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Strategic Giving: Leaving a Legacy Through Life Insurance

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Life insurance is a well-known way to ensure loved ones are taken care of after we’re gone. The same strategy can be employed to make a significant donation to a favoured charitable cause upon death. For the planful donor, this can result in a larger gift than might be possible in their lifetime and can offer appealing tax benefits in the process.

A gift of life insurance can typically be done through the creation of a new life insurance policy or through an existing policy. Although both plans should result in a meaningful future gift to charity, they each offer different tax and charitable planning benefits. To help donors make an informed decision on the structure that is right for them and their charitable goals, let’s take a closer look at each approach and what to keep in mind when planning a giving strategy that’s right for every situation.

A gift of a new life insurance policy

Donors who are interested in making a gift to a charitable cause after death but would also benefit from receiving immediate tax receipts might consider creating a new life insurance policy to structure their gift.

When a donor establishes a donor advised fund and gifts a new life insurance policy to a charitable foundation, they can receive donation receipts for ongoing premium payments as they are made. While many people choose to make premium payments in cash, they also have the option of using appreciated securities to pay the premium and bypass the capital gain associated with these assets. This approach further reduces the ultimate cost of the donor’s gift of life insurance and maximizes the positive impact of their gift.

A gift of an existing life insurance policy

For some donors, there comes a time when life insurance is no longer needed, or they would like to consider giving all or a portion of the proceeds to charity. In this case, designating a charitable foundation as the owner and beneficiary can provide assurance that the proceeds will be distributed according to their wishes - to both charitable and non-charitable beneficiaries. The donor can receive a donation receipt for the value of the policy designated for charity, as well as a donation receipt for a pro-rated share of future premiums paid. In this case, the donor will pay a gift tax on a percentage of the policy’s value at the time of transfer, but when the grant gets distributed, the recipient won’t have to worry about the payout being taxed as part of their estate.

Consider your beneficiary

In many cases, establishing a donor advised fund with a charitable foundation can provide the most options for donors. For those interested in donating with a life insurance policy but want to retain the flexibility to give to several causes or make changes to their beneficiaries, a donor advised fund is a smart strategy. This is because the donor maintains optimal control over the grantable funds. A donor can leave instructions with the charitable foundation with which they have set up to the fund regarding the charities they wish to support. If their needs or interests change over time, they can modify their instructions at any time. Grants from their donor advised fund will begin once the policy proceeds have been received by the charitable foundation.

Deciding to make a future gift to charity thorough life insurance, whether through an existing policy or a new one, can make a lot of financial sense. It is a flexible tax-smart strategy that can be achieved through several approaches to suit any number of financial and charitable goals.

For further information about gifts of life insurance, please visit giftfunds.com