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Become A Philanthropist and Not Give
Away “the Farm”!
Retirees today are
looking for ways to become philanthropic but are finding it difficult to
do so with a low investment environment. There are those with a great
deal of disposable income for charitable purposes and have more than
enough to live on. At the same time, there are those that want to be
philanthropic but aren’t in the financial position in order to fulfill
their dreams.
By using some age-old
strategies through the use of prescribed annuities, it is possible to
become a philanthropist, preserve the value of your estate for your heirs,
and keep your retirement income in tact.
Let’s look at an
example.
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Jill
Giving is 73 years young and in great health.
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She has
3 grown children, and was recently widowed after her husband, Jack, died
from a long battle with cancer.
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Her
retirement income is made up of work pensions (both her’s and Jack’s), a
RRIF, GICs, T-Bills, an equity investment portfolio, Old Age Security and
Canada Pension Plan.
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Her
income was reduced after Jack
passed away as there was a 60% survivor benefit on his work pension and
his CPP.
Jack’s OAS also ceased at his death. She would like to maintain her
current level of income as it is now reduced after Jack’s passing.
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Jill
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.
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From
the $500,000 in GICs Jill holds, they yield $20,000
interest per year (4.00% average return) and
with an approximate marginal tax rate of 43.41%, she nets $11,318.00
after-tax.
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Jill
wonders how she can maintain income and make a gift to the Canadian Cancer
Society.
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She
also wants to leave her estate in tact as much as possible for her
children and grandchildren.
Jill called upon her
financial planner, John, to explore her options. After a few meetings of
discussing various strategies, John recommended that from the capital of
$500,000 in GICs, Jill can;
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Make an
immediate gift of $125,000 to the Canadian Cancer Society. This would give
her an immediate tax savings of approximately $58,012.50.
If all of the donation receipt can not be utilized in one year, she can
carry it forward for the next 5 years. This will fulfil her current
philanthropic wishes.
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Next, Jill will
purchase a prescribed life annuity with the remaining $375,000 and a
Term-100 life insurance policy for $500,000 (we know that Jill is healthy
and will qualify for the insurance).
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After paying
for the life insurance premium from the annual payment of the prescribed
annuity, Jill has $11,849.07 per year of after tax income, slightly more than
she was receiving from her GICs
including $1,083.42 of recouped Old Age Security Clawback..
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If Jill was to
keep her financial structure in its present form and make a gift of
$125,000
from her GICs, her after tax income would drop to $8,488.50 annually
assuming a constant interest rate of
4.00%.
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Jill still has
plenty of liquidity in her portfolio with her equity investments, T-Bills,
and her RRIF.
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The $500,000 of
capital is replaced in her estate by the life insurance plan.
Additionally, the tax-free life insurance proceeds can pass to her heirs
outside of the estate, therefore escaping probate, legal, administration,
and executor fees.
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Average Fixed Income
Return: |
4.00% |
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Marginal Tax Rate: |
43.41% |
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Capital Invested: |
$500,000 |
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Fixed Income - GICs |
Charitable
Insured Gift Annuity |
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Capital: |
$500,000.00 |
$375,000.00 |
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Gift to Charity: |
$0.00 |
$125,000.00 |
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Tax Credit: |
$0.00 |
$58,012.50 |
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Gross Annual Income: |
$20,000.00 |
$34,410.48 |
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Taxable Portion |
$20,000.00 |
$7,236.57 |
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Tax Payable |
- $8,682.00 |
- $3,141.40 |
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Sub-total: |
$11,318.00 |
$31,269.08 |
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Life Insurance Premium: |
$ - |
-$20,503.44 |
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Add'l After Tax Income from OAS Clawback
Reduction |
$ - |
$1,083.42 |
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After Tax Return: |
$11,318.00 |
$11,849.07 |
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Capital to Heirs in Estate |
$500,000.00 |
$500,000.00 |
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All quotes as of
September 27, 2005 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 this strategy.
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