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WIIFM – What’s in it for Me?
John Jordan, CFPCertified Financial PlannerWebsite: www.johnjordan.ca
Providing… Estate Planning Charitable Gift Planning Business Succession Planning
New Perspectives on Complex Gifts
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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
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Charitable Gift Planning – Case Study
John Jordan, CFPCertified Financial PlannerWebsite: www.johnjordan.ca
Providing… Estate Planning Charitable Gift Planning Business Succession Planning
New Perspectives on Complex Gifts
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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
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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
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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
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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
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Present Situation
List of Taxable AssetsCurrent Value
J ill's RRSP $23,300.00
Jack's RRSP $150,185.00
Cottage $197,390.00
Non-Registered - income $228,531.00
Non-Registered - estate $300,000.00
Life Insurance $0.00
Charitable Bequests $0.00
Totals $899,406.00
Future Value at Mortality
$23,765.00
$153,178.00
$432,505.80
$228,531.00
$1,160,905.34
$0.00
$-50,000.00
$1,948,885.14
Tax Payable
$-11,029.34
$-71,089.91
$-65,555.47
$0.00
$-199,773.08
$0.00
$23,205.00
$-324,242.80
Estate Value
$12,735.66
$82,088.09
$366,950.33
$228,531.00
$961,132.26
$0.00
$-26,795.00
$1,624,642.34
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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
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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
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New Estate &
Charitable Plan
List of Taxable AssetsCurrent Value
Future Value at Mortality
Tax Payable
Estate Value
J ill's RRSP $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
Charitable Bequests $0.00 $-250,000.00 $116,025.00 $-133,975.00
Totals $1,219,406.00 $1,884,653.38 $-178,149.98 $1,706,503.40
Previous Totals $899,406.00 $1,948,885.14 $-324,242.80 $1,624,642.34
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• Amount left to Charity increased from $50,000 to $250,000
To C
harit
y
To C
RA
0
50000
100000
150000
200000
250000
300000
350000
Before
After
• Amount left to family increased from $1,624,642.34 to $1,706,503.40
New Estate & Charitable Plan
• Amount left to CRA decreased from $324,242.80 to $178,149.98
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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
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Charitable Gifts & Insured Annuities
John Jordan, CFPCertified Financial PlannerWebsite: www.johnjordan.ca
Providing… Estate Planning Charitable Gift Planning Business Succession Planning
New Perspectives on Complex Gifts
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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
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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
Female - Age 75Capital Amount - $150,000
Single Life - 1 Year Guarantee 15,235.08$ 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 PaymentTotal Guaranteed
Payments
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Examples of
Annuities
• Canada Pension Plan• Old Age Security• Retirement pensions
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Charitable Annuities
New 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.
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Charitable Gift &
Insured Annuity
- Demographics
INCREASEINCREASE 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
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Gift of Cash • Female – age 75• Capital Amount - $200,000• Current 5 Year GIC – 3.60%• Marginal Tax Rate – 46.41%
Current Status… 5-Year GIC
Gift to Charity -$
Capital Invested 200,000.00$
Tax Savings from Gift -$
Gross Annual Income 7,200.00$
Taxable Portion 7,200.00$
Tax Payable 3,341.52$
After Tax Income 3,858.48$
Capital to Heirs in Estate 200,000.00$
5-Year GIC - with Charitable Gift
50,000.00$
150,000.00$
23,205.00$
5,400.00$
5,400.00$
2,506.14$
2,893.86$
150,000.00$
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Charitable Gift & Insured
Annuity Comparison
• Female – age 75• Capital Amount - $200,000 ($150,000 after Gift)• Current 5-Year GIC – 3.60%• Marginal Tax Rate – 46.41%
5-Year GIC
Gift to Charity 50,000.00$
Capital Invested 150,000.00$
Tax Savings from Gift 23,205.00$
Gross Annual Income 5,400.00$
Taxable Portion 5,400.00$
Tax Payable 2,506.14$
T-100 Insurance Premium -$
After Tax Income 2,893.86$
Capital to Heirs in Estate 150,000.00$
Charitable Gift & Annuity
50,000.00$
150,000.00$
23,205.00$
15,235.08$
2,414.57$
1,120.60$
6,785.00$
7,329.48$
150,000.00$
4,435.62$
9.12%
Difference in Annual After-Tax Life Income…
Equivalent Rate of Return of Insured Gift & Annuity
• Annuity quote based on rates as of March 28, 2005 – 1-year guarantee payment period
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Charitable Gift & Annuity
50,000.00$
150,000.00$
20,080.00$
15,235.08$
2,414.57$
752.14$
6,785.00$
7,697.94$
150,000.00$
Charitable Gift &
Insured Annuity
Comparison
• Female – age 75• Capital Amount - $200,000 ($150,000 after Gift)• Current 5-Year GIC – 3.60%• Marginal Tax Rate – 31.15%
5-Year GIC
Gift to Charity 50,000.00$
Capital Invested 150,000.00$
Tax Savings from Gift 20,080.00$
Gross Annual Income 5,400.00$
Taxable Portion 5,400.00$
Tax Payable 1,682.10$
T-100 Insurance Premium -$
After Tax Income 3,717.90$
Capital to Heirs in Estate 150,000.00$
• Annuity quote based on rates as of March 28, 2005 – 1-year guarantee payment period
3,980.04$
7.45%
Difference in Annual After-Tax Life Income…
Equivalent Rate of Return of Insured Gift & Annuity
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Charitable Gift &
Insured Annuity
- Demographics
MAINTAINMAINTAIN 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
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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
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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 $20,000.00– 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.
