THE ACCIDENTAL PHILANTHROPIST
By Mark Halpern, CFP, TEP, MFA-P
By any measure, we live in an age of instant information. The answers to many of life’s questions are just a Google query away. You probably have a smartphone or computer within arm’s reach.
Correction: I meant to say “disinformation”. Much of the content available online is incomplete, unreliable, or both. For important information, like planning your financial future, you need answers from reliable sources.
When it comes to Philanthropy, experienced professionals provide valuable insights based on your own unique situation.
They will also share effective strategies to help you maximize your philanthropic impact in the most cost-effective and tax friendly manner.
At WEALTHinsurance.com, we are building a community of like-minded financial professionals (accountants, lawyers, estate planners, insurance advisors, charities, foundations, etc.) to create $1 billion of charitable giving annually. See additional details at https://wealthinsurance.com/billion.php. Achieving that objective can become a reality if generous people have reliable information upon which to act.
This article contains information that isn’t widely known.
Take the test yourself…did you know that:
1. PolicyPRESERVER™ Strategy Don’t Allow Term Life Policies to Lapse
Many young families buy (or should buy) inexpensive term Life Insurance to protect the family from a sudden catastrophic loss if a parent dies. By the time the kids grow up and become independent, those policies are often unaffordable and allowed to lapse.
Before they expire, those policies can be very valuable, because they can be converted into permanent Life Insurance with no medical evidence. A client in her early 60s developed a medical condition that made her uninsurable. Using our PolicyPRESERVER™ strategy, we helped transform an expiring $300,000 term life policy that she no longer needed into a $300,000 charitable gift to her alma mater.
An independent actuary valued the term policy at $175,000, which saved her $87,500 in taxes, all at once or spread out over five years. Meanwhile, another graduate stepped up to pay the ongoing premiums on the donated policy and will receive a charitable donation receipt for all the premiums he pays.
She was recognized during her lifetime for her generous legacy gift, and when she passes away, the university will receive the entire $300,000 death benefit.
2. RRSP/RRIF Tax Converter™ strategy Taxes payable become generous charitable gifts
Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are useful tools that allow people to save for retirement on a tax-deferred basis (the RRSP part) and keep money growing in a tax-deferred environment during retirement if it remains in the plan (the RRIF part).
The problem arises when people finally access those funds, and that’s when up to 54 percent of those savings (in Ontario) go to the tax department.
Wealthy clients usually have large sums in registered accounts, money they don’t need to pay bills.
A $2 million RRSP/RRIF is actually worth only $920,000 to your heirs. Consider donating all or part of your RRSP/RRIF to your own charitable fund and/or other charities and nothing to the tax department (CRA).
Money in RRSP and RRIF accounts is often perceived to be “stuck,” destined only to provide a retirement income stream and tangled up within the strict rules of registered plans. You can liberate those funds to do some good in the world.
We recently helped a client preserve his hard-earned money by converting $2 million of taxable RRSP funds (worth only $920,000 to his family), into a charitable family legacy of $4.5 million.
3. CPP Philanthropy™ Charitable Giving With Tax Savings Using Government Benefits
You don’t have to be rich and famous to leave a substantial charitable gift and enjoy significant tax savings. You may not need your monthly Canada Pension Plan (CPP) benefits to pay your bills. That ‘never spend’ money only gets taxed, re-invested and then taxed again. We call it “The Tax Grind”.
The CPP Philanthropy™ strategy uses your CPP benefits to fund a permanent tax-exempt Life Insurance policy, creating a substantial windfall for your family and the causes you care about.
Let’s use the example of a married couple, both 65, each receive $1,100/monthly in CPP benefits, for a total of about $26,000 a year. They live in Ontario and pay tax at the highest marginal tax rate, 53.53 percent.
They can apply this strategy four different ways:
- Life Insurance Policy Owned by Charity, Tax Savings Now: As above, create a charitable gift of $1.5 million using joint-and-last-to-die Life Insurance, this time with the charity as owner and beneficiary of the policy. Use the CPP benefit to pay the policy premiums and receive an annual charitable donation receipt of $26,000, mitigating the tax payable on the pension benefit and replacing it with a large gift.
