Legacies, Bequests, Philanthropy, Charitable Giving part 3

In this column, the third of a three-part column, I’m going to outline some more gifting strategies that take more up-front planning but once again the outcome can give much greater meaning and benefits for all concerned today and for years to come. The types of gifts, donations, bequests and legacies I’m going to talk about in this article are the following:

• Life Insurance Donation Structures

• Charitable Remainder Trusts The following were from Part 1 (March 2013)

• Cash

• Gifts in Kind

• RRSP’s and RRIF’s

• Legacies & Bequests And these were from Part 2 (April 2013)

• Donor advised Funds

• Annuity Structures


The fields of philanthropy, charitable giving, gifting, donations legacies and bequests can be sophisticated, if not complicated with significant consequences to one’s net worth, estate and beneficiaries. The implications of any planning decision can carry through decades into the future. The ideas and structures defined and suggested in the following, may or may not be suitable for any one individual to another; it is recommended that suitable advice be sought from accredited advisors in the fields of financial planning, investment, taxation and law. Donations of size and type require thoughtful and informed decision making. Professional advice should be accessed before any decision is made.

Donations with life insurance, is my favorite way to be charitable. It’s not just because I am in the “Life Insurance” business; it’s because you can give/leave a substantial charitable gift/legacy. Not only does the charity benefit, but you also receive a sizable tax savings either during your lifetime or after.

Life insurance policies can be owned by the charity or personally. Let’s say you currently own an “extra” policy and decide you want to donate it. If that’s the case you can assign the policy to a charity and make it the owner and beneficiary. The outcome of that change would then make the annual policy premiums qualify as a tax-deductible donation on your annual income tax return. Remember, if you owned the policy before transferring the ownership it would only give you the tax savings from that point on. Although, policies with a cash surrender value are entitled to a tax receipt equal to the amount. Each year the premiums are paid you’ll be able to claim the charitable donation credit.

If you prefer to keep ownership of your policy on your own life; you can either name the charity as the beneficiary; or designate your estate the beneficiary. In turn, you would set up a bequest as part of your will to direct the proceeds to the charity. This arrangement allows you to easily change the charity that will receive the benefit, if need be. Because you’re in control with this type structure, you aren’t entitled to a charitable donation tax credit for the premiums you pay each year. Upon your death the charity can issue a tax receipt for the proceeds it receives from the policy. This can have a very attractive benefit for estates that may have large capital gains as well as registered investments like RRSPs/RRIFs because, the proceeds are 100% taxable on your final tax return (unless the taxable assets pass to your surviving spouse).

During the planning process it would be determined which charitable giving arrangement works best for you. in the meantime let’s look at a couple scenarios. During an annual review with one of my clients “Steve” who owns a very successful accounting firm; decided he did not need an old London Life policy that his parents took out for him when he was a baby. Steve new he could donate life insurance policies to charities, and that is what he would like to do.

Some of the meeting discussion went like this… We would need to find out if the policy would have any tax implications if the polices’ ownership changes. However, we discussed this result is not entirely negative; as an ownership change on an investment, because Steve could receive a tax receipt from the charity equal to the cash value in the policy and that would offset the tax triggered from the ownership change. After we talked about all the pros and cons he decided it was the right thing to do for him. But he decided that he wanted to give a little more; so Steve and I arranged to meet with the charity to start the paperwork on his existing policy and on a new life insurance policy based on his life. The charity was named as the owner and beneficiary of the new policy. This ensures that the charity will receive the proceeds upon Steve’s death.

Steve then makes regular donations to the charity equal to the insurance premiums for the new policy. When Steve passes on, the proceeds of the policy pass directly to the charitable organization. In this instance Steve would receive a tax receipt, each year equal to the insurance premium paid

The following encompasses the most neglected and misunderstood estate planning issue. The problem is all about the debt that presents itself when a person dies. Few of us wish to face this problem probably because it’s all about the inevitable death and taxes.

Neglecting this creates frustration, uncertainty and heartache. To those who remain after the death of a loved one it leaves chaos, frustration, resentment and animosity. We know there are various estate settlement costs we can’t hide from; like the taxation that erodes the estate’s net-worth the hardest. When a person dies all or most of our assets are deemed to have been sold at their Fair Market Value (FMV) whether they, in fact, were sold or not. The government wants what’s coming to them…. THE TAX.

Sadly there is no way of avoiding the “Debt of Death.” The debt must be identified and it must be paid within a reasonable time frame. Now having said all this it is important to say, that in a spousal partnership the taxable assets can be rolled over to the remaining spouse tax deferred NOT eliminated as the taxes will be due on the second death.

Why am I talking about taxes here; because charitable giving helps all parties involved. With proper advanced planning you have choices like being charitable and looking after your taxes as well. Usually decisions are easier to be made when some thought goes into the size of the eventual taxation and the most economical way to pay it.

You have choices how to pay the debt to CRA. It all can be paid or a portion of the taxable assets can be donated to a charity. The latter action can eliminate taxes that would otherwise be paid away to the CRA. Think about it, do you want the government to spend your tax money or would you like to decide where your tax dollars go. Planning is the only way to take control of where your “taxes” go. Would you prefer leaving a legacy to your favorite charities or do nothing and leave it in the form of taxes to the “Tax Man”.

The last thing I’m going to cover here are Charitable Remainder Trusts These are great for wealthier individuals (HNW) looking to make very large gifts to a charity, establishing a charitable remainder trust may prove to be an attractive planned giving option. They are particularly helpful if the donor is looking to secure both income and significant tax relief during their lifetime. Charities find these arrangements appealing because they obtain immediate legal title to the property therefore, they don’t have to worry about the possibility of the donor changing their mind.

For these trusts I would suggest working with a lawyer who specializes in trusts and estates. The scenario goes like this; a donor would establish a charitable remainder trust by transferring property to a trust. The donor is considered to have disposed of the property; upon transfer, the assets may realize a capital gain or loss. The trust documents would instruct the trustee to pay all the income earned within the trust to the individual but requires the property to be transferred to a charity at some later date, usually upon the death of the donor. Once the charity is named as the beneficiary of the trust, it cannot be removed or revoked.

After death, the assets are then passed on to the designated charity. If the donor has a spouse, the charitable remainder trust should be set up so that the property passes to the charity only after the death of the second spouse.

The key benefit of a charitable remainder trust is that it can provide significant tax relief during the donor’s lifetime. When the trust is established, a tax credit is issued back to the donor based on a special calculation formula. This tax credit is often a considerable size.

In conclusion, each person’s financial situation is as unique as their fingerprints and no one insurance or investment product suits them all. Please remember I am not a lawyer or an accountant. Each individual case may imply different legal and taxation issues. You should seek professional advice first and work closely with an experienced advisor who is well-versed with choosing the correct products for your desired outcome.

At Latchman insurance brokers Limited, we work primarily in the corporate and professional marketplace and are very familiar with how to package the best products and coverage’s. We are educators on future planning envisioning. We are more than happy to provide free consults regarding estate, financial, succession and tax planning. We will discover your specific situation and initiate the ideal coverage tailored for you.

Posted by Robyn Latchman