Transcript CAGP National Conference 2005

WIIFM – What’s in it for Me?
New Perspectives on Complex Gifts
John Jordan, CFP
Certified Financial Planner
Website: www.johnjordan.ca
Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning
Topics
• Why Charitable Gift Planning
- the WIIFM factor
• Current gifts through asset
transformations
– Use of Charitable Gift & Insured Annuities
• To increase income and provide a major gift now
• To maintain income and provide a major gift now
• Charitable Planned Gifts
– Case Study
– Using Life Insurance effectively
– Gift Planning for business owners
Charitable Gift Planning – Case Study
New Perspectives on Complex Gifts
John Jordan, CFP
Certified Financial Planner
Website: www.johnjordan.ca
Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning
Case Study – • Jack & Jill Giving – mid sixties and
are mostly retired with 4 grown
Details
children
• Income sources: work pension,
OAS, CPP, and investment income.
RRSPs are being deferred until age
69.
• Assets include their home and
contents and a family cottage
• Have not done any significant
estate planning outside of their Will
• Were unaware of the amount of tax
payable in their estate
Case Study – • Had attended a presentation on
charitable gift planning which
Details
introduced the strategy of using
insurance to magnify a gift
• They had pondered this idea almost
2 years before proceeding to the
next step
• Their thought was to use $15,000
earmarked for the university and
purchase a $75,000 life insurance
policy.
• The discovery process then began
Case Study – • It was discovered that Jack & Jill
had 6 charities to share in $50k in
Details
their estate
• Jack’s father had recently passed
away and left them a sizeable
inheritance
• They wanted to explore how to
integrate their charitable bequests
with their estate planning
• Info and facts were gathered, a
dollar figure was allotted for this
program and the analysis process
began
Goals • Reduce tax in the estate and during
•
•
•
•
retirement
Magnify charitable bequests
Maintain income level
Fairness to children in the estate
Keep the process simple
Present
Situation
List of Taxable Assets
Current
Value
Future Value
at Mortality
Tax
Payable
Estate
Value
$23,300.00
$23,765.00
$-11,029.34
$12,735.66
Jack's RRSP
$150,185.00
$153,178.00
$-71,089.91
$82,088.09
Cottage
$197,390.00
$432,505.80
$-65,555.47
$366,950.33
Non-Registered - income
$228,531.00
$228,531.00
$0.00
$228,531.00
Non-Registered - estate
$300,000.00
$1,160,905.34
$-199,773.08
$961,132.26
Life Insurance
$0.00
$0.00
$0.00
$0.00
Charitable Bequests
$0.00
$-50,000.00
$23,205.00
$-26,795.00
$899,406.00
$1,948,885.14
Jill's RRSP
Totals
$-324,242.80 $1,624,642.34
Present • Maximum tax paid to CRA in the
estate
Situation
• Minimum amount in charitable
bequests
• All non-registered investments
exposed to tax, except where
deferrals are available
• If more is left to charity, less tax is
paid in estate, but less goes to
heirs
New
Strategy
• Jack and Jill wish to use $80,000 from
Jack’s father’s estate for an insurance
program for their charitable and estate
planning
• These funds will purchase a $400,000
Joint 2nd-to-Die Universal Life Insurance
plan
• The funds will be deposited into the
plan over a 4 year period.
• They will designate the charities as
beneficiary of $250,000 of the
insurance policy with the remainder
paid to their children
• Jack and Jill must revise their Wills in
order to reflect their new plan
New Estate
& Charitable
Plan
List of Taxable Assets
Current
Value
Future Value
at Mortality
Tax
Payable
Estate
Value
$23,300.00
$23,765.00
$-11,029.34
$12,735.66
Jack's RRSP
$150,185.00
$153,178.00
$-71,089.91
$82,088.09
Cottage
$197,390.00
$432,505.80
$-65,555.47
$366,950.33
Non-Registered - income
$228,531.00
$228,531.00
$0.00
$228,531.00
Non-Registered - estate
$220,000.00
$851,330.58
$-146,500.26
$704,830.32
Life Insurance
$400,000.00
$445,343.00
$0.00
$445,343.00
$0.00
$-250,000.00
$116,025.00
$-133,975.00
$1,219,406.00
$1,884,653.38
$899,406.00
$1,948,885.14
Jill's RRSP
Charitable Bequests
Totals
Previous Totals
$-178,149.98 $1,706,503.40
$-324,242.80
$1,624,642.34
New Estate &
Charitable Plan
• Amount left to Charity
increased from $50,000
to $250,000
350000
• Amount left to CRA
decreased from
$324,242.80 to
$178,149.98
300000
250000
200000
150000
100000
50000
A
CR
To
To
Ch
ar
ity
0
Before
After
• Amount left to family
increased from
$1,624,642.34 to
$1,706,503.40
What’s in it • WIIFM
– Annual taxable income is lowered
for me?
