Philanthropy and an Increased Retirement
Income
In today's low interest rate and negative-return
investment environment, retirees are exploring ways to increase after-tax
income while preserving the value of their estate and fulfill their
philanthropic wishes.
Well, there is a way that you can "have your
cake and eat it too"! It's called the Charitable Gift
& Insured Annuity. Unlike a Charitable Gift
& Annuity, which is suited to those
who do not have a need to preserve capital in their estate, this strategy
will replace the capital that would otherwise be lost upon death. This
strategy involves three components; a gift to your charity, a prescribed
annuity, and a life insurance policy. Compared to traditional
interest-bearing investments, such as GICs and T-bills, this approach can
significantly increase your after-tax income and guarantee it for
life!
Here is a situation. Betty Charity is 75 years
young and in good health. She has 3 grown children, and was recently
widowed after her husband, Barney, died from a long battle with cancer.
Her retirement income is made up of work pensions (both her's and
Barney's), a RRIF, GICs, T-Bills, a balanced equity portfolio, and Canada Pension Plan. Her income was reduced after Barney
passed away as there was a 60% survivor benefit on his work pension and
his CPP. Betty would like to make a
sizeable donation to the Canadian Cancer Society but would have to give up
a good portion of interest income in order to do so. From a $200,000 GIC
Betty holds, it produces $6,700 interest per year
(4.10% return) and with a
marginal tax rate of 46.41%, she nets $3,590.53 after-tax.
Betty called upon her financial planner, John, to
explore her options. After a few meetings and much discussion, John
recommended a Charitable Gift & Insured Annuity. The reasons
for recommending this fit Betty's goals as follows:
-
Betty will give an immediate gift of
$50,000 to the Canadian Cancer Society and receive a
donation receipt to offset income tax. If all of the donation receipt
cannot be utilized at one time, she can carry it forward for 5 years.
-
This donation will generate a tax
credit for Betty of approximately $23,205.00.
-
Betty will receive an increased lifetime
after-tax income of $6,652.34* from a prescribed
annuity with the capital of $150,000 ($200,000 - $50,000) being
preserved for her children by the use of a life insurance plan.
-
The annuity will make
up part of her fixed income portfolio to stabilize her annual
income.
-
The Charitable
Gift and Insured Annuity produces
$3,959.45 more
after tax income than the $150,000 GIC and
$3,061.81 more after tax income of the original $200,000 GIC.
-
In comparison, a GIC
would have to yield 8.28% in order to equal the after-tax income of
the Charitable Insured Gift Annuity. This return is guaranteed for
life.
-
Betty finds great
satisfaction in realizing her gift during her lifetime.
|
Betty's Average Interest Rate: |
4.10% |
|
|
Marginal Tax Rate: |
46.41% |
|
|
Capital Used: |
$200,000.00 |
|
| |
GICs |
Gift & Insured Annuity |
|
|
Total Capital |
$200,000.00 |
$200,000.00 |
|
|
Gift to Charity |
$50,000.00 |
$50,000.00 |
|
|
Donation Tax Credit |
$23,205.00 |
$23,205.00 |
|
|
Capital Used for Income |
$150,000.00 |
$150,000.00 |
|
|
Gross Annual Income |
$5,025.00 |
$14,784.00 |
|
|
Taxable Portion |
$5,025.00 |
$1,963.49 |
|
|
Tax Payable |
- $2,332.10 |
- $911.26 |
60.93% Less Tax Payable |
|
Sub-total: |
$2,692.90 |
$13,872.74 |
|
|
Life Insurance Premium: |
$ - |
-$7,220.40 |
|
|
After Tax Return: |
$2,692.90 |
$6,652.34 |
147.03% more after tax income |
|
Capital to Heirs in Estate: |
$150,000.00 |
$150,000.00 |
100% Capital Retention |
|
Annual
Income Advantage over GIC: |
$3,959.45 |
|
|
Rate of
Return Required to equal the Insured Annuity: |
8.28% |
|
|
All quotes as of
March 22, 2006 and
are subject to change without notice.
Life insurance rates quoted are
standard rates and are subject to the approval of the
underwriting department of the life insurance company.
E. & O. E. |
Some donors may wish to make the charity
beneficiary of the life insurance plan. The estate would receive a
donation receipt equal to the amount left to the charity, which would
offset income tax in the estate. Be sure to consult with a professional
advisor experienced with these issues before entering into a Charitable
Insured Gift Annuity.
* Annuity
quotes as of March 22, 2006
|
