Planned Giving:

1. Planned Giving: “What are the strategies that work for an advisor” Presented By: DeWayne Osborn CGA, CFP Lawton Partners Financial Planning Services Limited Dosborn@lawton.mb.ca

2. Planned Giving: Need to Build the “Planned Gifts Toolbox” • Understand what charities are • Understand the rules that govern them • Understand the law • Construct easy to follow examples

3. Planned Giving: Presentation Overview: • Charities – What are They? • Planned Giving – What is it and what are the pre-budget 2004 rules? • Discuss Budget 2004 – Issues • Examples of common gift strategies = How you can help and make money • Q & A

4. Planned Giving: Charities – What are They? Source: CRA

5. Planned Giving:Charities – What are They? ITA 149.1(1) Three Types: • Charitable Organizations • Public Foundations • Private Foundations

6. Planned Giving:Planned Giving – What is it and what are the rules? Planned Giving is: Marriage of the financial and charitable sectors • A gift that maximizes the donor’s philanthropic intent at a minimum cost (typically tax savings); • The end product of careful consideration of all the options available to the donor; • Can be outright or at death; • Generally not well understood by the charitable community, the donors, or CRA (Finance). CRA

7. Planned Giving:Planned Giving – What is it and what are the rules? Special Rules and Considerations: ITA 46(1),(2),(3),(5), 237.1, 248(35),IT 332R Gifts of Personal Property: • Deemed minimum cost and market value of $1,000; • Gifts of property over $1,000 must be valued by independent expert; • < $1,000, or too expensive to use professional, then may be valued by knowledgeable person from the charity; • Be careful with property created to be donated (e.g. preferred shares).

8. Planned Giving:Planned Giving – What is it and what are the rules? More Rules and Considerations: ITA 38a, 38a.1, Reg 3200, 3201, RC 4108(E) Taxable Portion of Capital Gains cut in half for Gifts by Taxpayers of: • Publicly traded securities on Cdn and 27 foreign exchanges; mutual funds and segregated funds; • Prescribed debt obligations; • Does not apply to Tier Three (Venture Exchange) • Can be applied after death (118.5). Does not apply to private foundations OR to capital losses!

9. Planned Giving:Planned Giving – What is it and what are the rules? More Rules and Considerations – Cont’d: 118.1(5.1),(5.2),(5.3) Life Insurance, RRSP, RRIF: • Now beneficiary designation qualifies as gift made by individual (deceased) – not corporate; • Transfer must occur within 36 months of death; May apply to residual values of annuity; • Can be extended with permission from Minister. • Now, similar to bequests thus excellent for endowments.

10. Planned Giving:Planned Giving – What is it and what are the rules? Charitable Gift Annuities • Two Kinds: self insured and re-insured; • Both offer guaranteed, non-reducing payments for life or term of years; • Re-insured offer guarantee periods (other than term or life); • Can be single life or joint (spouse, sisters, brothers, etc.); • All or majority of payment is tax free; • Tax receipt = (amount donated – cost of annuity).

11. Planned Giving:Planned Giving – What is it and what are the rules? The Great Challenge: ITA 118.1(13), 118.1(18), 118.1(6), 110.1(3), 110.1(6), 40(1.01) Non-Qualifying Security: • Donor, the estate, or anything that is non arms-length with the charity and its officers and like officials; then • Privately held security, or debt obligation; • No gift is deemed to have been made until the above conditions are cleared. Once done, tax receipt the lesser of the FMV when gifted, or when condition was cleared. Includes death of individual. • Disposition still occurs regardless. • Special reserve elections available.

12. Planned Giving:Planned Giving – What is it and what are the rules? The Compromise: ITA 118.1(19) Non-Qualifying Security – Excepted Gift: • Privately held share gifted at arms-length to a charitable organization or public foundation only. • Tax receipt issued immediately for FMV at that date. • No further requirements of charity or donor.

13. Planned Giving:Planned Giving – What is it and what are the rules? Special Gifts: Gifts of Cultural Property: • Must be gifted to a designated institution; • Schedule “A” or Schedule “B”; • Fair Value (tax receipt) determined by CCPERB; • Cost base disposition (no capital gain); • No income limit (e.g. 75%); • Donation can be carried forward for up to 5 years. • Excellent for getting more business

14. Planned Giving:Examples: Gift of Publicly Traded Securities: • Bill has $100,000 worth of IBM shares. The shares have a cost basis of $10,000. • Bill gifts the shares to ABC Charity for a $100,000 tax receipt which produces a $45,000 tax credit. • Bill has a taxable capital gain of $22,500 which attracts $9,000 in tax. • Bill’s net tax savings is $36,000 ($45,000 - $9,000). If stock was corporately owned, a tax-free capital dividend of $67,500 could be paid out.

