wiifm – what’s in it for me? john jordan, cfp certified financial planner website: providing…...

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

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




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


• 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


• 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

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 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

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

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 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

• 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

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

Charitable Gifts & Insured Annuities




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

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$




Annuity PaymentTotal Guaranteed

Payments

Examples of

Annuities

• Canada Pension Plan• Old Age Security• Retirement pensions

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.

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

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$

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$


Tax Savings from Gift 23,205.00$




T-100 Insurance Premium -$



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


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$


Tax Savings from Gift 20,080.00$







• 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

Charitable Gift &

Insured Annuity

- Demographics

MAINTAINMAINTAIN Annual Income while


• 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

Charitable Gift &

Insured Annuity

Maintain Annual Income while


• 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

Charitable Gift &

Insured Annuity



• 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.

Charitable Gift &

Insured Annuity



• 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)

Charitable Gift & Insured AnnuityMaintain Annual Income while providing a Major Gift

Now!Current Situation

Gift to Charity -$


Tax Savings from Gift -$





Add'l After Tax Income due to OAS Clawback reduction

-$




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$


• 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

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


• 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


• 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

Family

$127,628 taxes

T-Bills$75,000

Tax onAnnual interest

Tax receipt for $75,000

$222,372 after tax to

heirs


• 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

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

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


• 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

Corporate Charitable Gift and Insured Annuity




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!

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%


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-$


Tax Owing in Estate 116,025.00-$

After Tax Estate Value 383,975.00$

Charitable Gift -$


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


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


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$


• 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

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

WIIFM – What’s in it for Me?




wiifm – what’s in it for me? john jordan, cfp certified financial planner website: providing…...

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