Giving Money to Charity at or Near Death

If you want to give money to charity and you are planning your estate, what is the best way to do it? There is an option to give to charity each year or as a lump sum upon death. At the time of death, there are options to give to charity as part of your will, through life insurance or through donating assets. There are considerations to consider when making these choices:

What Is My Income Level and What Do I Need For My Lifestyle Now and At The Day of My Death?

If you have a high annual income (high would mean you are paying the highest tax rates) and you don’t need this money for day to day expenses, then giving to charity while you are living may be a good idea. You can make this decision each year if your income fluctuates, or if you have a year where the income spikes such as a year when a property is sold or capital gains are harvested on investments.  There would be a trade-off between lowering the tax rates currently, and lowering them for the estate. You also would want to consider how quickly you want to give to charity and whether you would like to see how your money is being utilized.

There are many personal opinions that surface with respect to charities and how it should be done, so some introspection is required to ask yourself what your preferred method of giving would be. It is a good idea to ask your favourite charities how they would like their donations – lump sum versus frequently, and assets versus cash. Some charities have difficulty dealing with large sums of money because they may not have the facilities to allocate it where they need it. Other charities may have unpredictable funding from other sources if large sums are donated which would disrupt their cash flows.  Depending on the type of donation, a charity may earmark it for different uses and this would facilitate how the donations get utilized.

If I Give Donations at the Time of My Death, How Should I Do it?

Donating Your RRSP

What about donating RRSP, RRIF or LIRA accounts to charity? Why do this? These accounts may be taxed heavily depending on your income at the day of death and on the remaining balance at the day of death. This strategy is similar to donating shares that have large unrealized capital gains at death which could be nullified if the shares were donated to charity prior to sale.

Donating Through Your Will

The disadvantages are that the will can be contested or changed which may affect the intended outcome of giving to charity. There are also probate fees that apply to anything passing through a will.

Donation of Life Insurance Through a Will

This donation is made at death. Note that donation is made by the estate and at the time of death. Note that “cultural gifts” and “ecological gifts” are taxed differently. Donations can be claimed: in the taxation year of the estate in which the donation is made, an earlier taxation year of the estate, or one of the last two taxation years of the individual up to 100% of net income. The estate can also carry forward donation credits up to 5 years into the future if it is Graduated Rate Estate (GRE) or 10 years for ecologically sensitive land. Note that a gift given through a will or through the estate is treated the same way. The donation consists of a lump sum and the tax receipt is made to the estate and not the individual. There are probate fees, public disclosure and the possibility of estate contestability.

Donations of Life Insurance By Naming a Charity as a Beneficiary of the Insurance Policy

The individual in this case would not qualify for a charitable donation tax credit for the premiums paid. This would be done when an insurance policy is close to renewal or set to expire. If you let the policy expire by not paying premiums, you may not get any value for it or get cash surrender value which may be lower than its fair market value. Life insurance policies can be donated by 1) changing the assigning the charity as the beneficiary and upon death. The estate would receive a tax credit based on the amount of the gift. Another way is to 2) change the policy ownership and beneficiary to the charity. The charity should be consulted as to whether they would accept this kind of gift. This method is useful for direct donations as opposed to using third parties. Can the donation credit be used? It is worth 75% of net income at a maximum with a carry forward of 5 years.

Donations of Life Insurance Policies Directly To A Charity

In case 2), the fair market value is used which is typically higher than the cash surrender value. Who will pay the premiums once the insurance policy is donated? The insured can continue to pay premiums and get additional tax credits for the payments if they occur after the transfer of the insurance policy is made to the charity, or the premiums can be deducted from the policy’s cash value. Other donors of the charity itself can also pay the premiums. The charity may prefer to pay the premiums since if the donor agrees to pay the premiums and does not, the insurance policy will lapse. Note that the features of the life insurance policy should be checked thoroughly to make sure to arrive at the correct fair market value. In the second case, there are no probate fees, no contestability of the estate and no issue with creditors and the estate. This case can apply to a new or existing life insurance policy during your lifetime. The remainder of the estate can be kept whole for the other beneficiaries. Donating a life insurance policy can be cheaper than giving a cash donation because investment income is being generated inside of the life insurance policy. Note that if there is a split of an insurance policy between a donor and a charity, the CRA does not want an advantage in favour of the donor. The benefits to the charity and the donor must be clearly separated otherwise the charitable tax deduction would not be allowed. The individual making the donation has to calculate the value of the split – which is likely performed with help from an insurance underwriter or actuary.

Donating Assets

This method is donating assets in kind where there is an unrealized capital gain or loss embedded in the transaction. This is called donating capital property and the total donation limit is increased by 25% of the taxable capital gain. The donor may designate a value between the ACB (Adjusted Cost Basis) and the FMV (Fair Market Value) of the donated property for calculating the capital gains and tax credit. If an insurance policy is purchased to replace the value of the assets donated (and offset the tax consequences of a capital gain), the tax savings from the gift can be applied toward the purchase of the insurance policy.

Donor Advised Funds and Foundations

A donor advised fund is an endowment fund. Monies are put into the fund and the fixed payout is made to registered charities. There is flexibility as to when donations are made and who to make them to. This can be used as a legacy of charitable giving since the donations can continue after death and be your heirs as well. The money is donated to an organization who invests the initial donation, administers where the proceeds are donated, invests the money guided by you and issues the tax receipts.

