By Mark Halpern, CFP, TEP, MFA-P

Charities often focus their fundraising efforts on current gifts received in cash, cheques and credit cards. Those are in fact the costliest and least tax-effective ways to give. There are better ways to enhance donations by facilitating smart tax planning by donors. This can even help build a portfolio of legacy gifts that contribute substantially more to a charity’s long-term financial sustainability.  Contact us to receive a copy our reports “After-tax Cost of a Donation” and “More Than 20 Ways to be Generous”.

What often stands between a charity and more sophisticated, larger gifts is a shortage of resources and expertise. The solution is to partner with experts. Our team, for example, serves as a legacy process consultant for over 60 charities across Canada. When a donor expresses the wish to make a major donation, the charity can reach out to us, and we’ll work with the donor and the donor’s professional advisors to structure that gift in the most cost-effective and tax-effective way possible.

There’s no obligation – just an opportunity for the donor to access wisdom and knowledge to make the best decision possible in a cost and tax-effective way. An additional advantage to the charity is that these conversations often extend beyond the current gift to explore the benefits that arise from incorporating Strategic Philanthropy into a donor’s estate planning. This often leads to bigger donations down the road.

To provide a sense of the opportunity that’s often there but usually missed, here are three examples of families we’ve worked with, each of which discovered new ways to give that enabled them to take their generosity to the next level.

Turning capital gains tax into charity

I was recently an expert panelist at a financial literacy conference with 600 attendees. At the dinner that followed the panel, I saw a couple I know very well. The husband gave me a big smile and put four fingers in the air. I asked him what that was about. He replied, “Remember I wanted to donate three emergency vehicles to a charity? Well, I donated four!” And then he kissed me on my left cheek and said thank you because they couldn’t have made the gift without my help.  That made me smile just as brightly.

The backstory is that a charity introduced me to this couple. They knew they wanted to make a $250,000 gift but weren’t sure how to best navigate it. One thing that came out of our conversations is that the husband’s elderly mother had an equity portfolio that was what we call “pregnant with capital gains” – meaning that its value had appreciated significantly during her lifetime and 27 percent of the capital gains were destined to evaporate into taxes on her death.

I pointed out that an in-kind donation of the securities from the portfolio would eliminate tax on the capital gains and provide a charitable receipt for the full market value. Then, the charitable receipt could be applied to mitigate up to 75 percent of the mother’s net taxable income in the year of the donation or any of the next four years (Note that charitable donations on death can mitigate up to 100 percent of estate taxes due at death). This tax savings made it possible for the family to make an even larger gift than originally planned – and bring an additional much-needed emergency vehicle into service.

Exploiting the value of old, unwanted Life Insurance

Another affluent family I was introduced to has a patriarch in his 90s. When the family business was sold, the company that bought it also received Life Insurance policies on the patriarch that they didn’t see any value in. The policies had no cash value, so the company planned to simply cancel them. Fortunately, the family’s advisor knew about my work and asked if there was anything that could be done to capture value from those policies.

I explained that even if it doesn’t have a cash value, Life Insurance of all types is worth something. I recommended that the client and the advisor speak with the purchasing company and encourage them to take the trouble to turn “nothing into something”. We arranged to get a fair market valuation on the Life Insurance policies, which turned out to be worth several million dollars. The acquiring company still had no use for the policies themselves but agreed to donate them to the family’s foundation and receive a very valuable charitable receipt to mitigate tax!

For its part, the foundation could keep the policies alive, paying the premiums for the remaining years of the patriarch’s life using foundation funds. The result for the family will be a multimillion-dollar legacy they will use to advance their ambitious philanthropic goals. It’s a total win-win-win all around.

Extracting registered money for charity

I also consulted with a very generous philanthropist with a net worth of around $800 million. He gives away $15 million to $20 million every year, and it pains him that he can’t give away more. As it happens, he and his wife had a total of $3 million in RRSPs that would be taxable as income on withdrawal – in his case, in Ontario, at a rate of 53.53 percent – money they would never need to fund retirement.

Through another advisor, he heard about our RRSP/RRIF Conversion Strategy, which extracts money from registered plans to fund charitable gifts. The goal is to avoid losing more than half of a registered plan’s value to tax. The fact is that, for very wealthy families, the after-tax value of an RRSP or RRIF doesn’t move the dial much on retirement income. However, there’s an alternative that maximizes charity while saving tax.

If the securities inside an RRSP or RRIF are transferred in whole or in part to a donor-advised fund (DAF) or foundation, the 53.53 percent tax bill will still come due – but there will be an approximate accompanying 50 percent charitable receipt. For this donor, the result is a gift of $3 million to charity – when the registered plan was really only worth $1,394,100 to him – plus a charitable receipt that offsets all but 3.53 percent of taxes due.

Going forward, our plan is for the donor to allocate $1 million a year from their foundation for 10 years towards premium payments on a new Life Insurance policy owned by his foundation. In the end, this will create an exceptional legacy gift of about $60 million, plus there’s flexibility, as well, to take dividends as cash and distribute them to charity during his lifetime or take a tax-free withdrawal from the cash surrender value and give it to charity during his lifetime because the policy is charity owned and the withdrawal will not be taxable!

Creating charity is our mission

Our conversations with donors often result in strategies that involve restructuring rather than insurance sales. I call it “simply moving the shells around”. We engage enthusiastically in them because we are dedicated to creating charity. Also, they tend to open the door to more comprehensive discussions about estate planning, including insurance solutions that incorporate further Strategic Philanthropy.

We’re also keen to share our knowledge. We regularly present to national accounting, legal, investment and insurance firms full of professionals who are outstanding at what they do but who nevertheless have knowledge gaps related to Strategic Philanthropy. In addition, we walk charitable leadership teams through the complexities of various approaches to philanthropy, with the goal of empowering them to attract larger gifts.

We are currently developing a community of 100 allied professionals, (accountants, lawyers, insurance advisors, investment advisors, bankers and estate planners) each committed to using their best efforts to create $10 million per year of legacy gifts which equal $1 Billion of new philanthropy annually. For more information or to join us, please visit https://wealthinsurance.com/billion.php

Lastly, to become an expert in Strategic Philanthropy and HNW Life Insurance sales, consider signing up for the Power of Platinum, the unique mentoring and coaching program developed by me with Jim Ruta. Please visit https://powerofplatinum.com or reach out to us directly – we’d love to share how we go about maximizing the rewards of philanthropy for charities and helping their donors go from success to significance often just by converting taxes into charity.

 

Mark Halpern is a well-known CFP, TEP, MFA-P and Certified Financial Planner, Trust & Estate Practitioner and Master Financial Advisor—Philanthropy. He writes this column exclusively for each issue of Foundation Magazine.

Previous post

East Coast Zoological Foundation receives $2.5 million gift from the Nelson Family

Next post

World Around Us

The Editor

The Editor