- Life Insurance Policy Owned Personally, Tax Savings Later: Use the CPP benefits to pay the premiums on a joint-and-last-to-die Life Insurance policy for $1.5 million. The charity, as beneficiary, will receive the insurance payout on the death of the second spouse. Their estate will receive a donation receipt for $1.5 million and save the family about $750,000 in taxes.
- Donate RRSP/RRIF By Will or Beneficiary Designation: RRSP/RRIF will be fully taxed as income (at up to 54 per cent in Ontario) on the second death. A $1-million RRSP/RRIF will only be worth approximately $460,000 to their family, after taxes. This strategy designates a charity as beneficiary of the RRSP/RRIF, which mitigates the RRSP/RRIF taxes. To replace the $460,000 that would have gone to the family, use some of the CPP benefit to pay for a $500,000 Life Insurance policy to fund the tax liability, or use the entire CPP benefit to purchase a $1.5 million joint-and-last-to-die insurance policy, with the family/estate as the beneficiary. On the second death, the Life Insurance policy pays out $1.5 million tax-free to the family. This represents an additional $940,000 for the family (compared to $460,000) and a large gift to charity
- Charity begins at home. Create a “pension” for your children and grandchildren: Use the CPP benefits to buy a $1.5 million joint-and-last-to-die insurance policy. Designate your children and grandchildren as beneficiaries. Assuming the insurance proceeds earn 5 percent annually, your descendants will receive a $75,000 “pension” every year, in perpetuity.
4. GPS – Gift Pension Strategy™ Donations With Benefits – Guaranteed Income Philanthropy
Life is full of compromises, but sometimes you can have it all. Use the Gift Pension Strategy™, to create an exceptional charitable gift that combines favourable elements of an Annuity, Life Insurance, Philanthropy and Tax to achieve guaranteed income, maximize legacy gifts, create annual gifts, and save taxes.
Use non-registered money (funds outside a registered plan such as an RRSP, RRIF or Tax-Free Savings Account) to purchase an annuity that pays guaranteed income for life at a rate that can be as high as 10 percent, depending on your age. At the same time, you buy permanent Life Insurance and transfer the ownership to a registered charity, donor-advised fund (DAF) or your own private foundation.
The annuity income is tax-efficient because it’s a mix of principal and interest. A portion of that income pays the premiums on the Life Insurance, and every premium payment earns you a charitable donation receipt, reducing your annual tax bill.
The result: you have created a rock-solid, dependable pension plan for yourself that won’t fluctuate with market volatility, and you’ve also set up a legacy gift that satisfies your philanthropic objectives.
Due to space limitations, the information contained in this article is limited, so we created some easy-to-understand one-pagers that more fully explain each of the above-mentioned strategies. Please contact us to obtain complimentary copies of those explanatory documents by sending an email to info@WEALTHinsurance.com
We love helping people make generous charitable donations using money that would otherwise go to the tax department. Our advisors across the country are available to help you achieve your own philanthropic and estate planning objectives.
Please don’t hesitate to contact us.
Private Foundation or Donor Advised Fund (DAF)?
A Private Foundation is a corporation or trust registered as a charity with Canada Revenue Agency (CRA) and usually established and managed by one donor or family. There are about 200 private foundations in Canada — the first was launched in Winnipeg and the biggest is based in Vancouver — and they generally make the most sense with a minimum initial investment of $2 to $5 million. Private foundations provide complete control over which charities benefit from donations but are very complex and time-consuming to manage.
A Donor Advised Fund (DAF) requires significantly less donor time, energy and financial commitment, and can also provide greater anonymity because there’s no disclosure to the CRA by individual donors. A DAF can be established at a Public Foundation to administer and invest donations made by individuals, families and organizations.
Our team can help you decide how to best structure your charitable giving, so your donations have the biggest impact on the causes you care most about.
MARK HALPERN is a well-known CFP, TEP, MFA-P (Certified Financial Planner, Trust & Estate Practitioner, Master Financial Advisor – Philanthropy). He was honoured to speak in the Disruptors Category at Moses Znaimer’s most recent ideacity conference. His talk generated high interest and comments. Watch “The New Philanthropy” at bit.ly/MarkHalpernTalk. Learn more at www.wealthinsurance.com. He writes this column exclusively for each issue of Foundation Magazine.
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