– Tax in estate is lowered significantly
– No money “out-of-pocket” – shift in
assets
– Estate is preserved for heirs
– Establish a major charitable
endowment
• Opportunity Spotting
– Donors looking for innovative planned
giving strategies
– Existing Donors who may have made
cash bequests in their Will
– Must be in good health to acquire
insurance
Charitable Gifts & Insured
Annuities
New Perspectives on Complex Gifts
John Jordan, CFP
Certified Financial Planner
Website: www.johnjordan.ca
Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning
What is an • A series of payments either for a
certain period of time, or for life, in
Annuity?
exchange for a lump sum deposit –
reverse mortgage
• Payments are a blend of principal
and interest guaranteed for life or a
term certain period
• Payments can be based either on a
single life or joint lives
• Payments may be level or indexed
What is an
Annuity?
• Level payments with prescribed taxation
are most common.
• Guarantee payment periods can be
integrated to ensure return of deposit
• Longer guarantee period, lower payments
and vice versa
Female - Age 75
Capital Amount - $150,000
Annuity Payment
Total Guaranteed
Payments
Single Life - 1 Year Guarantee
$
15,235.08
$
15,235.08
Single Life - 5 Year Guarantee
$
14,715.36
$
73,576.80
Single Life - 10 Year Guarantee
$
13,342.92
$
133,429.20
Single Life - 15 Year Guarantee
$
11,676.96
$
175,154.40
* Annuity quote based on rates as of March 28, 2005
Examples of • Canada Pension Plan
Annuities • Old Age Security
• Retirement pensions
– for annuities after
Charitable • Simplified process
December 20th, 2002
Annuities • Tax receipt for the full amount of gift
New Administration
• Annuity is based on prescribed taxation
– T4A for a prescribed amount annually
for life
• Donor remains the owner of the
annuity and the charity may be named
as revocable beneficiary of any
remaining annuity payments after the
death of the donor
• Establishing the annuity this way, a tax
receipt can be issued to the donor’s
estate for the remaining payments, if
any.
Charitable Gift • For those who would like to donate a
significant gift now, but not suffer in
& Insured
reduction of income
Annuity • Three main components:
- Demographics
INCREASE Annual
Income while providing
a Major Gift Now!
