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Giving Money to Charity at or Near Death
If you want to give money to charity and you’re planning your estate, what’s the best way to do it? There is an option to give to charity each year or a lump sum upon death. At death, there are options to give to charity as part of your will, through life insurance or by donating assets. Things to consider when making these choices:
What is my income level and what will I need for my lifestyle now and on the day of my death?
If your annual income is high (higher means you pay the highest tax rate) and you don’t need this money for day-to-day expenses, it may be a good idea to give to charity while you’re alive. If your income fluctuates, or if you have a year where assets are sold or capital gains are made. There will be a trade-off between lowering tax rates currently and lowering them for estates. You’ll also want to consider how soon you want to give to the charity and whether you like to see how your money is being used.
There are many individual opinions regarding charity and how it should be done, so some introspection is necessary to ask yourself what your preferred method is. It’s a good idea to ask your favorite charities how they like their donations – lump sum vs. recurring, and assets vs. cash. Some charities find it difficult to deal with large sums of money as they may not have the facilities to distribute it where it is needed. Other charities may receive unexpected funding from other sources if large amounts are donated that disrupt their cash flow. Depending on the type of donation, the charity can put it to different uses and this will simplify how the donations will be used.
If I donate at the time of my death, how do I do it?
Your RRSP is making a donation
What about donating RRSP, RRIF or LIRA accounts to charity? Why do this? These accounts can be heavily taxed depending on your income on the day of death and the amount remaining on the day of death. This strategy is similar to donating shares at death with large unrealized capital gains that can be canceled if the shares are donated to charity before the sale.
Donating through your will
Disadvantages are that the will can be contested or changed which can affect the intended effect of charitable giving. Probate fees also apply to anything passed by will.
Donation of life insurance by will
This charity is done at the time of death. Remember that donations are made by the estate and at death. Note that “cultural gifts” and “environmental gifts” are taxed differently. Donations can be claimed: in the taxation year of the estate in which the donation is made, the previous taxation year of the estate or one of the last two taxation years up to 100% of the individual’s net income. The estate can also carry forward donation credits up to 5 years into the future if it is a graduated rate estate (GRE) or 10 years for ecologically sensitive land. Note that gifts made by will or estate are treated the same way. The donation is a lump sum and tax receipt is given to the estate and not to the individual. There are probate fees, public disclosure and the possibility of estate contests.
Donation of life insurance by naming a charity as the beneficiary of the insurance policy
A person in this case will not be eligible for charitable donation tax credit for premiums paid. This will be done when an insurance policy is close to renewal or about to expire. If you let the policy expire without paying the premium, you will get no value or a cash surrender value that may be less than its fair market value. Life insurance policies can be donated by 1) designating a charity as a beneficiary and upon death. Will receive an estate tax credit based on the amount of the gift. Another way is to 2) change the ownership and beneficiary of the policy to a charity. Charities should be consulted as to whether they will accept such gifts. This method is useful for direct donations instead of using a third party. Can a donation credit be used? It is worth 75% of the maximum net income with a carry forward of 5 years.
Donate 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 premium once the insurance policy is donated? The insured may continue to pay premiums and receive additional tax credits for payments if the insurance policy is transferred to a charity or the premiums may be deducted from the cash value of the policy. Other donors to the charity may also pay the premium. The charity may prefer to pay the premium because the donor has agreed to pay the premium and if not, the insurance policy will lapse. Remember that the features of a life insurance policy should be thoroughly checked to ensure that it is priced at the correct fair market value. In the second case, there are no probate fees, no estate contest, and no issues between creditors and the estate. This case may apply to a new or existing life insurance policy during your lifetime. The remainder of the estate may be left in its entirety to other beneficiaries. Donating a life insurance policy can be cheaper than donating cash because the life insurance policy is generating investment income. Note that if the insurance policy is split between the donor and the charity, the CRA does not want to favor the donor. The benefit to the charity and the donor must be clearly separated or the charitable tax deduction will not be allowed. The donee has to calculate the value of the partition – which is done with the help of an insurance underwriter or an actuary.
This method is donating assets where there is an unrealized capital gain or loss embedded in the transaction. This is called donating capital assets and the total donation limit is increased by 25% of taxable capital gains. The donor can assign a value between the ACB (adjusted cost base) and the FMV (fair market value) of the donated property to calculate capital gains and tax credits. If an insurance policy is purchased to replace the value of the donated property (and offset the tax consequences of capital gains), 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. Money is put into the fund and fixed payouts are made to registered charities. There is flexibility in when the donation is made and to whom it is given. This can be used as a legacy of charitable giving as donations can continue after death and so can your heirs. The money is donated to an organization that invests the initial donation, administers where the money is donated, invests the money under your direction and issues tax receipts.
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