There’s a way to leave a legacy that you may not have thought about — by way of a life insurance policy for yourself purchased through a professional corporation.
“I’ve been active in the community all my life and I felt like I wanted some continuity to go on through a legacy gift,” said Lyon Hamburg. “I became aware of a more effective way to give a legacy gift.”
As Hamburg explains it, professionally incorporated business people, can get a life insurance policy that is purchased through their professional corporation with after tax corporate dollars which currently enjoy a low rate of 12.2%, compared to personal tax rates of over 50%.
“The advantage of using a professional corporation for many business strategies, including this, is that the premiums for the policy are paid through the corporation rather than with after-tax dollars paid personally,” he said.
“As a simple explanation, there’s two ways I could buy life insurance for myself — either personally or through my professional corporation. The proceeds of the death benefit can be passed on to the estate without any tax liability through the capital dividend account, If the estate then gifts a large portion of the proceeds of the policy to Federation, the estate will get a huge tax savings when the estate is finally settled. For those individuals that have assets that will be subject to capital gains and income taxes, this tax credit can help preserve the estate for future generations. Certain assets like a cottage, or stocks, or personal corporate shares held for a long time can accumulate significant capital gains that will produce a large tax liability when the estate passes on to the next generation. Furthermore, all RRSP holdings will be fully taxed as income."
Hamburg adds that certain assets, like a cottage, or stocks held for a long time, can accumulate significant capital gains that will produce a large tax liability when the estate passes on to the next generation.
“So there are essentially four powerful advantages to this,” said Hamburg. “Firstly, the premiums are paid through the corporation, which is less costly than with personal after-tax dollars. Secondly, the death benefit is usually tax-free and can add significant value to the estate. Thirdly, it allows for a large legacy gift that helps the community. And finally, the estate gets a large tax credit. which can reduce the tax liability when the estate is finally settled.”
Hamburg also explains that there are some creative financing options available to purchase the policy should someone not wish to use funds in the corporation. Funds can be borrowed to pay for the policy and then the loan is paid off upon death with the balance of the proceeds split between the estate and a large charitable donation.
Micah Garten, Federation’s Director of Development, says legacy giving is his favourite kind of fundraising.
“Regardless of your circumstance it gives everyone the option of making a personally significant gift,” he said. “It also won’t cost you anything today, and there are many different ways to make the gift that allows for you to just redirect your tax burden to the charities you are passionate about.”
Hamburg agreed, acknowledging legacy giving is an easy way to give back.
“You make this kind of donation if you’re the type of person who wants to give to the community,” said Hamburg. “You have to be someone who anticipates that when they die, they’ll have more than enough, and you have to be able to think outside the box.”
Everyone has the ability to leave a legacy gift. All it takes is a desire to perpetuate the values and causes you care about. Once you make that decision there are so many ways you can do it to reduce your tax burden — just contact your financial advisor to figure out which vehicle is best for you.