Leaving a Lasting Legacy: Insurance for Charity

For Canadians looking to leave a lasting charitable legacy while preserving their estate for their heirs, life insurance can be a powerful tool.

Today, we are experiencing the early beginnings of an approximate $1 Trillion wealth transfer over the next 20 years. These assets will go to loved ones, and inevitably the government via tax. However, there are several strategies you can employ to make significant charitable contributions with notable tax benefits.

The Estate-Focused Charitable Strategy

This approach offers several key advantages:

1. Estate Tax Reduction: The death benefit paid to the charity generates a tax receipt that can offset estate taxes.

2. Probate Avoidance: Since the death benefit is paid directly to the charity, it bypasses your estate, avoiding probate fees.

3. Estate Preservation: By using life insurance to fund your charitable gift, you can preserve other estate assets for your heirs.

Here’s How It Works…

1. Purchase a Policy: Take out a new permanent life insurance policy (or use an existing one).

2. Name the Charity: Designate a registered charity as the beneficiary.

3. Pay Premiums: Continue paying premiums during your lifetime.

4. Estate Receives Tax Receipt: Upon your passing, your estate receives a tax receipt for the full amount of the death benefit paid to the charity.

5. Offset Taxes: Use the tax receipt to offset taxes owing on your estate (up to 100% of net income in the year of death and preceding year).

Case Study: Meet the Johnsons

• Scenario: Robert and Linda (aged 65) have a $5M estate. Their estimated estate tax bill is $2M. They want to leave $1M to charity.
• The Strategy: They purchase a $1M joint last-to-die insurance policy and name the charity as beneficiary.
• The Outcome: Upon passing, the charity gets $1M tax-free. The estate gets a $1M tax receipt, generating a tax credit of ~$416,157 (Ontario rates).
• Net Result: The estate tax bill drops from $2M to ~$1.58M. They created a $1M gift for a net cost of only ~$583k to the estate.

By strategically using life insurance, you can make a lasting impact without sacrificing your estate’s value or your heirs’ inheritance.