Potential donors often wrestle with a variety of objectives that don’t always work well together. Your wish to donate to a favourite charity may be dampened by impending taxes … or by a feeling that the gift may be perceived as disinheriting your children.
Consider the family cottage. The primary objective is to leave it to the children so the family tradition can continue and the pleasure of owning can be shared with grandchildren. One problem is the capital gains tax which, although it can be deferred until the death of the second parent, will become payable at that time. The money with which it will be paid will come from the balance of the state, so the parents feel that Revenue Canada is essentially already disinheriting their children.
Given this situation, how can they justify setting money aside for a charity? And on the other hand, how can they, as successful citizens who have benefited from all that Canada has to offer, in good conscience ignore the legitimate needs of the less fortunate members of our society? Unable to resolve these opposing needs, they procrastinate, as many of us do. Unfortunately, all too often the question remains unresolved, and the bequest is never made.
An alternate approach is for a financial advisor to make the question concerning the existence of assets subject to capital gains part of the normal fact-finding process. In the example shown, we should consider the effect of buying an insurance policy on a joint last-to-die basis, such that it pays out at the same time the taxes are payable. The beneficiary is the estate of the survivor of the two parents, and the estate is directed, through the will, to gift the proceeds to the charity of choice. The receipt will be for the amount of the gift.
Example: |
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|---|---|---|---|
| A couple aged 65, owns a cottage worth about $120,000. Their adjusted cost base in $50,000. Before starting to calculate the gain, we need to calculate a future value for the property, allowing for inflation to their best statistical mortality. If we use 3% (low for vacation property) and 25 years, the fair market value at the `deemed disposition’ will be $250,000. | |||
| Cottage FMV | $250,000 | Insurance | $150,000 |
| ACB | $50,000 | Annual Premium | $3,666 |
| Capital Gain | $200,000 | Pay Period | 10 Years |
| Taxable Gain (75%) | $150,000 | Total Cost | $36,660 |
| Tax Payable (50%) | $75,000 | Tax Savings* | $75,000 |
| * The proceeds of the life insurance will produce a tax receipt for the estate of $150,000. At a 50% tax rate, the receipt would save approximately $75,000 in taxes. | |||
The result – the taxes have been prepaid for 49 cents on the dollar; the balance of the estate is free and clear for the children, who will also inherit the cottage, now fully unencumbered; and the charity will receive a bequest of $150,000 (likely more than the donors would otherwise have been able to pledge). Overall, this classic use of life insurance is a win-win scenario.
Sherry Rodney Kushner and Edward Pearce are the authors of a new manual: PLANNED GIVING: Making It Happen!, published by Strategic Ink Communications. This article is an adaptation, with permission, from the Section on Gifts of Life Insurance. To order your copy, call (416) 696-8146.
