We have had many clients who are interested in leaving a large gift to their favorite charity. Traditionally, their preference has been to plan a larger legacy gift through their Estate by way of their Will. However, many professional advisors in this space have found that chartable gifts by Will are fraught with complications due to recent tax changes and family law applications. Alternatively, more and more are reviewing and recommending the use of permanent life insurance to fund a client’s charitable gifting strategy. Using life insurance for charitable gifting can result in both a more efficient gift to the charity and a more appropriate tax result for a client, their estate and their beneficiaries.
The Limitations of Traditional Charitable Gifting
Indeed, under the traditional form of charitable gifting, none of your money goes to the charity until you (or your spouse as applicable) pass away. The Estate would be responsible to make the legacy gift, but it may prevented from doing so on a timely basis. This could be due to the Estate having non-liquid assets (e.g. real estate or corporate shares) that requires dispositions before the gift can be made, or maybe the Estate is under a wills variation challenge that effectively freezes any assets until remedied. The other reality is that sometimes your charitable gifting is not always set up the right way, limiting the tax benefits of the gift to both you and the charity(ies) of your choice. What if your Estate will have a very large tax bill, but the manner the donation is made will not allow the donation tax credit to help offset this Estate tax bill. Yikes!
A Better Way to Give
The use of a permanent life insurance to source your charitable gifts can prevent the issues noted above. The life insurance proceeds are paid directly to the charity shortly after passing thereby avoiding delays in making the gift. The use of a life insurance policy to direct the gift can be a very effective way to mitigate wills variation risks for these monies. And by planning a charitable gift by life insurance in advance, your professional advisors can ensure the tax benefits associated with the gift are appropriate matched to taxable income and thereby maximized.
These days, more people want to see their money at work, and that means giving more while they are alive and receiving tax benefits now. This can be accomplished by a charitable gift using life insurance. For example, when a client sets up a life insurance policy, they can transfer ownership to the charity of their choice. On transfer, the value of the policy will be considered a donation for tax purposes for the client. And everytime the client makes a premium payment on the policy, they are paying the insurance that is owned by the charity, which means they are giving the money to the charity and thus making a qualified donation for tax purposes. Down the road, the charity will get the death benefit tax free, but the client got the value of the donations now during their lifetime.
The Hybrid Option
The Hybrid Option involves using a life insurance policy to do some gifting now and some after passing, but the benefits of the policy are shared with your beneficiaries instead of being fully for the benefit of the charity.
There are several forms of Hybrid Option that can be customized for every client situation. One such option would involve a client with a charitable intent and who owns marketable securities outside of a registered or tax free account. The client would acquire a permanent life insurance policy with annual premiums for a set period of time. Annually, the client would donate some of their marketable securities to charity, thereby gaining a donation tax receipts and special treatment of NIL capital gains tax on the securities donated. The client could then leverage the permanent life policy to reacquire some of the marketable securities. The hybrid option allows you to give money now tax efficiently and maintain your marketable securities for you beneficiaries. On passing, some of the life insurance proceeds would be used to repay any investment loan used to reacquire the marketable securities. The residual insurance benefit can then be allocated to either beneficiaries tax free, or to fund a further legacy gift to the charity on passing.
A Win-Win Solution
In general, our clients are very happy with the hybrid method because they are truly saving tax now and later, and they’re doing their gifting while they are alive. The charity is happy now because they have a dedicated donor that is giving them cash now to meet their mandates. In short, it’s a win-win.
Let MGF Advisory Help
Marco Faccone, CPA, CA, CFP has long specialized in the area of corporately held insurance and estate planning, advising and assisting shareholders with succession and wealth accumulation strategies.
Marco has worked alongside estate lawyers and tax accountants to offer his clients a professionally tailored and value-added plan. If you are interested in setting up a hybrid gifting plan that benefits both you and your charity, MGF Advisory would be happy to help.
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This post was written by Marco Faccone