want their contributions returned or retained by the charity and used for some other purpose. Ideally, donors should communicate their decision in writing to avoid any misunderstandings. Charities must provide donors with this option in order to avoid violating their legal duty to use “trust funds” only for the purposes specified.

A charity should send a letter to donors who request a refund of a prior designated contribution informing them that (1) there may be tax consequences, (2) they may want to consider filing an amended tax return to remove any claimed deduction, and (3) they should discuss the options with their tax advisor. Charities should consult with an tax attorney when deciding how to dispose of designated funds if the specified purpose has been abandoned or is no longer feasible.