Donation of Life Insurance

Dave and Karen are a couple in their mid 70s. They are very comfortable financially, have retirement savings to match their lifestyles and no debt. They own their home and a family cottage that has really gone up in value. They also own a $350,000 life insurance policy that was paid up at age 65.

They have two children. Both are married with children; one living in California, and the other lives in Winnipeg. The Winnipeg child and grandchildren, since COVID, have spent the entire summer at the cottage after Dave and Karen upgraded the internet. Dave and Karen would like to transfer the cottage to their Winnipeg child, in part because it is showing wear and tear from the extra use, and they don’t feel that it is right to use their retirement savings to benefit only one child. They have been told there will be a big capital gain on transfer (as they will use the principal residence exemption more efficiently for their home) even though they would be gifting the cottage and not selling it. Their CPA says the tax bill would be about $100,000.

How the donation of an existing insurance policy can reduce current taxes.

Dave and Karen are also very active charitably. Their children are all doing well financially. They feel that gifting their home in Winnipeg to the California child at a later date will equal the cottage gift, so equalization between children is not necessary. Dave and Karen feel that gifting their cottage and home together with any remaining retirement assets to their children is sufficient. So the life insurance policy is not required for estate purposes. They were thinking about changing the beneficiary of the policy to five charities: two would each receive $100,000 and three would receive $50,000 each, and the tax deduction in their estate would cover tax on any remaining RRIF and any estate tax.

Their accountant suggested they talk to GiftPact to discuss an immediate policy gift as a way to offset the tax of $100,000 on transferring the cottage. As it turned out, the offsetting deduction was enough to cover most of the tax. Here’s how it worked:

Insurance policy attributes:

Dave and Karen have had some health issues in the past. Their medical history and current conditions make their life insurance policy more valuable today, because life expectancy is reduced.

Tax attributes of an insurance gift:

Dave and Karen can donate their old policy to charity in the same year as they give their cottage to one of the children. GiftPact would become the owner and beneficiary of the policy, under Dave and Karen’s GiftPact Donor-Advised Fund. Through an agreement with GiftPact, the funds will be distributed according to their wishes. If their intentions change they can easily change which charities will receive the proceeds on second death

Often, the best solution is to donate insurance on death, where (in this case) the estate would receive a $350,000 donation receipt. Sometimes, as with Dave and Karen, it just made sense to get a smaller receipt now to facilitate their other planning.

Be a savvy philanthropist

How you structure your charitable gift is often just as important as the amount you give, both for the charity and for you as the donor. In-kind donations of life insurance policies or securities are a smart and tax-effective alternative to a cash gift.

If you would like to learn more about donor-advised funds and how GiftPact Foundation can maximize the impact of your charitable giving, please get in touch.

The information in this article is for illustration purposes only. It is obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is for informational and educational purposes and is not intended to provide specific advice, including, without limitation, investment, financial, tax or legal matters. This article is published by GiftPact Foundation Inc. (“GiftPact”), and unless indicated otherwise, all views expressed in this article are those of GiftPact. The views expressed herein are subject to change without notice as tax policies and regulations change over time.