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Giving Money to Charity at or Near Death
If you want to give money to charity and you’re planning an estate, what’s the best way to do it? There is the option to donate to charity each year or as a lump sum on death. At the time of death, there are options to give to charity as part of your will, through life insurance or a gift of funds. The following should be considered in making these choices:
What is my income level and what do I need for my lifestyle now and on the day of my death?
If you have a high annual income (high would mean you pay the highest tax rates) and you don’t need that money for day-to-day expenses, it might be a good idea to give to charity while you’re alive. You can make this decision every year if your income fluctuates or if you have a year in which your income spikes, such as a year when real estate is sold or when there is a capital gain on investments. There would be a trade-off between lowering current tax rates and lowering them for real estate. You’ll also want to consider how quickly you want to give to charity and whether you want to see how your money is used.
There are a lot of personal opinions that come out about charity and how you should do it, so it takes some introspection to ask yourself what your best way to give would be. It’s a good idea to ask your favorite charities how they want their donations – one-off or frequent and assets rather than cash. Some charities struggle with large sums of money because they may not have the ability to allocate it where they need it. Other charities may have unpredictable funding from other sources if large amounts are donated, which would disrupt their cash flows. Depending on the type of donation, the charity can use it for different purposes, which would make it easier to use the donations.
If I donate on death, how do I do it?
Donate your RRSP
What about donating your RRSP, RRIF, or LIRA accounts to charity? Why do this? These accounts can be highly taxed depending on your income on the date of death and the amount remaining on the date of death. This strategy is similar to donating shares that have large unrealized capital gains at death that could be wiped out if the shares were donated to charity before being sold.
Donate as you wish
The disadvantages are that a will can be challenged or changed, which can affect the intended outcome of charitable giving. There are also legacies that apply to anything that goes through a will.
Donating life insurance by will
This donation is made upon death. Note that donations are made by estate and upon death. Please note that “cultural gifts” and “ecological gifts” are taxed differently. Donations can be claimed: in the tax year of the estate in which the donation is made, the 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 estate can carry forward the donation credit up to 5 years into the future if it is a graduate degree (GRE) estate or 10 years for ecologically sensitive land. Note that a gift made by will or inheritance is treated the same. The donation consists of a lump sum, and the tax benefit is paid to the estate and not to the individual. There are probates, public disclosure, and the possibility of disputing the estate.
Donations of life insurance by naming a charity as the beneficiary of the insurance policy
In this case, the individual would not be entitled to tax relief for charitable donations for premiums paid. This would be done when the insurance policy is close to renewal or expiring. If you let the policy lapse without paying premiums, you may not receive any value for it, or you may receive a cash surrender value that may be less than fair market value. You can donate life insurance policies by 1) changing the charitable designation as beneficiary and upon death. The estate would receive tax relief based on the amount of the gift. Another way is to 2) Change the ownership of the policy and the beneficiary to a charity. The charity should be consulted as to whether they would accept such a gift. This method is useful for direct donations as opposed to using third parties. Can the donation credit be used? It is worth a maximum of 75% of net income carried forward 5 years.
Donations of life insurance policies directly to charity
In case 2), the fair market value is used, which is usually higher than the cash purchase value. Who will pay the premiums when the insurance policy is gifted? The policyholder can continue to pay premiums and get additional tax credits for payments if they occur after the policy is transferred to a charity, or the premiums can be deducted from the cash value of the policy. Premiums can also be paid by other donors of the charity itself. The charity may prefer to pay the premiums because if the donor agrees to pay the premiums but does not, the insurance policy will lapse. Note that the features of a life insurance policy should be thoroughly checked to ensure the correct fair market value. In the second case, there are no probate costs, no contestability of the probate, and no problems with creditors and probate. This example may apply to a new or existing life insurance policy during your lifetime. The remainder of the estate may be preserved in its entirety for other beneficiaries. A life insurance policy endowment can be less expensive than a cash endowment because the investment income is generated within the life insurance policy. Note that if there is a split of the insurance policy between the donor and the charity, the CRA does not want priority in favor of the donor. The benefits to the charity and the donor must be clearly separated, otherwise the charitable tax deduction will not be allowed. The individual making the donation must calculate the value of the division – which is likely done with the help of an insurance company or actuary.
This method is a gift of funds in kind if there is an unrealized capital gain or loss built into the transaction. This is called a capital gift and the total donation limit is increased by 25% of the taxable capital gain. The donor can determine the value between the ACB (adjusted cost basis) and FMV (fair market value) of the donated property to calculate the capital gain and tax credit. If the insurance policy is purchased to replace the value of the gifted assets (and offset the tax consequences of the capital gain), the tax savings from the gift can be used to purchase the insurance policy.
Donor-advised funds and foundations
A donor-advised fund is an endowment fund. The money is invested in a fund and a fixed payout is paid to registered charities. There is flexibility in when they are donated and to whom. You can use this as a legacy of charitable giving, as donations can continue after death and are your heirs too. The money is donated to the organization that makes the initial donation, manages where the proceeds are donated, invests the money under your direction and issues tax receipts.
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