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WIIFM – What’s in it for Me?

John Jordan, CFP Certified Financial Planner. Website: www.johnjordan.ca. Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning. WIIFM – What’s in it for Me?. New Perspectives on Complex Gifts. Topics. Why Charitable Gift Planning - the WIIFM factor

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WIIFM – What’s in it for Me?

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  1. John Jordan, CFP Certified Financial Planner Website: www.johnjordan.ca Providing… Estate Planning Charitable Gift Planning Business Succession Planning WIIFM – What’s in it for Me? New Perspectives on Complex Gifts

  2. 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

  3. John Jordan, CFP Certified Financial Planner Website: www.johnjordan.ca Providing… Estate Planning Charitable Gift Planning Business Succession Planning Charitable Gift Planning – Case Study New Perspectives on Complex Gifts

  4. Case Study – Details • Jack & Jill Giving – mid sixties and are mostly retired with 4 grown 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

  5. Case Study – Details • Had attended a presentation on charitable gift planning which 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

  6. Case Study – Details • It was discovered that Jack & Jill had 6 charities to share in $50k in 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

  7. 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

  8. Present Situation

  9. Present Situation • Maximum tax paid to CRA in the estate • 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

  10. 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

  11. New Estate & Charitable Plan

  12. New Estate & Charitable Plan • Amount left to Charity increased from $50,000 to $250,000 • Amount left to CRA decreased from $324,242.80 to $178,149.98 • Amount left to family increased from $1,624,642.34 to $1,706,503.40

  13. What’s in it for me? • WIIFM • Annual taxable income is lowered • 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

  14. John Jordan, CFP Certified Financial Planner Website: www.johnjordan.ca Providing… Estate Planning Charitable Gift Planning Business Succession Planning Charitable Gifts & Insured Annuities New Perspectives on Complex Gifts

  15. What is an Annuity? • A series of payments either for a certain period of time, or for life, in 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

  16. 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 * Annuity quote based on rates as of March 28, 2005

  17. Examples of Annuities • Canada Pension Plan • Old Age Security • Retirement pensions

  18. Charitable AnnuitiesNew Administration • Simplified process – for annuities after December 20th, 2002 • Tax receipt for the full amount of gift • 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.

  19. Charitable Gift & Insured Annuity- DemographicsINCREASE Annual Income while providing a Major Gift Now! • For those who would like to donate a significant gift now, but not suffer in reduction of income • Three main components: • 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

  20. Gift of Cash • Female – age 75 • Capital Amount - $200,000 • Current 5 Year GIC – 3.60% • Marginal Tax Rate – 46.41%

  21. 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% • Annuity quote based on rates as of March 28, 2005 – 1-year guarantee payment period

  22. 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% • Annuity quote based on rates as of March 28, 2005 – 1-year guarantee payment period

  23. Charitable Gift & Insured Annuity- DemographicsMAINTAINAnnual Income while providing a Major Gift Now! • For those who would like to donate a significant gift now, but not suffer in reduction of income • Three main components: • 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

  24. Charitable Gift & Insured AnnuityMaintain Annual Income while providing a Major Gift Now! • Jill Giving is 73 years young and in great health • She has 3 grown children, and was recently widowed after her husband, Jack, 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

  25. Charitable Gift & Insured AnnuityMaintain Annual Income while providing a Major Gift Now! • Jill would like to make a sizeable donation to her and Jack’s favourite charities • However, she would have to give up a good portion of interest income • Jill has $500,000 of GICs averaging 4.00% return; • Annual Interest $20,000.00 • Annual Income Tax $8,682.00 • After Tax Income $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.

  26. Charitable Gift & Insured AnnuityMaintain Annual Income while providing a Major Gift Now! • Here’s what Jill can do: • Make immediate gift of $150,000 to the charities • 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)

  27. Charitable Gift & Insured AnnuityMaintain Annual Income while providing a Major Gift Now!

  28. What’s in it for me? • WIIFM • Higher after-tax income for life • Possible reduction in claw-back in OAS • $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

  29. John Jordan, CFP Certified Financial Planner Website: www.johnjordan.ca Providing… Estate Planning Charitable Gift Planning Business Succession Planning Gifts of Life Insurance New Perspectives on Complex Gifts

  30. 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

  31. Gifts of Life Insurance • Policies that are gifted at death: • The donor remains as the owner of 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

  32. 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

  33. Present Situation Tax on Annual interest RRIF $350,000 T-Bills $75,000 Family Tax receipt for $75,000 $222,372 after tax to heirs $127,628 taxes

  34. 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

  35. New Situation RRIF $350,000 $75,000 T-Bills Life Insurance $300,000 Tax-Free after Donation receipt $374,025* Tax-Free Family Tax receipt for $350,000 $0 taxes Projected Death Benefit in 20 years – $300,000 of insurance plus investment account

  36. Gifts of Life InsuranceNew Situation • 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

  37. What’s in it for me? • WIIFM • Both their current and estate status’ are in a 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

  38. John Jordan, CFP Certified Financial Planner Website: www.johnjordan.ca Providing… Estate Planning Charitable Gift Planning Business Succession Planning Corporate Charitable Gift and Insured Annuity New Perspectives on Complex Gifts

  39. What is a Corporate Planned Gift and Insured Annuity • A strategy designed to create a sizable Charitable Planned Gift while maintaining income and lowering tax at death. • 3 elements • 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!

  40. Corporate Planned Gift and Insured Annuity • Mr. Widget, a healthy and young age 67, owns 100% of WidgetCo and has interest bearing investments held in the corporation of $500k invested at 5.00%. • Tax on investments held in a corporation (non-business income) range from 47.79% - 52.79% - use an average of 50.00%

  41. Corporate Planned Gift and Insured Annuity • Current Situation

  42. Corporate Planned Gift and Insured Annuity • Mr. Widget acquires a “non-prescribed” life annuity with the $500,000 of capital • To replace the capital upon death, Mr. Widget purchases a $500k Insurance 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

  43. $500,000 Life Insurance Replace Capital Tax Free $400,000 Life Insurance Gifted to Charity Tax deductible Corporate Planned Gift and Insured Annuity WidgetCo $500,000 Investment Non-prescribed Annuity $42,370/year $6,235.83 average tax to age 90 Eliminated $116,025 of tax at death $13,125.17 Average Annual After Tax Income to age 90 Charity

  44. Corporate Planned Gift and Insured Annuity

  45. What’s in it for me? • WIIFM • All investment income is maintained • 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

  46. Charitable Giving - Summary • Many different ways to give • Take a look at the situation and evaluate any opportunity for gifts • 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

  47. John Jordan, CFP Certified Financial Planner Website: www.johnjordan.ca Providing… Estate Planning Charitable Gift Planning Business Succession Planning WIIFM – What’s in it for Me? New Perspectives on Complex Gifts

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