– A cash gift now
– A commercial annuity
– A life insurance policy
• Donors in their early 60’s and older
• Those who have other retirement income
sources
• Those who are looking to increase
income stream and have a guaranteed
fixed income portion of their portfolio
• Want to preserve capital for their heirs
Gift of Cash
•
•
•
•
Female – age 75
Capital Amount - $200,000
Current 5 Year GIC – 3.60%
Marginal Tax Rate – 46.41%
Current Status…
5-Year GIC - with
Charitable Gift
5-Year GIC
Gift to Charity
$
Capital Invested
$
Tax Savings from Gift
$
Gross Annual Income
$
Taxable Portion
-
$
50,000.00
$
150,000.00
$
23,205.00
7,200.00
$
5,400.00
$
7,200.00
$
5,400.00
Tax Payable
$
3,341.52
$
2,506.14
After Tax Income
$
3,858.48
$
2,893.86
Capital to Heirs in Estate
$
200,000.00
$
150,000.00
200,000.00
-
Charitable Gift
& Insured
Annuity
Comparison
•
•
•
•
Female – age 75
Capital Amount - $200,000 ($150,000 after Gift)
Current 5-Year GIC – 3.60%
Marginal Tax Rate – 46.41%
Charitable Gift &
Annuity
5-Year GIC
Gift to Charity
$
50,000.00
$
50,000.00
Capital Invested
$
150,000.00
$
150,000.00
Tax Savings from Gift
$
23,205.00
$
23,205.00
Gross Annual Income
$
5,400.00
$
15,235.08
Taxable Portion
$
5,400.00
$
2,414.57
Tax Payable
$
2,506.14
$
1,120.60
T-100 Insurance Premium
$
$
6,785.00
After Tax Income
$
2,893.86
$
7,329.48
Capital to Heirs in Estate
$
150,000.00
$
150,000.00
Difference in Annual After-Tax Life Income…
$
4,435.62
-
Equivalent Rate of Return of Insured Gift & Annuity
•
Annuity quote based on rates as of March 28, 2005 – 1-year guarantee payment period
9.12%
Charitable Gift
& Insured
Annuity
Comparison
•
•
•
•
Female – age 75
Capital Amount - $200,000 ($150,000 after Gift)
Current 5-Year GIC – 3.60%
Marginal Tax Rate – 31.15%
Charitable Gift &
Annuity
5-Year GIC
Gift to Charity
$
Capital Invested
$
Tax Savings from Gift
50,000.00 $
150,000.00
$
150,000.00
$
20,080.00 $
20,080.00
Gross Annual Income
$
5,400.00 $
15,235.08
Taxable Portion
$
5,400.00 $
2,414.57
Tax Payable
$
1,682.10
T-100 Insurance Premium
$
-
After Tax Income
$
Capital to Heirs in Estate
$
$
752.14
$
6,785.00
3,717.90 $
7,697.94
150,000.00
Difference in Annual After-Tax Life Income…
$
$
Equivalent Rate of Return of Insured Gift & Annuity
•
50,000.00
Annuity quote based on rates as of March 28, 2005 – 1-year guarantee payment period
150,000.00
3,980.04
7.45%
Charitable Gift • For those who would like to donate a
significant gift now, but not suffer in
& Insured
reduction of income
Annuity • Three main components:
- Demographics
MAINTAIN Annual
Income while providing
a Major Gift Now!
– A cash gift now
– A commercial annuity
– A life insurance policy
• Donors in their early 60’s and older
• Those who have other retirement income
sources
• Those who are looking to maintain
income stream and have a guaranteed
fixed income portion of their portfolio
• Want to preserve capital for their heirs
Charitable Gift • Jill Giving is 73 years young and in great
health
& Insured • She has 3 grown children, and was
Annuity
recently widowed after her husband, Jack,
Maintain Annual
Income while providing
a Major Gift Now!
died from a lengthy illness
• Her retirement income is made up of;
–
–
–
–
–
–
work pensions (both her’s and Jack’s),
a RRIF,
GICs,
T-Bills,
an equity investment portfolio,
Old Age Security (reduced due to OAS
clawback) and
– Canada Pension Plan
Charitable Gift • Jill would like to make a sizeable
donation to her and Jack’s favourite
& Insured
charities
Annuity • However, she would have to give up a
Maintain Annual
Income while providing
a Major Gift Now!
good portion of interest income
• Jill has $500,000 of GICs averaging
4.00% return;
– Annual Interest
– Annual Income Tax
– After Tax Income
$20,000.00
$8,682.00
$11,318.00
• Jill wonders how she can maintain
income and make a gift to the charities
• She also wants to leave her estate in
tact as much as possible for her
children and grandchildren.
Charitable Gift • Here’s what Jill can do:
– Make immediate gift of $150,000 to the
& Insured
charities
Annuity
Maintain Annual
Income while providing
a Major Gift Now!
– Purchase a prescribed life annuity with
$350,000 of her GICs
– Purchase a $500,000 Term-100 Life
Insurance plan to replace capital to her
heirs
– OAS clawback is reduced due to the
prescribed annuity, resulting in an after
tax income to $12,036.72
– Immediate tax savings of $69,615.00
(5-year carry forward if needed)
Charitable Gift & Insured Annuity
Maintain Annual Income while providing a Major Gift Now!