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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 $12,036.72
– Immediate tax savings of $69,615.00 (5-year carry forward if needed)
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Charitable Gift & Insured AnnuityMaintain Annual Income while providing a Major Gift
Now!Current Situation
Gift to Charity -$
Capital Invested 500,000.00$
Tax Savings from Gift -$
Gross Annual Income 20,000.00$
Taxable Portion 20,000.00$
Tax Payable 8,682.00$
T-100 Insurance Premium -$
Add'l After Tax Income due to OAS Clawback reduction
-$
After Tax Income 11,318.00$
Capital to Heirs in Estate 500,000.00$
Charitable Gift & Annuity
150,000.00$
350,000.00$
69,615.00$
33,342.00$
6,624.44$
2,875.67$
19,565.00$
1,135.38$
12,036.72$
500,000.00$
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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
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Gifts of Life Insurance
John Jordan, CFPCertified Financial PlannerWebsite: www.johnjordan.ca
Providing… Estate Planning Charitable Gift Planning Business Succession Planning
New Perspectives on Complex Gifts
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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
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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
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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
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Present Situation
RRIF$350,000
Family
$127,628 taxes
T-Bills$75,000
Tax onAnnual interest
Tax receipt for $75,000
$222,372 after tax to
heirs
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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
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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-FreeTax-Free after
Donation receipt
Tax receipt for $350,000
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Gifts of Life InsuranceNew Situation
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
0
50000
100000
150000
200000
250000
300000
350000
400000
Before
After
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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
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Corporate Charitable Gift and Insured Annuity
John Jordan, CFPCertified Financial PlannerWebsite: www.johnjordan.ca
Providing… Estate Planning Charitable Gift Planning Business Succession Planning
New Perspectives on Complex Gifts
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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!
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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 $500k invested at 5.00%.
• Tax on investments held in a corporation (non-business income) range from 47.79% - 52.79% - use an average of 50.00%
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Corporate Planned Gift and Insured
Annuity
• Current Situation
Investment 500,000.00$
Interest Rate 5.00%
Gross Income 25,000.00$
Tax Rate -50.00%
Tax Owing 12,500.00-$
After Tax Income 12,500.00$
Tax Owing in Estate 116,025.00-$
After Tax Estate Value 383,975.00$
Charitable Gift -$
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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
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Corporate Planned Gift and Insured
Annuity
$400,000 Life InsuranceGifted to CharityTax deductible
$500,000 Life InsuranceReplace Capital
Tax Free
$500,000Investment
Non-prescribed Annuity
$42,370/year$6,235.83 average tax
to age 90
$13,125.17Average Annual After Tax
Income to age 90
Charity
WidgetCo
Eliminated $116,025 of tax at death
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Corporate Planned Gift and Insured
Annuity
Current Proposed
Investment 500,000.00$ 500,000.00$
Interest Rate 5.00% N/A
Gross Income 25,000.00$ 42,370.00$
Tax on Income 12,500.00-$ 6,235.83-$
Income 12,500.00$ 36,134.17$
Insurance Premiums (after deduction) -$ 23,009.00-$
Annual After Tax Income 12,500.00$ 13,125.17$
Tax Owing in Estate 116,025.00-$ -$
After Tax Estate Value 383,975.00$ 500,000.00$
Charitable Gift -$ 400,000.00$
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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
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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
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WIIFM – What’s in it for Me?
John Jordan, CFPCertified Financial PlannerWebsite: www.johnjordan.ca
Providing… Estate Planning Charitable Gift Planning Business Succession Planning
New Perspectives on Complex Gifts