15. Planned Giving:Examples: Purchase a new Policy with Charity as Owner: • Bob and Mary purchase a 10-pay, joint LTD policy with death benefit of $250,000. The hospital is the owner. The annual premium is $3,470. • Upon the last death, the hospital will get the $250,000. There is no need to purchase first then assign to the charity

16. Planned Giving:Examples: Assign an Existing Policy to Charity: • Some time ago, Bob and Mary purchased a 10-pay, joint LTD policy with death benefit of $250,000. The current cash value is $23,870. There are no policy loans or premiums due. • Bob became seriously ill and was cared for in the local hospital. • Once recovered, Bob and Mary decided to assign this policy to the hospital. They receive a $23,870 tax receipt today, the hospital will get $250,000 later. Policies about to lapse may be assigned to other charities

17. Planned Giving:Examples: • Wealth Replacement: • 118.1(6), 110.1(3) • Sylvia age 73 and a non-smoker cannot use her cottage any longer.  • All of her children have moved out of province and she has been assured that they do not want the family cottage. • She decides to donate the cottage to XYZ charity for a $150,000 (ACB) tax receipt. • The resulting tax saving of $67,500 was sufficient to purchase a $250,000 insurance policy with her children as equal beneficiaries.  • XYZ charity sold the cottage to help fund its activities, and Sylvia left $250,000 tax-free cash to her family. Can use securities as well!!

18. Planned Giving:Examples: • Wealth Replacement: mortgaged property • Sylvia age 73 and a non-smoker cannot use her cottage any longer.  • $300,000 FMV, ACB = $150,000, mortgage amount = $50,000 • She decides to donate the cottage to XYZ charity. • In order to generate the same $67,500 to purchase the policy, she needs a credit of $117,500. • XYZ charity sold the cottage to help fund its activities, and Sylvia left $250,000 tax-free cash to her family.

19. Planned Giving:Examples: Perpetual Tax Shield: • Assume Mary owns a life only annuity that pays her $8,000 per year. • The taxable portion is $1,800 which attracts $720 in tax. • Mary’s net after-tax cash flow is $7,280 per year. • If Mary wanted to help her charity, she could direct the $1,800 to pay for a T-100 policy for $200,000 on her life. The policy is owned by the church. • Mary receives a tax receipt for every premium paid. • Her after-tax cash flow is now $6,290 (10.5% Pre-tax GIC Return) • Her net cost of the gift per year is $990.

20. Planned Giving:Examples: Assumptions: Male Age 78 Non-smoker $100,000 Invested & $100,000 Insurance Cash Flow

21. Planned Giving:Examples: Charitable Remainder Trust: • Major thrust of the government relations of the CAGP. • Second only to bequests in the USA. • Not clearly defined in the ITA of Canada. • Can work with non-capital property or where ACB is close to FMV. • Does work with real property (residual interest). • Can be used to generate income from non-income producing assets. • Used to remove assets from estate (challenge, probate)

22. Planned Giving:Examples: Charitable Remainder Trust (AKA Charitable Estate Freeze): • Charities are the capital beneficiaries; • 75 year old or older donors; • Can be inter vivos or testamentary; • Gift deemed to be made by individual – not trust; • Full disposition into the trust of non-real property; • Capital cannot be encroached upon; • Tax receipt = discounted value of capital that will ultimately pass to the charity; • Valuation – hence avoid complicated properties. • Capital gains are considered to be capital.

23. Planned Giving:Examples: Charitable Remainder Trust: • Trust needs to be properly constructed and collapsed; • Trustees appointed (can be financial advisor); • Tax returns filed; • A lot of work to go around!!

24. Planned Giving:Examples: Charitable Remainder Trust: • Bill age 75 places $250,000 in money market funds into a trust; • He receives all the interest income for life; • When he dies, the hospital will get the $250,000; • Bill gets a $187,000 tax receipt ($84,150 tax savings). It may be possible to use insurance to replace the value of the assets placed into the trust!!

25. The Financial Planning Guide Client Financial Planner Planning Process 1. Gather Data 2. List Objectives 3. Prioritize Needs 4. Review Alternatives 5. Develop Plan 6. Implement Plan 7. Review Progress Present Situation & Objectives Where am I now & where do I want to be? Tax Planning How can I best defer, convert, or eliminate taxes? Investment Planning Is my money safe & is my return maximized for my risk profile? Retirement Planning Do I have enough money to live comfortably & protect against inflation? Estate Planning How can I best create, preserve, and transfer wealth?

26. Planned Giving: Any Questions??? Thank You! Planned Gifts Website at www.lawton.mb.ca Email: Dosborn@lawton.mb.ca