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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.

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Presentation on theme: "WIIFM – What’s in it for Me? John Jordan, CFP Certified Financial Planner Website: www.johnjordan.ca Providing… Estate Planning  Charitable Gift Planning."— Presentation transcript:

1 WIIFM – What’s in it for Me? John Jordan, CFP Certified Financial Planner Website: Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning 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 Charitable Gift Planning – Case Study John Jordan, CFP Certified Financial Planner Website: Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning 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 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 2 nd -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 Amount left to Charity increased from $50,000 to $250,000 Amount left to family increased from $1,624, to $1,706, New Estate & Charitable Plan Amount left to CRA decreased from $324, to $178,149.98

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 Charitable Gifts & Insured Annuities John Jordan, CFP Certified Financial Planner Website: Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning 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 Annuities New Administration Simplified process – for annuities after December 20 th, 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 INCREASE Charitable Gift & Insured Annuity - Demographics INCREASE 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 MAINTAIN Charitable Gift & Insured Annuity - Demographics MAINTAIN 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 maintain income stream and have a guaranteed fixed income portion of their portfolio Want to preserve capital for their heirs

24 Charitable Gift & Insured Annuity Maintain 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 Annuity Maintain 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, –Annual Income Tax $8, –After Tax Income$11, 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 Annuity Maintain 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, –Immediate tax savings of $69, (5-year carry forward if needed)

27 Charitable Gift & Insured Annuity Maintain 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 Gifts of Life Insurance John Jordan, CFP Certified Financial Planner Website: Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning 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 RRIF $350,000 Family $127,628 taxes T-Bills $75,000 Tax on Annual interest Tax receipt for $75,000 $222,372 after tax to heirs

34 Gifts of Life Insurance Their bequest can be greatly enhanced and their estate preserved with the use of a “Joint-2 nd -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 Life Insurance $300,000 Family $0 taxes RRIF $350,000 $75,000 T-Bills Projected Death Benefit in 20 years – $300,000 of insurance plus investment account $374,025* Tax-Free Tax-Free after Donation receipt Tax receipt for $350,000

36 Gifts of Life Insurance New 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 Corporate Charitable Gift and Insured Annuity John Jordan, CFP Certified Financial Planner Website: Providing… Estate Planning  Charitable Gift Planning  Business Succession Planning 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% % - 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 Corporate Planned Gift and Insured Annuity $400,000 Life Insurance Gifted to Charity Tax deductible $500,000 Life Insurance Replace Capital Tax Free $500,000 Investment Non-prescribed Annuity $42,370/year $6, average tax to age 90 $13, Average Annual After Tax Income to age 90 Charity WidgetCo Eliminated $116,025 of tax at death

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, , phone or fax with any questions or situations that need consultation A few simple questions may uncover an otherwise overlooked charitable gift

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


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