Giving money to charity at or near death

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

What is my income level and what do I need for my lifestyle now and on the day of my death?

If you have a high annual income (high would mean you’re paying the highest tax rates) and you don’t need this money for everyday expenses, then donating to charity while you live might be a good idea. You can make this decision each year if your income fluctuates, or if you have a year in which income increases, such as a year when a property is sold or capital gains are made on investments. There would be a trade-off between lowering current tax rates and lowering them for the estate. You’ll also want to consider how quickly you want to donate to charity and whether you’d like to see how your money is used.

There are many personal opinions that come up regarding charitable organizations and how they should be done, so it requires some introspection to ask yourself what your preferred method of giving would be. It’s a good idea to ask your favorite charities how they’d like to receive their donations: lump sum vs. frequency and assets vs. cash. Some charities have a hard time handling large sums of money because they may not have the facilities to allocate it where they need it. Other charities may have unpredictable funds from other sources if large sums are donated that would disrupt their cash flows. Depending on the type of donation, a charity can put it to different uses and this would make it easier for the donations to be used.

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 subject to heavy taxes depending on your income on the day of death and the balance remaining on the day of death. This strategy is similar to donating stocks that have large unrealized capital gains at death that could be nullified if the shares were donated to charity prior to sale.

Donate through your will

The disadvantages are that the will can be challenged or changed, which can affect the intended outcome of the charitable gift. There are also probate fees that apply to anything that passes through a will.

Gift of Life Insurance by Will

This donation is made upon death. Keep in mind that the donation is made by inheritance and at the time of death. Please note that “cultural gifts” and “ecological gifts” are taxed differently. Gifts may be claimed: in the estate tax year in which the gift is made, a prior estate tax year, or one of the individual’s last two tax years up to 100% of net income. The farm can also transfer gift credits up to 5 years into the future if it is a Graduated Rate (GRE) farm or 10 years for ecologically sensitive lands. Note that a gift given through a will or through probate is treated the same. The donation consists of a lump sum and the tax receipt is made to the estate and not to the individual. There are probate fees, public disclosure, and the possibility of estate contestability.

Life Insurance Donations by Naming Charity as Insurance Policy Beneficiary

The person in this case would not qualify for a charitable contribution tax credit for the premiums paid. This would be done when an insurance policy is about to be renewed or expires. If you let the policy expire by not paying premiums, you may not get any value for it or you may get a cash surrender value that may be less than its fair market value. Life insurance policies can be donated 1) by changing the charity’s assignment as 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 ownership and beneficiary of the policy to the charity. The charity should be asked if they would accept this type of gift. This method is useful for direct donations instead of using third parties. Can the donation credit be used? It is worth a maximum of 75% of net income with a 5-year carryover.

Life insurance policy donations directly to a charity

In case 2), the fair market value is used, which is usually higher than the cash salvage value. Who will pay the premiums once the insurance policy is donated? The insured can continue to pay the premiums and get additional tax credits for the payments if they are made after the insurance policy is transferred to charity, or the premiums can be deducted from the policy’s cash value. Other donors to the charity itself may also pay the premiums. The charity may prefer to pay the premiums as if the donor agrees to pay the premiums and does not, the insurance policy will lapse. Please note that the features of the life insurance policy should be thoroughly verified to ensure that the correct fair market value is arrived at. In the second case, there are no probate fees, no contestability of the estate, and no problem with creditors and the estate. This case may apply to a new or existing life insurance policy during your lifetime. The rest of the inheritance can be kept in full for the other beneficiaries. Donating a life insurance policy can be cheaper than giving a cash gift because the investment income is generated within the life insurance policy. Keep in mind that if there is a split of an insurance policy between a donor and a charity, the CRA does not want an advantage in favor of the donor. The benefits to the charity and the donor must be clearly separated, otherwise the charity’s tax deduction would not be allowed. The person making the donation has to calculate the value of the split, which is likely to be done with the help of an insurance underwriter or actuary.

asset donation

This method consists of donating assets in kind when there is an unrealized capital gain or loss implicit in the transaction. This is called a gift of capital assets and the total gift limit is increased by 25% of the taxable capital gain. The donor may designate a value between the ACB (Adjusted Cost Basis) and FMV (Fair Market Value) of the donated property to calculate the capital gains and tax credit. If an insurance policy is purchased to replace the value of donated assets (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. Money is deposited into the fund and the fixed payment is made to registered charities. There is flexibility as to when donations are made and to whom. This can be used as a legacy of charitable donations, as the donations can continue after death and be your heirs as well. The money is donated to an organization that invests the initial donation, manages where the proceeds are donated, invests the money guided by you, and issues the tax receipts.