Apr 23, 2013

Create Your Legacy (Part IV)

Planned Giving in Action: Types of Gifts (Continued)

In this series of articles presented in four parts, Mary and Karen will talk about estate planning and charitable giving. The information provided in this series of articles is illustrated with real life client situations (names changed for confidentiality reasons) as they progress through different life stages. Read Part I, Part II or Part III.

Donation of Publicly Listed Securities

Another technique that can be used to benefit a charitable organization is the donation of public shares, bonds, mutual fund units, and employee stock option shares. A donation of publicly listed securities can be made in your lifetime, or in your will.

Shares of public companies that have increased in value since the date of purchase can be donated directly to a charity on death. This results in more favourable tax consequences for your estate than if the shares had been sold, and the cash value of the shares (after tax) donated to the charity. This is because there is no capital gains tax payable on the direct transfer of the shares.

Donation of Private Shares

Shares of private corporations are more difficult to gift, and offer less tax incentives to do so. If the donor is not careful, the gift can create negative consequences for other shareholders and the charity itself. However, philanthropic entrepreneurs may wish to explore this option with the guidance of their lawyer, accountant, and investment advisor.

Charitable Annuity

A charitable annuity allows an individual to enjoy the security of guaranteed income payments while ensuring a charitable contribution is made on his or her behalf on death. Some charities sell annuities that provide a fixed lifetime payment to the contributor. This arrangement allows the charity to benefit from a lump sum contribution from you, while you earn income from the annuity throughout your lifetime. You receive a charitable tax deduction for your contribution, and the annuity payments receive preferential tax treatment. Our client Anne is now 78 years old and is enjoying an active life. She still travels a fair bit, enjoys good health and is very, very active in her favourite charitable organization. Her two children have done very well; one is a successful orthopedic surgeon and the other running a very profitable eco-friendly product manufacturing and distributing company. Anne is enjoying quality time with her 7 grandchildren when they are home from university as well. Her income stream consists of the mandatory minimum withdrawals from her RRIF, CPP, OAS and a sizeable but taxable interest/dividend income from her investment portfolio. Anne also owns the preference shares in a holding company, which she inherited from Phil on his death. These preference shares were created as part of an estate freeze in Phil’s operating company prior to his retirement. Her preference shares pay her dividends and are slowly being redeemed by the holding company. The holding company common shares are held by her two children and they manage the investment assets in that holding company. Anne is starting to find it difficult to manage her investment portfolio and feels burdened by the review and decision process required. Her children are attentive but very busy. She would prefer to have a carefree, steady and reliable income stream rather than dealing with investment advisors and making numerous investment decisions throughout the year or involving her children. She also quite likes the idea of benefitting her favourite charitable organization now.

Anne’s current Will leaves sizable legacies to be paid outright to her grandchildren and the rest of her estate to her children. The children are the executors along with a tie-breaker clause in which her trusted lawyer plays a role. Her children and the trusted lawyer are now also her attorneys for property and her children and one close friend are her attorneys for personal care. She previously named the charitable organization as her beneficiary on her RRSP and on her life insurance and gifted the cottage to the charity, retaining a life estate for Bill in it. She had also set aside a fund in her estate for her brother Bill, who is not as well off as her and who she assists with his financial needs from time to time.

Anne has now decided to name the charitable organization as beneficiary on her RRIF, to change the beneficiary on her life insurance to her children, and to replace the life insurance gift, which she previously had earmarked for the charity, by making a current gift to the charity , that also benefits her and Bill. Anne will purchase from the charity annuity that provides fixed monthly lifetime payments to Anne. In fact, Anne has decided to purchase a joint annuity naming herself and her brother Bill to ensure he receives the payments in the event of her death and thereby eliminate the need for a trust for him in her Will. Anne appreciates that once she purchases this annuity, she loses access to the capital and cannot retrieve it either for herself or for her estate. Her estate is sufficient that she does not require the capital. Anne has arranged to utilize her personal investment portfolio assets which would on her death have had significant gains to purchase the annuity. Anne will receive a guaranteed income stream at fairly attractive return rates, usually higher than those of regular GICs, fully backed by the charitable organization. The charitable organization will keep whatever is left of the contributed assets on the last to die of Anne and Bill. Only part of the annuity income is taxable, and Anne will get a tax receipt for part of the amount paid for the annuity now. This gift also has the advantage of avoiding probate fees (Estate Administration Tax) on the value of the investment portfolio assets on Anne’s death and will save income taxes to her estate on death because the asset has already been disposed of. Anne will enjoy the ease of no longer having to administer these funds, the benefit of knowing that the charitable organization is benefiting now from her contribution, that Bill will be looked after without the added administrative burden of running a trust in her estate and that the charitable organization will benefit on the death of the survivor of the two of them.

Charitable Remainder Trust

Charitable remainder trusts can be created from cash, securities, and real estate. Assets of your choosing are managed by a third party in accordance with a trust agreement. Under the trust agreement, the income from the assets in the trust is payable to you. With a charitable remainder trust, an asset is managed on your behalf by a trustee, in accordance with the terms of a trust agreement. During your lifetime, the income from the asset is paid to you. On death, the trustee transfers the investment to the charity of your choosing. So long as the capital investment cannot be returned to you under the terms of the trust, you will receive a charitable tax receipt at the time the trust is arranged, for the value of the asset transferred to the trust. The property in the trust is not subject to probate, providing further savings to your estate. Charitable remainder trusts are especially appealing to persons who want to make a future charitable gift while obtaining present tax relief and income during his or her lifetime.

Foundations and Donor Advised Funds

Individuals or groups of individuals with philanthropic goals may wish to consider the use of a charitable foundation to achieve their objectives. A private foundation can be created from the financial resources of one individual, or by pooling the resources of a number of people. A private foundation allows you to control the charitable cause benefitting from your contributions. Private foundations involve complex reporting requirements and taxation issues, so professional advisors are a must if you are considering starting a foundation.

If a foundation proves too cumbersome, another option is to establish a donor advised fund. A donor advised fund is a fund established in your name, or the name of your family at a charitable foundation (such as Tides Canada). The fund can be established with a gift in your lifetime, or with a planned gift. After establishing a donor advised fund you can recommend distributions from the fund to charities of your choice. A donor advised fund can provide you with the flexibility to make grants either from the income or the capital of the fund. It is a cost efficient and easy way to manage your charitable giving, because the foundation hosting your fund is responsible for all of the administrative work associated with the fund – including legal, investment and accounting aspects.Taking Action

There are numerous ways you can reach your philanthropic goals while benefitting you and your estate. Before settling on the type of planned gift you wish to make, it is important to speak to your legal and financial advisors, as well as the charitable organization itself so that a gift can be tailored to your financial and personal situation.

Photography by Karen