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Financial Freedom Is Merely Organized Common Sense
Creating Capital And Income For A Charity
Bill and Mary have enjoyed a successful life in their community. Throughout their business career, they have contributed where they thought they could have an impact. Now as they retire, the will continue that with personal assets.
Their concern is, what happens after they pass? To be clear, they want to be perpetual contributors to their community.
The feeling is not uncommon
I had a client many years ago who had the thought and set up a foundation to carry out his wishes post mortem. It still operates and the contributions have had visible effects in the community. Others have made bequests by will to their preferred charities.
Every estate plan should consider the possibility. There are ways to use your taxes better. There are ways to significantly magnify the effect of your donation.
The developing concern.
People give a little of their income each year to charities of their choosing. Some gifts are reflexive, while others are made with a commitment to the goals and values of the particular charity.
What’s the risk to those charities? Principally, they are competing for donations with tens of thousands of others. There are approximately 86,000 registered charities in Canada. (The ones who can give you a receipt for tax purposes.) There are another 90,000 or so unregistered charities and non-profit organizations. You can see the current list or registered charities. I think you will be amazed what happens when you search by your community.
Some charities will not survive. Others who are more future oriented will be fine. The key will be to change from regular donations to capital providing investment income. They compete monthly for the regular donations and there are only so many dollars to capture.
Capital donations are more difficult to get but provide enduring cost free benefits.
As always it is Vision and Strategy before methods.
A simple case
A couple donates monthly to their church. They see it to be a helpful organization and know their $200 a month will be hard to replace when they are gone. The leave the church $60,000 in their will so the income from that can replace their contributions.
A more complicated case.
A couple has money in their RRSP for which they have no need given their employer pensions. They decide to leave the $200,000 to their favourite charities in their wills and avoid the tax on The RRSP at their death. I the interim, they intend to donate any income forced out of the plan by the RRIF rules. The charities of their choice will receive whatever remains at their second death, and regular amounts in the interim.
If they are both 71 in the beginning, their fund earns 4% continuously, and we assume they donate the income they must report to the CRA each year and thus have no tax effect it, we get this result
Donations begin at a little over $15,000 and begin to shrink because of the way the withdrawal formula reduces the fund and investment yield increases it. At age 80 the donation is $13,000 and the fund is $145,000. By age 90 the donation is $10,500 but the fund has dropped to $75,000. By 95 the donations are $9,000 and the fund is $38,000. While the charities have received many donations, the idea of creating a permanent source of income is not so certain.
An alternative – annuitize the RRSP and use the cash flow to buy life insurance. A $200,000 fund will produce roughly $1,000 per month of income. Each month the couple pays $1,000 to an insurer for a life insurance policy. The charity is the owner of the policy and issues a tax receipt each year for the amount the couple has paid in premium. That offsets the tax cost of the interest. On their death, the annuity will stop and the death benefit will be paid to the charity. The result is interesting.
They pay $1,000 a month annually would be better, but there are cash flow considerations to be overcome. Not difficult, just fussy.
If the second death occurs at age 80 the payout is in the $350,000 range. At 90 around $425,000. At 95 around $500,000. Comapred to donate as they go and leave the balance case above, the charity would have had to invest their annual donations wisely to have the $462,000 extra on hand. Think magnify.
More complicated still
In some circumstances where is a large tax liability at the second death arising from frozen corporate shares, it is possible, but uncommon, to give away your taxes. The cost to the estate is near zero, to do so and can create a gift to a charity double the taxes due. That one is worth exploring for a few.
Charities work
Not every one matches your personal idea of what helps society the most and you should assess that. Not every charity is predictable over the future. I had a client who had intended to leave a mid six-figure sum to his local church and eventually decided not to do so. He was concerned about the influence of the governing body.
Make a strategic decision about the charity and its effects.
Discover products that could enhance the benefit to the charity at little or no cost to your heirs.
Caveats
- Examples are not much like real life.
- Insurance premiums depend on age, health, and other factors.
- Interest rates are assumed.
- Tax effects are assumed
- Your circumstances, and your need for flexibility in the future, will be considerations.
- if there is no fit for you, say no.
The takeaway
Some effort on the method side of charitable giving will usually yield significant benefits to the charity and little cost to you. Don’t overlook the possibility.
Charities will need more capital providing income to get along in the future, Regular donation campaigns are becoming too expensive and yield less than they once did.
I help people have more retirement income and larger, more liquid estates.
Call in Canada 705-927-4770, or email don@moneyfyi.com
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