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Creating a legacy

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Creating a legacy: planned giving with life insurance - a win-win for you and your favourite charity.
OMA Insurance
1/1/2013
Planned giving with life insurance is an effective way to provide the gift of a charitable legacy. Not only does it allow you to support a cause that’s meaningful, but you also benefit from tax savings. This month’s column provides a general overview of the two main ways to structure a charitable legacy using life insurance, as well as the benefits and drawbacks of each option, and where to turn for more information and expert guidance.

As you move through different life stages, your financial planning needs change over time. While your family is still young, life insurance is an effective solution to protect your financial obligations, such as your mortgage, and provide income replacement to help take care of your family.

Once your nest is empty and you've built up assets for retirement, life insurance has traditionally been used as a simple way to leave behind money to family members.

A recent study indicates that while leaving a family inheritance remains a priority, Canadians are also incorporating charitable donations as part of their estate plan.1

Planned giving with life insurance is an effective way to give the gift of a charitable legacy. Not only does it allow you to support a cause that's meaningful, but you also benefit from tax savings. In general, there are two main ways to structure a charitable legacy using life insurance: you own the policy, or the charity owns the policy. An overview of each structure is provided below.

Structure 1: You Own The Policy

With this structure, you purchase a life insurance policy and either name the charity as beneficiary, or bequest the proceeds of the policy to the charity in your will. Upon death, the full amount of the donation qualifies for a charitable tax credit (up to 100% of net income), which can be a powerful tool in helping to reduce the income tax owing on your final tax return.

For example, if you had $100,000 remaining in your Registered Retire­ment Income Fund (RRIF) at time of death, this money would be 100% taxable. Assuming that there is no spousal rollover, this was your only income for the year, and you had no other assets, your estate would owe approximately $43,000 in taxes, leaving only $57,000 to your beneficiaries. However, if you had a life insurance policy for $100,000 that paid the full death benefit to a charity, the charitable tax credit would be approximately $40,000, reducing your taxes owing to only $3,000. The charity receives $100,000 and your beneficiaries receive $97,000 from your estate (the value of the RRIF, less taxes owing).2

Structure 2: The Charity Owns The Policy

Under this structure, you still purchase the life insurance policy, but you assign the charity as owner and beneficiary. The difference here is that the premiums you pay each year qualify as a tax-deductible donation, giving you the advantage of yearly tax savings during your lifetime.

This method is also used if you already have a life insurance policy; you can transfer policy ownership and the beneficiary designation to the charity. While you won't be able to claim the premiums you've paid in the past as a tax-deductible donation, you will be able to do so once the transfer takes place.

Which Structure Is Best?

If you're looking for ways to reduce your annual income taxes during your lifetime, Structure 2 is often the better choice. However, if you've accumulated a significant amount of assets with tax-deferred growth, Structure 1 may offer more tax savings. Whichever option you are considering, it is important to talk to your family about your wishes and to seek advice from a financial and tax professional to determine which structure will best meet your needs.

For a definition about what qualifies as a charitable organization, visit the Revenue Canada website at www.cra-arc.gc.ca, search under Charities Glossary. To learn more about life insurance and other financial planning solutions available to OMA members, contact us to schedule a complimentary Insurance Check-up with one of our non-commissioned OMA Insurance Advisors at 1.800.758.1641, or info@omainsurance.com. For more information, visit www.omainsurance.com​.

References

1.  BMO Financial Group. BMO estate planning study: inheritances & expectations — Canadians are keeping it in the family. [Internet]. Toronto, ON: Bank of Montreal; 2012 Oct 17. Available from: http://newsroom.bmo.com/press-releases/bmo-estate-planning-study-inheritances-expectat-tsx-bmo-201210170826668001​. Accessed: 2012 Dec 17.

2.  Example for illustrative purposed only based on current Canada Revenue Agency (CRA) marginal tax rates and charitable tax credits.​