Adjustments To Net Income In Calculating Operating Cash Flows Include: Giving Money to Charity at or Near Death

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Giving Money to Charity at or Near Death

If you want to give money to charity and are planning your estate, what’s the best way to do it? There is the option of giving to charity each year or as a lump sum upon death. At the time of death, there are options to give to charity as part of your will, through life insurance or through the donation of assets. When making these choices, you must consider the following:

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 pay the highest tax rates) and don’t need that money for everyday expenses, giving to charity while you’re alive can be a good idea. You can make this decision every year if your income fluctuates or if you have a year where your income rises sharply, such as a year when a property is sold or a capital gain is made on investments. There would be a trade-off between lowering tax rates now and lowering them for property. You’ll also want to consider how quickly you want to give to charity and whether you want to see how your money is being used.

There are many personal opinions that surface about charities and how they should be done, so it takes some introspection to ask yourself what your preferred way of giving would be. It’s a good idea to ask your favorite charities how they like their donations – flat or recurring, and assets or cash. Some charities struggle with large sums of money because they may not have the ability to allocate it where they need it. Other charities may have unpredictable funding from other sources if large amounts are donated which would disrupt their cash flows. Depending on the type of donation, the charity can earmark it for different purposes and this would facilitate the way in which the donations are used.

If I am making a donation at the time of my death, how should I go about it?

Donate your RRSP

What about donating an RRSP, RRIF or LIRA account to charity? Why do that? These accounts can be highly taxed depending on your income at the date of death and the remaining balance at the date of death. This strategy is similar to donating shares that have large unrealized capital gains at death that could be reversed if the shares were donated to charity before being sold.

Donate of your own free will

Disadvantages are that a will can be contested or changed which can affect the intended outcome of the charitable giving. There are also probate fees that apply to anything that goes through a will.

Donating life insurance through a will

This donation is made at the time of death. Please note that the donation is made by the estate also at the time of death. Note that “cultural gifts” and “environmental gifts” are taxed differently. Donations can be claimed: in the tax year of the real estate in which the donation was made, the earlier tax year of the real estate, or one of the last two tax years of the individual up to 100% of net income. The estate can also carry forward donation credits up to 5 years into the future if it is a graduated rate estate (GRE) or 10 years for environmentally sensitive land. Note that a gift made by will or estate is treated in the same way. The donation consists of a lump sum, and the tax receipt refers to the property, not to the individual. There are probate fees, public disclosure and the possibility of disputing the estate.

Donations of life insurance by naming a charity as the beneficiary of the insurance policy

The individual in this case would not qualify for a charitable donation tax credit for premiums paid. This would be done when the insurance policy is about to renew or expire. If you allow the policy to lapse by not paying premiums, you may receive no value for it or receive a cash surrender value that may be less than fair market value. Life insurance policies can be donated by 1) changing the allocation of the charity as beneficiary and in the event of death. The estate would receive a tax credit based on the amount of the gift. Another way is to 2) change the ownership of the policy and the beneficiary to a charity. The charity should be consulted as to whether it will accept this type of gift. This method is useful for direct donations as opposed to using third parties. Can a donation credit be used? It is worth a maximum of 75% of net income with a 5-year carryover.

Donations of life insurance policies directly to charity

In case 2) the fair market value is used, which is usually higher than the cash purchase value. Who will pay the premiums after the insurance policy is donated? The policyholder may continue to pay premiums and receive additional tax relief for payouts if they occur after the policy is transferred to charity or the premiums may be deducted from the cash value of the policy. Other donors to the charity itself may also pay premiums. The charity may prefer to pay the premiums because if the donor agrees to pay the premiums and does not, the insurance policy will lapse. Keep in mind that the features of a life insurance policy should be thoroughly checked to ensure that you are getting the correct fair market value. In the second case, there are no probate fees, no contestability of the estate and no problems with creditors and the estate. This case can apply to a new or existing life insurance policy during your lifetime. The rest of the estate can be retained in its entirety for other beneficiaries. Donating a life insurance policy can be less expensive than making a cash donation because the investment income is generated within the life insurance policy. Note that if there is a split insurance policy between the donor and the charity, the CRA does not want preference in favor of the donor. The benefits of the charity and the donor must be clearly separated or the charitable tax deduction would not be allowed. The individual making the donation must calculate the value of the division – which is probably done with the help of an insurer or actuary.

Donation of property

This method is a donation of assets in kind where there is an unrealized capital gain or loss built into the transaction. This is called capital asset donation and the total donation limit is increased by 25% of the taxable capital gain. The donor can determine the value between the ACB (adjusted cost basis) and FMV (fair market value) of the donated property for calculating capital gains and tax credits. If the insurance policy is purchased to replace the value of the donated property (and offset the tax consequences of the capital gain), the gift tax savings can be applied to the purchase of the insurance policy.

Donor-advised funds and foundations

A donor fund is a grant fund. The money is put into a fund and a fixed payment is made to registered charities. There is flexibility in when donations are made and to whom. This can be used as a legacy of charitable giving as donations can continue after death and be your heirs. The money is donated to an organization that makes the initial donation, administers where the proceeds are donated, invests the money under your direction and issues tax receipts.

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