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Leaving a Charitable Legacy |
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Creating a charitable legacy can be one of the most personal and enduring decisions you can ever make. By using a new or existing life insurance policy, you can extend your philanthropic footprint while reducing your taxes either now or for your estate, allowing you to “both give and receive”. It’s interesting to note that without proper planning, you might inadvertently be making Canada Revenue Agency (CRA) one of your largest beneficiaries. As it now stands, Ottawa collects a maximum of (approximately):
There is always a better way - and it’s through charitable planned giving, constructed to give you the most tax-efficient outcome and give your favourite charitable organizations a more substantial gift. There are a number of reasons why you might want to donate to a charity in the first place. It could be to honour or continue the work of a loved one, or help eradicate an illness that has affected a family member or friend. Perhaps it’s to repay a good turn someone has done for you or your family. There is the case of a client of mine, a mid-50’s single internist practising in heart diseases, who consults in the cardiology department in an Ontario hospital. After a thorough review of his insurance portfolio, we concluded the good doctor actually had too much insurance. But rather than cancelling the surplus, I suggested he gift that “extra” policy to charity to offset estate taxes. He liked the idea and I connected him with the Jewish Foundation of Greater Toronto where he donated the insurance to four worthy causes, including the Southlake Regional Health Centre in Newmarket, MacKenzie Health, McGill Medical School and the Jewish Foundation of Greater Toronto. The hospital was delighted to receive the “future gift” bequest. While my client could have given to any hospital, or any charity for that matter, he opted for the hospital he works in as a way of giving back to his local community. There are many other people who have the means and opportunity to make life better for those less fortunate than themselves. With professional advice and planning you can ensure that your intentions are satisfied, while taking advantage of tax-saving incentives offered by the government. Further, many options are available when considering planned charitable giving. Any of them will let you create a legacy that provides for future generations, while making sure you and your loved ones are able to reap significant benefits and rewards. There are two main avenues for using your existing life insurance policy to provide a tax-efficient avenue for charitable giving. One is to make the charity the owner and beneficiary of a life insurance policy in which case your premiums generate a charitable tax receipt. The net result is the cost is minimized to the donor and the charity can recognize the donor now for a future large gift. The second approach has the insured paying the premiums themselves with after tax dollars (works even better in a corporation) and the beneficiary of the policy is the charity. Upon death, the insurance face amount generates a large charitable tax receipt which can be used to reduce or eliminate estate taxes. Alternatively, one could purchase a new life insurance policy and name either the charity or your estate the beneficiary and include the charity as part of your will as a bequest. This provides flexibility for those whose financial situation may change or who want the flexibility to possibly change the name of the charity that will receive the benefit down the road. While you won’t get a charitable donation receipt for any premiums being paid, the charity would issue a tax receipt for the proceeds it receives at death and this will be used to offset taxes due on your final tax return. This approach will potentially save your estate quite a few tax dollars. For example somebody with a $1 million tax liability could leave $2 million in insurance proceeds which would erase the bill owing to CRA. They can now be remembered for leaving $2 million to charity instead of $1 million to the tax department. If you want, you can also create a charitable gift annuity which will provide you with a guaranteed income for life and a tax receipt for the gift portion of the annuity. This strategy may be especially attractive to more conservative investors. If you have the means, there are other ways to ensure your generosity for the years ahead. If you have no surviving spouse or have made other estate planning arrangements, consider making a charity the beneficiary of your RSP or RIF. Instead of 49% being siphoned off for the tax department, the entire contribution will help your worthy cause and the tax department will get none. A donor can fulfill their wishes for charitable giving through an endowment. An endowment is a one-time irrevocable gift to either a private foundation or what’s known as a donor-advised fund (DAF) within a public foundation. An endowment is best for those who want to ensure a sustainable legacy in which your family can be involved in the fund distributions. Under CRA rules, the endowment must grant a minimum of 3.5% of its asset value every year. This is great news for your favourite charity or charities, which can count on the income from the underlying capital coming in annually. A major tax advantage for private endowments and DAFs is that donors can receive full tax benefits for contributing without having to disburse the entire contribution amount immediately. A private foundation can be set up either as a trust or a corporation. Under the trust structure, there are fewer audits, they do not require an elected board of directors or have annual general meetings. Private foundations generally prefer incorporation to give them the direct involvement they want in their charitable activities. So what’s the difference between a private endowment and a DAF? DAFs only take 24 hours to set up and are more turn-key than a private foundation. With the short set-up time, DAFs are often created around the end of the year to take advantage of the annual tax deadlines. DAFs are also part of a larger public foundation and any tax reporting and record-keeping is done for the donor as part of the overall fee that is charged. A private foundation on the other hand, typically takes three months to establish, and is an organization that is set up exclusively for charitable purposes. Rather than funding its ongoing operations through periodic donations, a private foundation generates income by investing its initial donation and often disburses the bulk of its investment income each year to charities. Because they report to CRA, private foundations must maintain their own record-keeping and reporting and pay for their own administrative and legal expenses. Set up costs are the responsibility of the foundation. There are many ways to dedicate a portion of your wealth to charity. By incorporating a life insurance policy with charitable donations into a comprehensive estate plan, your assets can benefit causes you care about, all in a tax-efficient manner. Your generosity will go far and the organizations you support will be immensely appreciative of your kindness. |
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