Recently I received an inquiry from a life insurance advisor about a client who wished to establish a policy and donate it to two charities.  My colleague wanted to know if this was possible.  In my experience it is possible, but not the best way to do it.

Donation Structures

in Canada there are two basic ways to donate using life insurance.

1. A donor makes the charity owner and beneficiary of the policy. After the policy is established and ownership donated to the charity, every premium paid by the donor is eligible for a tax receipt.  The ownership and beneficiary designation can’t be changed.  The death benefit produces no tax receipt because it is an investment owned by the charity.
2. A donor names a charity beneficiary of the policy and retains ownership. The donor may change the charity beneficiary and premiums are not a donation. This arrangement is considered an estate donation.  The charity would issue a tax receipt for the death benefit to the donor’s estate.

Practical Challenges

There are several practical challenges associated with having more than one charity owner of a policy:

• The insurer may not allow joint ownership by charities. Although I am not an insurance professional, I understand this is a growing issue due to new industry compliance requirements.
• Set-up and administration of the policy is more complex with multiple parties. Not all charities are experienced or efficient about the set-up process, which can lead to delays and missed deadlines.
• The issuance of the annual tax receipts relies on two or more charities having good processes for decades.
• The ownership and beneficiary designations are irrevocable, which reduces the donor’s ability to change their mind. There is no flexibility to remove a failing charity or simply accommodate the donor’s changing charitable priorities.
• Due to this lack of flexibility and long commitment to pay premiums, charitable life insurance policies have a high failure rate. Donors lose interest and the policy lapses.
• Lapsed policies produce disappointed donors. They want to do good, and instead they feel they have wasted money.

One charity owner; multiple charity benes

My preferred solution is to arrange a donation of a single policy to a foundation with donor advised funds that allows a grant of the death benefit to charities of the donor’s choice.  The Canadian Association of Gift Planners’ (CAGP) Charitable Donations of Life Insurance guide agrees.  It recommends “the best approach is for the policy to be donated to a single charity, with a gift agreement indicating that the proceeds will eventually be shared with another charity/charities. Community foundations are often an excellent intermediary for these situations.”

Having a single foundation own the policy within a donor advised fund achieves the goal of donors with multiple charitable interest.  It also addresses all the “practical challenges” listed above. There will be one informed charity owner, one annual tax receipt, and the donor retains the choice of ultimate charities they wish to support.  The policy donation is still irrevocable, but it is less likely to lapse as these donations are as flexible as a gift by will. It becomes part of the estate plan. Charities may not appreciate this ongoing donor discretion, but it does help ensure donated dollars are not wasted.

This plan also works with the second common charitable life insurance donation structure noted above.  A foundation with a donor advised funds can be named beneficiary of a policy, but not owner.  This often occurs when the donor already has an active fund and wants to increase their giving at death. Whatever the structure, the goal of using an intermediary charity is to make donations of life insurance simpler and to pay out to charities.