Perhaps you have thought about opening a fund, but struggle with the idea of donating a portion of your assets. A good alternative, especially for younger donors and their families, is to consider a life insurance policy. For a relatively modest amount to cover the premium costs, you can ultimately provide a large gift that will have substantial impact in the future.
Transfer an existing policy
Do you have a life insurance policy that no longer fits the need for which it was originally purchased?
The contribution of a paid-up policy that is no longer needed by the donor or donor’s family can create current tax benefits. Often these policies, purchased originally to protect the spouse and young children, outlive their usefulness. After the children have grown and the protection for which the insurance was purchased has been provided by other assets, the insurance can be used to satisfy a charitable donation.
If you own a life insurance policy that you no longer need, simply call your insurance agent and request to change the beneficiary to receive the proceeds from the policy. By transferring an existing policy and naming the JCFC as owner and beneficiary, you are able to receive an immediate tax receipt for the cash surrender value of the policy. Future gifts you make to the Foundation in the form of premium payments will be eligible for a donation tax receipt.
If you re-assign the ownership of the policy and name the JCFC as beneficiary
- You receive an income tax charitable deduction.
- You reduce your future estate tax liability.
When the proceeds of the policy are transferred to your fund at the Foundation, you have created a legacy which can be directed to support your favourite charity, field of interest or to perpetuate your gift to the Federation’s Annual Campaign.
Buy a New Policy
Would you like to leave a significant legacy at a small monthly or annual cost?
Purchase a life insurance policy naming JCFC as owner and beneficiary. Make a tax-deductible cash gift to the JCFC for an amount equal to the annual premium. At death, an endowment fund is established in your name, with the investment income allocated annually according to your instructions.
Even greater leverage is possible when two donors, usually spouses, purchase a two-life second-to-die policy. With two lifetimes before the payment of death benefits, a future gift will cost you even less. For a 30-year old*, ten annual payments of $1000 can result in a magnificent $100,000 legacy! (*Joint life policy; non-smoker).
Name the JCFC as the beneficiary of a new or existing policy
A charitable donations tax credit will become available when you designate that the death benefit proceeds of your policy are paid directly to a registered charity such as the JCFC. Your estate will receive a tax credit for the proceeds of the policy when the gift is realized. This tax credit can be applied to a maximum of 100% of your net income in the year prior to, and the year of death.
An example of using a gift of life insurance to capitalize a fund at the JCFC
The Joneses are both 65 years of age, in good health and in a comfortable financial position. The Joneses will purchase a term-to-100 life insurance policy jointly on their lives. The policy will pay out $100,000 upon the death of the second one. Assume the policy will have premiums of $1,425 annually, payable until they are both gone. After paying the first year’s premium, they will donate that policy to their favourite charity (there is no tax credit for this gift because there is no cash surrender value in this case).
Since the charity owns the policy now, the charity knows it will always be the beneficiary of the policy and will collect the $100,000 death benefit when the second one dies.
Next, the Joneses are going to donate $23,500 to the charity, which the charity will use to purchase a life annuity on the couple’s lives. This annuity will pay out $1,425 annually, exactly what is needed to pay for the life insurance policy the charity now owns. The couple will receive a donation tax credit for the $23,500 gift, which will save them about $10,575 at a marginal tax rate of 45 per cent. The out-of-pocket cost to the Joneses is $14,350 in this example ($23,500 less the tax savings of $10,575 plus $1,425 for the first year premium).
In the end, the charity receives a fully funded, irrevocable future gift of $100,000 (albeit in the future) that cost the couple $14,350.
The Joneses are able to make a commitment to the charity today so that it can acknowledge the gift, they receive some tax savings today, avoid probate fees on the insurance proceeds, and set up a planned gift with a one-time transaction that avoids future payments and administration for the couple.