By Jacqueline M. Demczur

In recent years, insurance industry regulators have expressed concern over donations of life insurance. Most prominently, the British Columbia Financial Institutions Commission (“FICOM”), now the BC Financial Services Authority (the “BCFSA”), took the position in November 2019 that charities soliciting or accepting donations of life insurance policies from BC residents was considered “trafficking” in contravention of BC’s Insurance Act. It should be noted, though, that BCFSA subsequently clarified its position that bona fide charities were not prohibited from soliciting donations of life insurance policies or benefits, which was discussed in the May 2020 Charity & NFP Law Update.

Following these concerns, the Canadian Association of Gift Planners (“CAGP”) published the Charitable Donation of Life Insurance Package – CAGP Guidelines (the “Guidelines”) in March 2021 in response to recommendations that interested parties “establish best practices to ensure appropriate processes and measures are followed when making use of insurance products for charitable donation purposes.” The Guidelines are published as four separate sets of guidelines tailored to the various parties involved, including guidelines for donors, advisors, charities, and insurers, and are all applicable to both policy transfers as well as the setup of new charitably-owned policies.

Of particular interest to charities, the Guidelines for Canadian Charities (“Charity Guidelines”) was designed to assist charities with making informed decisions about accepting gifts of life insurance policies. The Charity Guidelines are also intended to help charities remain compliant with provincial regulators by minimizing the risks of taking part in the trafficking of life insurance policies, such as Stranger-Owned Life Insurance (STOLI) and viatical settlements, both of which are currently prohibited in almost all Canadian provinces apart from Quebec and Saskatchewan.

The Charity Guidelines set out best practices for determining whether a valid relationship exists between a charity and a donor prior to a gift being made, for example whether the donor has a history of donating to or volunteering with the charity. While the absence of an existing relationship does not make a gift illegitimate, charities are warned to proceed with caution and to ensure that the donor has a clear, philanthropic intent beyond simply obtaining a tax receipt. The Charity Guidelines also set out best practices regarding the transfer itself, including ensuring the donor obtains appropriate independent advice about the gift, and that the charity accepts the insurance policy as a gift rather than purchasing the policy from the donor. Charities are also advised to obtain a detailed illustration of the insurance policy and conduct an independent review of the policy to determine its viability. In this regard, due diligence questions are provided for charities to consider during their review.

The Charity Guidelines also outline preferred types of policies for charities, including “limited pay” policies, which minimize the risk that donors may need to make lengthy commitments to a long premium paying periods. Charities are warned to exercise “extreme caution” in cases of split-dollar donations where donors retain ownership of part of the policy due to their complicated and risky nature, as well as against sharing ownership of policies with other charities.

The Charity Guidelines then provide guidance on interacting with insurance advisors, for example refraining from compensating any advisors that interact with the donor as an incentive to transfer the policy (though unrelated third-party advisors may be paid to provide an independent analysis of the proposed policy). Once they become owners of the policy, charities are not obligated to retain the same advisor as the policy’s advisor of record. Finally, a charity donation checklist is provided to help charities ensure that all proper steps and due diligence have been taken leading up to the gift.

Three supplemental documents are also included with the Guidelines, including: (1) Understanding Tax Receipting of Charitable Gifts of Life Insurance; (2) How to use Life Insurance as a Charitable Gift; and (3) What is Insurance Trafficking?

As they are best practices guidelines only, the Charity Guidelines are obviously optional. However, they are a very helpful and comprehensive resource that set out a standard of best practices for all parties involved in the gift of a life insurance policy, and will be of great interest to charities, donors, as well as advisors and insurers. As such, the Charity Guidelines will serve as an excellent resource for charities to ensure that the risks of accepting gifts of life insurance policies are minimized for all parties involved.

Read the June 2021 Charity & NFP Law Update