Planning Strategies Involving Life Insurance:
In our practice over the years, we have found that life insurance can significantly increase the size of your gift to your favorite charity.  Also, if combined with proper planning and professional advice, the donor can create tax benefits to their own estate.

The Tax Basics:
Individuals who make annual donations to charities are eligible for tax credits but cannot exceed 75% of the donor’s income in the year.  Any excess gifts can be carried forward and claimed in the following five years (again subject to 75% income limitation).

Gifts made in the year of death (through the deceased’s will or otherwise) can be claimed against 100% of income in that year.  If there is insufficient income to fully utilize the credit, such gifts can be carried back in the year prior to death.  Any gifts that can not be claimed in those two years will expire.

Two Strategies For Gifting Life Insurance:
One strategy is for the death benefit to be gifted to the charity upon death.  This can be executed by either bequesting the death benefit through the donor’s will or by simply naming the charity as direct beneficiary through the life insurance policy.

Another tried and true method is to have the charity designated as owner and beneficiary of the life insurance policy.  The donor pays the premium and can claim a credit for premiums paid on an annual basis. However, there is no credit available to the deceased’s estate upon the payment of the death benefit.

The Pros and Cons of the Two Strategies:
The advantage of gifting a death benefit directly or via the will is that the donor retains control of the policy and can change the beneficiary in the event there is a change in financial circumstances or a change in charitable intent.  The disadvantage of this method is that there is no current credit allowed for premiums paid on the policy and, depending on the size of the death benefit and income of the deceased donor, the full amount of the credit may not be utilized.

The disadvantage of gifting the life insurance proceeds through the will is that the benefit will become subject to probate taxes and other estate administration charges, as well as becoming subject to the claims of the deceased’s creditors.  As a result, it is preferable to structure the gift through a revocable beneficiary designation.

The advantage of designating the charity as owner/beneficiary is the ability for the donor to receive tax relief on an annual basis, by form of credits.  The advantage to the charity is that it now knows that some time in the future a donation will be made equal to the face amount of the policy.

The disadvantage to the donor is loss of control.  If the donor has a change in circumstances (or change of heart), his or her only recourse would be to stop paying premiums under the policy.  From the charity’s perspective, if the donor stopped making premium payments, it would have to decide whether to continue premium payments or surrender the policy for any cash surrender value.

What If The Donor Is Also An Owner Of A Private Corporation?
Yes, a corporation can purchase an insurance policy on the life of a shareholder.  In this case we would recommend that the corporation would be the owner and beneficiary of the policy (it should be noted that rules that permit an individual to directly designate a charity as the beneficiary and claim the death benefit as a charitable gift do not apply to corporate donors).

If the insurance proceeds are received by the corporation and donated to the charity, the donation can be claimed in the current tax year (subject to the 75% of net income limit) and any excess donation can be carried forward to offset corporate income over the next five years.

Under this set up, there can be another significant advantage to the corporation’s shareholders.  In addition to the corporation deducting against corporate income, there is also a special dividend account created when the life insurance death benefit is paid to the corporation.  It is called the “capital dividend account”.  This account allows for the corporation to pay out “tax-free” capital dividends to surviving shareholders in the future.