WIIFM – What’s in it for Me?

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 PlanList of Taxable Assets

Current 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 $1,706,503.40Previous 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 Cha

rity

To CR

A

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 Payment Total 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

- DemographicsINCREASEINCREASE 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$ 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


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

Charitable Gift &

Insured Annuity

- DemographicsMAINTAINMAINTAIN 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

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

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 -$ 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$


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

• 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

BeforeAfter


• 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 SituationInvestment 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 -$


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?

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