THE ACCIDENTAL PHILANTHROPIST® – MARK HALPERN
By Mark Halpern, CFP, TEP, MFA-P
James Bond fans will remember that he faked his own death in the 1967 film You Only Live Twice. Of course, we all know (until further notice) that everyone lives but once. However, few people realize that we do die twice. The first death happens when your body shuts down, hopefully after a long, healthy, happy and fulfilling life. The second death occurs when your name is mentioned for the very last time, as it’s only when people stop talking about you that you are truly gone.
Every living thing dies at some point. While we can’t alter the inevitable, we can extend and delay that certainty for many years. We can do so by creating a lasting charitable legacy that will endure for many years to come.
I spend a lot of time with generous and fortunate people who, unless they radically change how they spend or invest their money, will have more money when they die than they have today.
The financial challenge on their death (the first one) is the looming intervention of the Canada Revenue Agency (CRA), the government’s collection agency, which is only more than happy to take a big chunk of your hard-earned money: 54 percent of funds accumulated in Registered Retirement Savings Plans (RRSPs) and Registered Income Funds (RIFs) after the death of the second spouse; 47 to 70 percent of assets in personal holding companies, and 27 percent of capital gains from non-registered investments and real estate investments that are not your principal residence (in Ontario).
The solution begins with defining your tax liabilities and determining how much of your money can be used to implement strategies to preserve your wealth in a manner that will enable you to pass it on to the people and causes you truly care about. In our experience, every client prefers to leave money to family and charity versus funding the CRA.
You can do the same by using “your never spend” money — that’s the money you will never really need to pay your bills, that’s really earmarked for the next generation or causes you are passionate about.
Ensure That Your Name Lives On
With proper planning, you can use several available strategies to ensure that your name lives on for generations,
There are two common ways for you to leave a legacy: one is through a charitable donation where your name can be attached to a notable institution such as a hospital or educational facility, so people you have never met are touched in perpetuity by your generosity and selflessness. The second way, through a family legacy, is much more personal. Your name will be on the lips of your descendants for generations to come, particularly when they receive a generous cheque from your trustees or financial institutions every year, both of which you arranged well in advance.
Here’s just one of example of how the second method can work. Joe, a grandfather, purchased a participating whole life insurance policy on each of his grandchildren many years ago at the best time to buy life insurance — when the kids were young and healthy.
Joe committed to paying the premiums for 10 years only. The policies normally have different dividend paying options used to increase insurance coverage, so they stay tax exempt, like all life insurance products.
There are several different dividend-paying strategies to choose from. In this case, a policy worth, say $100,000, can lead to a dividend of 5-6 percent annually, producing a dividend cheque annually for his grandchildren that will continue throughout their lifetimes.
The dividends generated can also be used to buy additional insurance coverage or reduce future premiums. Using this strategy, you could elect to apply annual dividends to future premiums (offsetting the cost of the policy) or depositing the dividends paid into a savings account and earning interest on those funds.
Every year, the insurance company could send a cheque to your grandchildren and continue to do so in perpetuity as a gift to the policy owner.
It’s like receiving an annual birthday card in the mail from a late relative. If you received a cheque in the mail every Jan 1st from your great-grandfather, do you think you would remember his name? You can do that with this strategy.
The grandfather is not so much concerned about the return. Instead, he is convinced that this is the best investment he has ever made for his grandchildren, one that allows them to stay connected to him for decades years after he is gone.
A Second Tax-Efficient Strategy
Another strategy, known as “melt and cascade” allows taxpayers to “thaw out” the registered and unregistered investments they are not using in their retirement and stream those funds to children or other beneficiaries in the most tax-efficient method possible.
For example: Jack is 65, a divorced man with a thriving business and two grown children. He has almost $2 million in his RRSP and wants to leave half of it to his children and the other half to charity. He starts withdrawing from his RRSP to provide the after-tax funding needed to buy a $2-million life insurance policy on his life.
When Jack dies, his children will receive $1 million of death benefit proceeds tax-free and probate-free. The remaining $1 million of insurance proceeds will go to the designated charity. On top of that, it will generate a charitable receipt of $1 million, saving the estate about $500,000 in taxes.
In the end, his children get a $1.5 million benefit — that’s $500,000 more than the $1 million. His favourite charity recognizes him while he is alive as a $1 million donor, and he will be remembered for leaving a large charitable gift, instead of a large sum to the tax department, through this creative planning.
Use life insurance to leave a legacy and cash.
- Buy the policy and name the charity as the owner and beneficiary. Once you are sure that the charity has a charitable registration number, the premiums you pay for the policy qualify as a charitable tax deduction on your annual income tax return.
- Transfer ownership of an existing policy to a charity. In this case, you can get an actuary to put a present value on the old policy, thus generating a charity receipt for the actuarial value, which could be quite large. This can be used to offset current taxes owing. Going forward, you can claim the charitable donation credit for any premiums you pay after the transfer takes place.
- Buy a new policy and name either the charity or your estate as the beneficiary and include the charity as part of your will. This is a good strategy if you want the flexibility to change the charitable beneficiary at any point in the future.
Unlike the first two methods, you will not be able to receive a charitable donation credit for premiums. However, the charity will issue a tax receipt for the death benefit proceeds it receives, potentially saving your estate a lot of taxes.
My Par Gift™
Canada Life approached me a few years ago to help advise them on the development of a new Life Insurance product created specifically to meet the needs of charities, donors, and professional advisors. That product, My Par Gift™, became available for purchase in April 2023, and has the potential to help many more people take advantage of Strategic Philanthropy and Life Insurance opportunities. It’s a permanent Life Insurance policy purchased with a single premium. My Par Gift™ creates a legacy gift of 5-20 times the net value of the one time premium! The charity receives something of much greater value than what’s written on that donation tax receipt: the promise of a significantly larger payment on the donor’s death and the ability to create a cash flow for the charity during their lifetime. (See my Foundation article Mar/Apr. 2023)
Other Considerations
Rather than a one-time gift, you can also give to charity through an endowment, a sustainable legacy achieved by providing an irrevocable gift to either a private foundation or a donor-advised fund (DAF) within a public foundation.
There are specific tax rules for these endowments for how much must be granted every year. Private endowments and DAFs can receive full tax benefits for contributing, without having to disburse the entire contribution amount immediately.
DAFs, which are typically created around the end of the year to take advantage of annual tax deadlines, require as little as one day to set up. They are easier to operate than a private foundation, which can take about three months to establish, and is set up strictly for charitable purposes. Private foundations must maintain their own record-keeping and reporting and pay for administrative and legal expenses as well as set-up costs.
Our CPP Philanthropy™ strategy (the subject of my July/August 2021 Foundation article) is a very simple way to use government-supplied pension benefits to reduce your taxes significantly, while creating charitable gifts of over $1 million for your family and charities
We all know people are living longer than ever before. Life expectancy continues to expand, and “old” has taken on new meaning as people aged 100 years plus are a fast-growing population segment. Many Foundation® readers can’t name their great-grandparents. But readers do have a unique opportunity to create a charitable legacy for the benefit of their families and charities. It’s a legacy that will endure long after they are gone, ensuring their great-grandchildren will certainly remember their name.
Don’t do it alone. Get advice from experienced professionals to ensure that your hard-earned money ends up where you want it to go.
Be remembered for something other than paying a lot of taxes.
Call us for a consultation. We’d love to help.
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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