Sources:

https://www.advisor.ca/tax/tax-news/how-to-donate-a-life-insurance-policy/

https://advico.ca/charitable-giving-and-life-insurance/

What Can I Do With a Life Insurance Policy That I No Longer Need?

If you have had a life insurance policy at an earlier stage of life that you no longer need, the typical method of dealing with it is to let it expire or take the cash surrender value if it applies. There is another option that may be available: You can donate the insurance policy to charity. There are a number of conditions that would have to line up for this idea to work.

The Charity Has to Accept the Insurance Policy

The concept is that if you donate your insurance policy to charity, they will eventually get the payout which will be the donation. Since it is a life insurance policy and you are still alive, there will be a time delay before the payout comes to fruition. The ideal policies that charities would like are those that are about to expire or payout soon. In the meantime, the premiums have to be paid to keep the life insurance policy alive. If you the donor keep paying, you can get charitable tax credits for the premiums after the transfer, but if you stop paying, the charity does not get any payout. The charity will typically want to pay the premiums, but they will only do this if the payoff is worthwhile. The charity also has to be willing to accept this kind of gift as it may be too complicated or overwhelming for certain organizations. Having large one time donations can be problematic for cash flow management for the charity.

The Value of the Insurance Policy Has To Be Verified

The value of the insurance policy has to be valued based on its terms and conditions. This would include the premiums, health conditions, riders and special rules that may exist in the policy. This valuation would have to be done by an insurance underwriter or actuary.

Your Income Has to be High Enough

If you succeed in donating the insurance policy, you would be able to claim an amount up to 75% of your income in the year that you donate the insurance policy. You also have up to 5 years to carry forward the amount if you cannot claim it right away. If your income is not high enough or you cannot use the credits, there will not be any benefit to making a large donation. Even if all of the ducks line up, you are receiving a fraction of the donation in terms of the tax credit – typically between 15% and 29% of the amount donated.

The Insurance Policy Has to be Paid Up

The insurance payout has to be intact in order to donate it to a charity. If it is not, the value will not be as worthwhile.

Tax Liability on Sale

If the cash surrender value is higher than the adjusted cost basis (ACB) of the sale, there may be a tax liability on the sale which would negate any advantage of donating the insurance policy.

Sources:

How to donate a life insurance policy

Charitable Giving and Life Insurance

Can a Bank Run Still Happen Today?

A bank run is when an institution runs out of money to give depositors who are withdrawing money from the bank. This typically happens when a large number of people withdraw money at the same time. Is this still a problem today?

Bank runs would get started when depositors needed to withdraw money due to a catalyst such as a market crash. This would force people to sell assets or pay down loans suddenly creating a surge in the need for cash. This catalyst usually comes from outside the bank. The classic bank run mentality led to the fear that there was not enough money on deposit at the bank, causing an acceleration of withdrawals and leading to bank insolvency.

At the present time, there are new factors that affect how a bank run can happen. The first one is when the bank model of doing business is not profitable. A bank would typically collect deposits from savers and give them interest, and lend this money to borrowers and charge a higher rate of interest. What if a bank charges you money to make a deposit instead of giving you interest? This reality can come from  “negative interest rates”, and it is happening in Europe and Japan right now. It may happen in the U.S. and Canada at some point. The banks are being charged interest on money they park at the central bank for the purposes of keeping their “reserve ratio” intact. This reserve is money used as a backstop to fund large amounts of withdrawals that may occur at any given moment. The banks are charging depositors to keep money in accounts to try to recover these charges from the central bank. Mortgage rates would still be higher than the rates on deposit, but the difference between them would shrink. Depositors may in turn withdraw money from their accounts and keep it in cash because it is cheaper than keeping it in a bank. This effect would multiply resulting in a cash shortage at the bank.

The second challenge is the electronic form of money. Bank runs in the past involved physical currency and having to go physically to a bank to make a transaction. What if bank machines stopped working or accounts disappeared? This can happen as a result of hacking, computer viruses or a defect in the computer programming of the bank. If an event like this was made public, the ensuing loss of trust and possible panic could prompt a large number of withdrawals.

The third possibility is a bank “bail-in”. This is when banks lose so much money that they take money from depositors’ accounts to make them whole. Should this possibility arise, the classic bank run can happen is people may want to turn their account balances into physical cash to avoid it being confiscated. Many countries have passed laws allowing these types of bail-ins to happen. What about government backed deposit insurance? This did not exist in the past when there were many bank runs but it exists now. The issue with the insurance is: will it work? The insurance is akin to a type of government bail out of the banks by the taxpayer, similar to what happened in 2008 in the U.S. What if the claims on the insurance fund are very large? The insurer will run out of money quickly and the insurance may not pay out. In the case of the government, the national debt would rise and the taxpayer would be paying additional taxes in future years. This is similar to a large number of claims made against an insurance company and the company would have to raise premiums to recover the payout amounts.

A bank run can happen at any time since people may decide to withdraw money in large numbers for a number of reasons. The difference today is that the banking system has changed and there are other factors that have been added recently that complicate any predictions.