If you want to donate money to a charity and are planning your estate, what is the best way to do it? There is the option to donate to charity each year or as a lump sum upon death. At the time of death, there are options to donate to charity as part of your will, through life insurance, or by donating assets. There are considerations to keep in mind when making these decisions:
What is my income level and what do I need for my lifestyle now and on the day I die?
If you have a high annual income (high would mean you’re paying the highest tax rates) and don’t need this money for everyday expenses, then donating to charity while you live might be a good idea. You can make this decision each year if your income fluctuates, or if you have a year in which income increases, such as a year in which a property is sold or capital gains are made on investments. There would be a trade-off between lowering current tax rates and lowering them for estate. You’ll also want to consider how quickly you want to donate to charity and whether you’d like to see how your money is used.
There are many personal opinions that arise regarding charities and how they should be done, so it takes some soul searching to ask yourself what your preferred method of giving would be. It’s a good idea to ask your favorite charities how they’d like to receive their donations: lump sum versus frequency and assets versus cash. Some charities find it difficult to handle large sums of money because they may not have the facilities to allocate it where they need it. Other charities may have unpredictable funding from other sources if large sums are donated that would disrupt their cash flows. Depending on the type of donation, a charity may put it to different uses and this would facilitate the way donations are used.
If I give donations at the time of my death, how should I do it?
Donating your RRSP
What about donating RRSP, RRIF or LIRA accounts to charity? Why do this? These accounts may be heavily taxed depending on your income on the day of death and the remaining balance on the day of death. This strategy is similar to donating shares that have large unrealized capital gains at death that could be voided if the shares were donated to charity prior to sale.
Donate through your will
The disadvantages are that the will can be challenged or changed, which can affect the intended outcome of the donation to the charity. There are also probate fees that apply to anything that passes through a will.
Donation of Life Insurance Through Will
This donation is made upon death. Please note that the donation is made by inheritance and at the time of death. Please note that “cultural gifts” and “green gifts” are taxed differently. Gifts can be claimed: in the tax year of the estate in which the gift is made, a previous tax year of the estate, or one of the last two tax years of the individual up to 100% of the net income. The farm can also carry forward gift credits up to 5 years into the future if it is a graduated rate (GRE) farm or 10 years for ecologically sensitive land. Note that a gift given through a will or through the estate is treated the same way. The donation consists of a lump sum and the tax receipt is made to the inheritance and not to the individual. There are probate fees, public disclosure, and the possibility of estate contestability.
Life Insurance Donations by Naming a Charity as Beneficiary of the Insurance Policy
The person in this case would not qualify for a charitable donation tax credit for the premiums paid. This would be done when an insurance policy is about to renew or expire. If you let the policy expire by not paying premiums, you may get no value for it or get a cash surrender value that may be less than its fair market value. Life insurance policies can be donated 1) by changing the charity’s assignment as beneficiary and upon death. The estate would receive a tax credit based on the amount of the gift. Another way is to 2) change the owner and beneficiary of the policy to the charity. The charity should be asked if it would accept this type of gift. This method is useful for direct donations instead of using third parties. Can the donation credit be used? It has a value of 75% of the net income as a maximum with a carryover of 5 years.
Donations of life insurance policies directly to a charity
In case 2), the fair market value is used, which is usually higher than the cash surrender value. Who will pay the premiums once the insurance policy is donated? The insured may continue to pay the premiums and get additional tax credits for the payments if they are made after the transfer of the insurance policy to charity is made, or the premiums may be deducted from the cash value of the policy. Other donors from the charity itself may also pay the premiums. The charity may prefer to pay the premiums because if the donor agrees to pay the premiums and does not, the insurance policy will lapse. Keep in mind that the features of the life insurance policy should be thoroughly checked to ensure that you arrive at the correct fair market value. In the second case, there are no probate fees, no estate disputes, and no problem with creditors and the estate. This case may apply to a new or existing life insurance policy during your lifetime. The rest of the inheritance can be kept intact for the other beneficiaries. Donating a life insurance policy can be cheaper than giving a cash gift because the investment income is generated within the life insurance policy. Keep in mind that if there is an insurance policy split between a donor and a charity, the CRA does not want an advantage in favor of the donor. Profits to the charity and the donor must be clearly separated, otherwise the charity’s tax deduction would not be allowed. The person making the gift has to calculate the value of the split, which will likely be done with the help of an insurance underwriter or actuary.
Donation of assets
This method consists of donating assets in kind when there is an unrealized capital gain or loss implicit in the transaction. This is called a capital gift and the total gift limit is increased by 25% of the taxable capital gain. The donor may designate a value between the ACB (Adjusted Cost Basis) and the FMV (Fair Market Value) of the donated property to calculate the capital gains and tax credit. If an insurance policy is purchased to replace the value of donated assets (and offset the tax consequences of a capital gain), the tax savings from the gift can be applied to the purchase of the insurance policy.
Donor Advised Funds and Foundations
A donor-advised fund is an endowment fund. The money is deposited in the fund and the fixed payment is made to registered charities. There is flexibility in when donations are made and to whom. This can be used as a bequest for charitable donations, as donations can continue after death and be your heirs as well. The money is donated to an organization that invests the initial donation, manages where the proceeds are donated, invests the money guided by you and issues the tax receipts.
