The gifting of life insurance to registered charities has always been a popular method for individuals to fulfil their philanthropic goals, and worth considering when it comes to a charity that is near and dear to your heart.
There are basically two options when donating life insurance to a charity: donate a policy while one is alive or make the registered charity a beneficiary of the policy. The option selected will depend on many factors.
If you make the charity a beneficiary of your life insurance policy, you retain control over the policy and can change the beneficiary if circumstances change in the future. A donation receipt equal to the amount of the death benefit will be available on your passing. New rules were introduced for certain estates that allow the executor flexibility to decide whether the donation should be used in the tax filings of the deceased or by the estate, to maximize the use of the donation.
The other option is to transfer a policy to a charity while you are alive. In this circumstance, you receive a possible donation receipt on the transfer and if you continue to pay the premiums, then you receive a donation receipt for the premiums. There is a disposition of the policy on the transfer resulting in possible income tax based on the cash surrender value and adjusted cost basis of the policy. If the policy has a fair market value in excess of the cash surrender value, which could be due to a change in health, you could receive a donation receipt equal to the fair market value. In this case, the proceeds for calculating the taxable gain on the disposition is limited to the cash surrender value which could be significantly less than the value used for the donation receipt. If you have a policy that is no longer needed, rather than surrendering the policy, consider transferring the policy to a charity… it could be a win-win for you both!
Whether you donate a policy to a charity while living or make the registered charity a beneficiary of the policy depends on your estate planning goals.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolved from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.
Life Insurance Can Help Your Favourite Charity