Canada basically has six legacy giving vehicles: bequests, insurance, stocks & securities, RRSP’s & RIFF’s, gift annuities, and charitable remainder trusts.
Most of the information on these vehicles is a matter of public record however, in this article, references to numerous experts in the field for specific definitions will be made. The various assets which Canadians can give will also be discussed as will the vehicles available, and some of the tax implications of these gifts.
Read Part 1 (Bequests, Annuities and Gifts-In-Kind) here.
Read Part 2 (Charitable Remainder Trusts, Gifts of Residual Interest, Stocks & Shares and RRSP’s and RRIF’s) here.
Gifts of life insurance
The tools of planned giving normally include: bequests, annuities, life insurance, and gifts of residual interest and charitable remainder trusts (often funded by the assets listed here). Life insurance is an anomaly as it is often considered an asset, but can also be used as a planned giving tool.
Gifts of life insurance as part of a planned giving strategy allow for numerous options as to giving, charitable receipts, and tax consequences. I will briefly outline them here, but strongly advise that you read a two-book series from Jack Bergmans and Marlena McCarthy. Ripple Effect: Growing Your Business with Insurance and Philanthropy, is a guide geared towards Financial Advisors. The second book, Multiplying Generosity: Creatively Using Insurance to Increase Legacy Gifts, is the fundraisers guide. Both books are filled with information and examples of how you can help donors find the right insurance vehicle to achieve their desired goals of philanthropy and taking care of their loved ones. This is the power of insurance; you can often do both at the same time.
A lot of fundraisers don’t dig too deep into insurance as a legacy gift because they don’t have the confidence to talk about it as an option. And let’s face it, we already know that most people leave a bequest—the easiest thing to promote that everybody understands.
So why am I still talking about this? Because there are going to be instances and donors who will want to take advantage of the benefits of insurance giving. If you have the knowledge to suggest one of these options with enough confidence that you can get them to take it one step further and ask a professional advisor about it, the gift you reap will be so worth it. Why? Because, a gift of insurance has the multiplier effect of leaving a significant amount of money with a modest investment. Donor wins. Charity wins big.
I can assure you, the time invested into learning about how to use insurance vehicles for legacy giving will be worth it. Certainly, it is an opportunity for you to provide a workshop to your donor group. But, be sure to also invite younger people. The multiplier effect only increases over time. Financially savvy people and people who have a philanthropic spirit will appreciate you giving them this information and the opportunity to invest in a meaningful gift.
The options outlined here discuss the value to the charity and the tax benefits of each option, beginning with those options that are most desirable to the charity.
1. Transfer ownership of a paid-up policy. In this instance, a paid-up policy is the equivalent of an outright gift of cash. The value to the charity is they can immediately surrender the policy for the cash value, retain the life portion until the death benefit takes effect, therefore realizing the full value of the policy. The tax benefit to the donor is that they are entitled to a receipt for the cash surrender value. If the cash surrender value exceeds the adjusted cost base, the excess will be taxed at the donor’s ordinary income.1
2. Transfer ownership of an existing policy in which premium payments are still owing. The value to the charity is that the policy has an accessible cash value which is likely to increase. The tax benefits to the donor are an immediate receipt for cash surrender value plus a receipt for continued premium payments that the donor continues to make.
3. Purchase a new policy, naming the charity as the owner. The donor in this case can assure a major future gift without a large outlay of capital. The charity should, with whole life and universal life policies, be in a position to accumulate cash surrender values which can be borrowed against or used if needed. The charity also gains from the death benefit. The donor receives a receipt for premiums paid.
A donor could also name the charity as primary beneficiary on an existing policy. There are no tax benefits to the donor during their lifetime. At death, estates tax credits will apply if the estate is named as the beneficiary and the gift is left as a bequest.
The two final options for using insurance as a vehicle for planned giving are co-beneficiary and contingent beneficiary inclusions. Those who have other charitable or family commitments but still wish to leave a gift can name the charity as a co-beneficiary to share the death benefits with others. The potential is less than the whole policy but the charity may still receive something. The final option is the donor naming the charity as a contingent beneficiary to receive death benefits only if the primary beneficiaries are deceased. At this point the prospect of the charity receiving a gift is remote at best.
One final insurance vehicle that is often appealing to donors is wealth replacement life insurance. In this case, the insurance is not itself the gift, but rather, enables the gift. The main advantage for the donor is being able to make a sizable gift to charity, attain a charitable receipt for it and ultimately realize a larger tax-free gift for their family. This option can be funded one of two ways: with a gift of tangible property, or with cash, securities, or real estate through a charitable remainder trust.
The principle behind this option is to use the tax credit of the original gift to pay the premiums of the new policy, or in the case of the charitable remainder trust, potentially a combination of the tax credit and the income stream. The real power of this vehicle lies in the ability to increase the death benefit to greater than the original asset value. Also, the gift is received tax-free at the death of the donor.
1 Minton, F. and L. Somers, Planned Giving for Canadians. (Waterdown: Somersmith, 1997).
Michelle Harder has over 25 years of experience in fundraising and non-profit development as a consultant and as part of an executive team. With a Master of Arts degree in Philanthropy & Development from Saint Mary’s University in Minnesota, Michelle has both theoretical and practical experience in fundraising. With a focus on small shop and faith-based fundraising, Michelle is driven by a passion to help organizations achieve their fundraising and strategic goals. As a consultant, public speaker, and author of, The Definitive Guide to Faith-based Fund Development, Michelle has the expertise to help you raise the funds you need.
