Life Insurance and Charity Donations
We explain three different methods on how to use your life insurance for a charity donation by giving you are the pros and cons for each of them.
Key Takeaways
Life insurance can be used to make a charity donations. The 3 main ways to do this are with a will, with a designated beneficary or with transfer of ownership. The best way however wil depend on your financial and personal situation and we reommend the help of an expert for this choice.
When it comes to the beneficiaries of your life insurance, we often hear that we can name "whoever we want". If we can designate the person of our choice, could we also choose to make a donation to a charity with our life insurance policy?
The answer is yes, and here's how to do it.
Donate through a will
Probably the most obvious method, it is indeed possible to donate a life insurance benefit with one's will. To do so, all you have to do is designate the charity and the amount you wish to donate in your will. It's as simple as that, really.
The good side👍: You will be able to name several organizations easily, change them easily, a tax credit will be granted for your estate on your final tax declaration.
The bad side👎 : The amount of this donation can be seized by creditors in case of bankruptcy, you will not receive any tax credit during your lifetime.
Donate through a designated beneficiary
When purchasing an insurance policy, it is also possible to directly designate one or more charities as beneficiaries. It is also possible to make this choice for an insurance policy that is already in force, however, the current beneficiaries must be revocable, otherwise their signature will be required to make the change.
The good side👍 : The benefit will go directly to the charity without going through your estate, creditors will not be able to seize these amounts in the event of bankruptcy, you will be able to name several charities and change them easily*, a tax credit will be granted for your estate on your final tax declaration.
*As long as they are named as revocable beneficiaries.
The bad side👎 : You will not receive any tax credits during your lifetime.
Donate through a transfer of ownership
A slightly more complex method is to transfer ownership of your insurance policy directly to a charity. In this situation, you must first obtain written consent from the organization and you will want to continue to pay your premiums in order to obtain a tax credit. In addition, this method generally results in immediate tax consequences such as a tax credit or a taxable gain on your policy .
Of course, the evaluation of these tax consequences and the value of your policy at the time of the transfer must be done by experts. Finally, the tax treatment of this transfer will be different if the policy is deemed to have been acquired for the purpose of making a donation from the get-go.
The good side👍: You will receive a tax credit upon the transfer, and each year for the payment of your premiums.
The bad side👎: Your estate will have no tax benefits, you may have to pay actuarial fees to evaluate the value of your policy, you will not be able to change your mind after making the transfer.
Verdict | Charity Donations can be complex
All things considered, making a donation to a charity can be quite complex. Whether it is to maximize the value of your estate, to carry out advantageous tax planning strategies or simply out of pure generosity, it is always recommended to have the help of an expert for this type of operation 👌