Giving money to charities upon death or near death

If you want to donate money to charities and you are planning your estate, what is 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 charities 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 are paying the highest tax rates) and you don’t need this money for everyday expenses, then it may be a good idea to donate to charities while you live. You can make this decision every year if your income fluctuates, or if you have a year in which income increases, such as a year in which a property is sold or capital gains are obtained on investments. There would be a trade-off between lowering tax rates today and lowering them for equity. You will also want to consider how quickly you want to donate to charity and if you would like to see how your money is being used.

There are many personal opinions that come up regarding charities and how it should be done, so it takes some introspection to wonder what your preferred method of giving would be. It’s a good idea to ask your favorite charities how they would like to receive your donations: a lump sum rather than often, and assets rather than cash. Some charities have a difficult 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 facilitate how donations are 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 charities? Why do this? These accounts can be heavily taxed 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 reversed if the stocks were donated to charities prior to sale.

Donate through your will

The downsides are that the will can be challenged or changed, which can affect the intended outcome of donations to charities. There are also probate fees that apply to anything that goes through a will.

Life insurance donation by will

This donation is made upon death. Please note that the donation is made by the estate and at the time of death. Please note that “cultural gifts” and “green gifts” are taxed differently. Donations can be claimed: in the fiscal year of the estate in which the donation is made, a previous fiscal year of the estate, or one of the last two fiscal years of the individual up to 100% of net income. The farm can also transfer grant credits up to 5 years in the future for a graduated rate farm (GRE) or 10 years for ecologically sensitive lands. Keep in mind that a gift given through a will or estate is treated the same way. 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 contesting the estate.

Life insurance donations by naming a charity as the beneficiary of the insurance policy

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

Life insurance policy donations directly to a charity

In case 2), the fair market value is used, which is normally higher than the cash surrender value. Who will pay the premiums once the insurance policy is donated? The insured may continue to pay premiums and obtain additional tax credits for the payments if they occur after the insurance policy is transferred to the charity, or the premiums may be deducted from the cash value of the policy. 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 do so, the insurance policy will expire. Keep in mind that the features of the life insurance policy should be carefully reviewed to ensure that you arrive at the correct fair market value. In the second case, there are no probate fees, there is no dispute over the estate, and there are no problems with the creditors and the estate. This case can apply to a new or existing life insurance policy during its lifetime. The rest of the estate can be kept in full for the other beneficiaries. Donating a life insurance policy can be cheaper than giving a cash donation because investment income is generated within the life insurance policy. Note that if there is an insurance policy split between a donor and a charity, the CRA does not want an advantage in favor of the donor. The benefits for the charity and the donor must be clearly separated, otherwise the charity tax deduction would not be allowed. The person making the donation must calculate the value of the division, 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 capital property gift, and the total gift limit is increased by 25% of the taxable capital gain. The donor can designate a value between the CBA (Adjusted Cost Basis) and the 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 donation can be applied toward the purchase of the insurance policy.

Donor-advised funds and foundations

A donor-advised fund is an endowment fund. The 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 charitable donation bequest, as 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 under your guidance, and issues the tax receipts.

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