Today we are sharing a charitable giving strategy that can be implemented as part of your overall estate plan.
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This strategy involves donating life insurance policies and there are two primary methods of doing so.
The first way to do so is to purchase the life insurance policy with yourself as the owner as well as the insured, and name the charity that you would like the insurance policy to pay out to, as the beneficiary.
This method will provide you with a tax benefit at death. The benefit can be used in your year of death against your income for that year of death, up to 100% of your income in the year of death. As well, if the credits have not been used through in that year of death, credits can be used in the year previous. Again, up to 100% of income in the year prior to death.
A benefit of this method is that if you decide you would like to name a different charity as beneficiary, it is under your control to do so. All you need to do is fill out a beneficiary change form and make the adjustment. So you have a lot more flexibility with this method.
A second method for donating life insurance, is where you as the life insured are the insured on the policy, and the charity is the owner of the policy.
This method allows the charity to provide you with a tax receipt as you are paying premiums, and therefore, your benefit happens while living and helps you reduce your tax on your income while you are alive.
This strategy is beneficial for the charity; it also is beneficial for some clients who find that they need more tax benefit while they are alive, rather than the benefit to their estate, for a variety of reasons.
The downside to this strategy is that the charity remains owner of the policy, and you cannot change ownership of the policy to another charity. So, you need to be very confident that you have chosen a charity that you would like to support, and that they are going to use the proceeds of the policy in a manner that you deem suitable on your death. It can be a good idea to talk to the charity and have them write a letter of understanding for example, outlining that the use of the proceeds of the policy will be in line with what your goals and objectives are.
The benefit is that using that charity receipt while living can obviously help reduce your tax owing through your retirement (which is often when clients put this in place).
If you have any questions about or have any interest in learning about how using a life insurance policy to benefit charities can be suitable for you, please reach out.