Charitable Gift &
Annuity
Current Situation
Gift to Charity
$
Capital Invested
$
Tax Savings from Gift
$
Gross Annual Income
$
Taxable Portion
-
$
150,000.00
$
350,000.00
$
69,615.00
20,000.00
$
33,342.00
$
20,000.00
$
6,624.44
Tax Payable
$
8,682.00
$
2,875.67
T-100 Insurance Premium
$
-
$
19,565.00
Add'l After Tax Income due to OAS
Clawback reduction
$
-
$
1,135.38
After Tax Income
$
11,318.00
$
12,036.72
Capital to Heirs in Estate
$
500,000.00
$
500,000.00
500,000.00
-
What’s in it • WIIFM
– Higher after-tax income for life
– Possible reduction in claw-back in OAS
for me?
– $1,000 Pension Tax Credit (if not already being
claimed)
– Large tax receipt for instant tax savings
– Can see the gift working during lifetime
– No more re-investment risk
– Reduction of large amount of probate fees
with the use of life insurance
• Opportunity Spotting
– Would like to make a major gift – unsure how?
– Concerned with preserving capital for heirs
– Have their open investments in low-paying
GICs or Bonds
– Have had investment capital eroded by low or
negative market returns and inflation
– Need or would like to increase income
Gifts of Life Insurance
New Perspectives on Complex Gifts
John Jordan, CFP
Certified Financial Planner
Website: www.johnjordan.ca
Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning
Gifts of Life
Insurance
• Gifts of life insurance can greatly
magnify a Charitable Planned Gift
• A donor may gift an existing life
insurance policy or purchase a new one
• Existing or new policies that are gifted
while living:
– The charity is made owner and beneficiary
of the policy
– A donation receipt is issued as future
premiums paid
– For existing policies, receive a donation
receipt for the cash value (if any…a taxable
disposition may occur)
– No receipt is issued for the death benefit
Gifts of Life • Policies that are gifted at death:
– The donor remains as the owner of
Insurance
the policy and names the charity as
–
–
–
–
the revocable beneficiary
Receive a donation receipt for the
death benefit proceeds that are
gifted
No receipt is given for premiums
that are paid during the donor’s
lifetime
This receipt can then be used to
offset taxes owing in the estate
Structured properly, all taxes may be
eliminated in the estate
Gifts of Life
Insurance
• Mike & Anita, age 65, concerned with
amount of tax owing in their estate
• Want to preserve their estate for their
family but also provide a Charitable Gift
• Have sufficient retirement income from
RRIFs, work pensions, CPP, and OAS
• Have designated $75,000 to their
charity which is set aside in T-Bills
– Interest is taxed annually
• They have $350,000 in RRIFs between
them
• Potential tax liability of $162,435 on
RRIFs
• Need to re-structure their affairs and
look into alternative ways of charitable
gifting
Present Situation
RRIF
$350,000
T-Bills
$75,000
Tax on
Annual interest
Family
$222,372
after tax to
heirs
Tax receipt for
$75,000
$127,628 taxes
Gifts of Life
Insurance
• Their bequest can be greatly enhanced
and their estate preserved with the use
of a “Joint-2nd-to-die” estate universal
life insurance plan.
• Perform an “Asset Shift” by moving
the $75,000 into the estate insurance
plan over 3 years - $25,000 per year
• The RRIF may be left to the charity –
tax free after the donation receipt
• The life insurance plan is left to their
family – tax free
New Situation
$75,000 T-Bills
Life Insurance
$300,000
$374,025*
Tax-Free
RRIF
$350,000
Tax-Free after
Donation receipt
Family
Tax receipt for
$350,000
$0 taxes
•Projected Death Benefit in 20 years – $300,000 of insurance plus investment account
Gifts of Life Insurance
• Amount left to family
increased from $222,372
to $374,025
• Amount left to Charity
increased from $75,000
to $350,000
• Amount left to CCRA
decreased from $127,628
to $0
New Situation
400000
350000
300000
250000
200000
150000
100000
50000
To
CR
A
ity
Ch
ar
To
To
Fa
m
ily
0
Before
After
What’s in it • WIIFM
– Both their current and estate status’ are in a
for me?
