Making gifts of life insurance easy to understand
Using insurance to do good, care for your heirs, and reduce or eliminate taxes
Mike and Samantha Forsythe*, Ontarians both aged 65, want to be generous to the university they both attended. At present, they have included in their will a bequest of $75,000 to their university, which they have set aside in a tax-free savings account.
They also want to generously provide for their daughter Jane, who is a mother of four. They are bequeathing to her whatever will remain in their registered savings (RRSPs/RRIFs), but worry that taxes and probate fees will consume about half of these funds. Between them both, they currently hold about $350,000 in RRSPs.
After exploring their options with their financial advisor, they use their $75,000 in savings to purchase a $300,000 Universal Life joint-last-to-die insurance policy, and assign Jane as its beneficiary.
They update their will, taking out the $75,000 donation. They replace it with a donation of the proceeds of their registered funds, which are allowed to transfer directly to their university upon their death.
Mike and Samantha both pass away 20 years later. Their RRIFs are valued at $200,000. If they had been transferred to their daughter as originally planned, Jane would have eventually received about $120,000, after taxes and probate were settled. Instead, Jane now immediately receives the full tax-free death benefit of her parents' insurance policy, now worth about $378,000.
Their university receives $200,000, a donation almost four times greater than their original donation of $75,000. Their estate still must pay taxes on these funds, but they are completely offset by the charitable receipt their estate receives for their generous gift.
In the end, Mike and Samantha's university, and their daughter Jane, each receive almost four times as much as the couple originally planned, and all of their taxes were offset by charitable tax receipts!
*Note: This is a fictional example. The amount of insurance purchased for $75,000 will vary according to the age and health each individual purchasing an insurance policy. The value of registered funds upon death of their owners, after tax and probate, will vary from Canadian province to province.