better financial position
– Larger tax receipt in the estate to offset
other tax owing
– Lower tax during retirement
– Reduction of large amount of probate fees
with the use of insurance
• Opportunity Spotting
– Bequests of cash
– Donors may have the financial assets for a
planned gift but don’t know it
– Annual donors who would like to explore
further
– Must be in good health to acquire insurance
Corporate Charitable Gift and
Insured Annuity
New Perspectives on Complex Gifts
John Jordan, CFP
Certified Financial Planner
Website: www.johnjordan.ca
Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning
What is a • A strategy designed to create a sizable
Charitable Planned Gift while
Corporate
maintaining income and lowering tax at
Planned Gift
death.
and Insured
• 3 elements
Annuity
• Non-prescribed Life Annuity
• Life Insurance
• The use of section 118 of the Income tax act
• Putting all of the elements together
will benefit not only the donor and
their corporation but the charity(s) as
the beneficiary
• Avoid all tax possible – evade none!
Corporate • Mr. Widget, a healthy and young age
67, owns 100% of WidgetCo and has
Planned Gift
interest bearing investments held in the
and Insured
corporation of $500k invested at
Annuity
5.00%.
• Tax on investments held in a
corporation (non-business income)
range from 47.79% - 52.79% - use an
average of 50.00%
Corporate • Current Situation
Planned Gift
Investment
$
and Insured
Interest Rate
Annuity
Gross Income
$
Tax Rate
Tax Owing
500,000.00
5.00%
25,000.00
-50.00%
-$
12,500.00
$
12,500.00
-$
116,025.00
After Tax Estate Value
$
383,975.00
Charitable Gift
$
After Tax Income
Tax Owing in Estate
-
Corporate • Mr. Widget acquires a “non-prescribed”
life annuity with the $500,000 of capital
Planned Gift
• To replace the capital upon death, Mr.
and Insured
Widget purchases a $500k Insurance
Annuity
plan - $16,380/year
• To create a charitable gift, Mr. Widget
purchases a $400k Insurance plan and
assigns it to the charity – to the
corporation, receives a deduction for
the $13,258 premium annually – net
cost of $6,629/year
• This strategy will provide the same
income and significantly lower tax at
death
Corporate
Planned Gift
and Insured
Annuity
WidgetCo
$500,000
Investment
Eliminated
$116,025 of tax
at death
Non-prescribed Annuity
$42,370/year
$6,235.83 average tax to
age 90
$400,000 Life Insurance
$500,000 Life Insurance
Gifted to Charity
Tax deductible
Replace Capital
Tax Free
$13,125.17
Average Annual After Tax
Income to age 90
Charity
Corporate
Planned Gift
and Insured
Annuity
Investment
Current
Proposed
$ 500,000.00
$ 500,000.00
Interest Rate
5.00%
Gross Income
$
Tax on Income
-$
Income
Insurance Premiums (after
$
deduction)
$
Annual After Tax Income
$
Tax Owing in Estate
25,000.00
N/A
$
42,370.00
12,500.00 -$
6,235.83
12,500.00
$
36,134.17
-$
23,009.00
12,500.00
$
13,125.17
-$ 116,025.00
$
-
-
After Tax Estate Value
$ 383,975.00
$ 500,000.00
Charitable Gift
$
$ 400,000.00
-
What’s in it • WIIFM
– All investment income is maintained
for me?
– Tax on investment is eliminated at
death
– No money “out-of-pocket” – asset
shifting
– Establish a major charitable
endowment
– Assets are creditor proof
• Opportunity Spotting
– Affluent donors looking for innovative
strategies
– Must be in good health to acquire
insurance
Charitable • Many different ways to give
Giving - • Take a look at the situation and
evaluate any opportunity for gifts
Summary
• Can be very simple or very complex
– every situation is unique
• Call, email, phone or fax with any
questions or situations that need
consultation
• A few simple questions may
uncover an otherwise overlooked
charitable gift
WIIFM – What’s in it for Me?
New Perspectives on Complex Gifts
John Jordan, CFP
Certified Financial Planner
Website: www.johnjordan.ca
Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning