Giving to charity? Choose a tax-savvy method

Giving to charity? Choose a tax-savvy method

by Gail Johnson,  Reposted from The Globe & Mail, published June 28, 2018

It is better to give than receive, especially when that giving results in tax savings. One of the most common ways to donate money to a charity is through a will. But this approach has drawbacks. For one thing, the tax savings is limited. In the year of one’s death you can claim only up to 100 per cent of your “final” year’s income in donations. That may not add up to much. Plus, by going through your estate, probate fees of as much as 1.7 per cent apply. In addition, estates with high levels of charitable giving are sometimes challenged by family members who want a bigger share of the pie.

High-net-worth individuals should consider other methods to boost their tax savings and ensure family harmony.

SET UP A FOUNDATION

This option may appeal to those who plan to donate more than $1-million, as it allows the donor to have greater control over how dollars are given.

The foundation manages the money for you; it can earn income by investing the capital while donating to causes of your choice, even after you’re gone. It can also allow your name or your family’s name to be associated in the long term with what’s important to you.

“The intention of a foundation is to create a lasting legacy that earns a return and allocates funds to charities annually,” says Jennifer Reid, vice-president of tax and estate planning at Richardson GMP in Calgary.

USE LIFE INSURANCE

Donors can designate a charity as the beneficiary of a life-insurance policy. Funds are paid directly to the charitable organization, avoiding any potential estate battles. Since the funds don’t form part of the estate, they avoid probate, too; probate fees vary by province but can be as high as 1.7 per cent, which can add up on a significant charitable gift.

Insurance has other advantages. If it’s structured properly, the annual premiums can be considered charitable giving, meaning donors receive a tax credit each year.

“Donating life insurance is often beneficial, as an individual can determine the amount of donation credits that will be needed to offset the tax bill at death,” Ms. Reid says. “They can then fund a policy that generates the required death benefit. As the charitable donation offsets the tax, the remainder of the estate is kept whole for the family beneficiaries.”

Life insurance, depending on the policy-holder’s health and other factors, may cost less to purchase than the actual death benefit, Ms. Reid says. “You may be able to purchase the appropriate death benefit, and therefore donation, for much less than a straight cash donation from the estate.”

GIVE STOCKS

Donating stocks that have accumulated capital gains can be advantageous, as you’re donating “pre-tax” dollars.

Ms. Reid shares an example: Say you want to donate $1,000. You decide to liquidate stock from your portfolio to generate the cash. If you sell stock worth $1,000, but you originally paid $500 for it, you have a capital gain of $500 (50 per cent of which is subject to tax).

In this example, you pay tax and the charity receives less than $1,000.

Rather than liquidating the stock yourself and paying the tax, you donate the stock. The charity receives the shares, worth $1,000, and issues a donation receipt for $1,000. It can then turn around and sell the stock.

“The charity gets more, the individual gets a higher donation receipt and is exempt from paying tax on the capital gain that would otherwise result from selling or disposing of the shares,” Ms. Reid explains.

SET UP A TRUST

Whereas a foundation is set up for a particular charitable, non-profit or other social or religious purpose, donations can be made through a trust as well. A trust can be set up in one’s lifetime (inter-vivos trust) or upon death (testamentary trust).

Designated trustees then distribute capital or income up to the maximum federal or provincial tax credits available, the advantage being they can control the timing of the donations and whether they are lump sums or part of an income stream.

The benefits of using a trust can change with the times, however. “Sometimes the government is generous with a lot of tax credits for charitable giving; some years, depending on who’s in power, they restrict or limit the amount of tax credits,” says Henry Villanueva, legal counsel at Calgary’s MacMillan Estate Planning Corp. He recommends consulting an accountant and lawyer.

DONATE RRSPS AND RRIFS

You can designate a charity as a full or partial beneficiary of your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF).

Generally, the largest tax hit on an estate is for the remaining balance of an RRSP or RRIF on the death of a second spouse, because the Canada Revenue Agency treats this as income in the year of death. This money can be taxed at more than 50 per cent, including probate fees. A donation would cancel out this tax.

USE DONOR-ADVISED FUNDS

This method is similar to a foundation – you can leave a legacy, earn income and donate to worthwhile organizations over time – but without the operating expenses and administrative work, such as establishing and maintaining a board of directors, Ms. Reid says.

With donor-advised funds, people typically make a lump-sum contribution and receive a tax-credit receipt; the money is then managed inside the fund and given to causes according to your wishes.

The administration of the fund is completed for a fee by a partner organization, says Ms. Reid. Her firm uses Benefaction Foundation, which specializes in managing charitable giving for high-net-worth Canadians.

“A private foundation is more public – the Smith Family Foundation, for example – whereas a donor-advised fund is private,” Ms. Reid says.

Donor-advised funds are also a great way to involve children and grandchildren in the effort. “It can help to teach not-so-financially-savvy individuals the value of a dollar and the value of supporting valid charitable causes.”

 

Reposted from The Globe & Mail, published June 28, 2018 @ https://www.theglobeandmail.com/investing/globe-wealth/article-giving-to-charity-choose-a-tax-savvy-method

Mutual funds and/or approved exempt market products are offered through Investia Financial Services Inc.  Insurance products are provided through multiple insurance carriers.

Dubunking the Registered Retirement Savings Fund (RRIF)

Dubunking the Registered Retirement Savings Fund (RRIF)

Registered Retirement Savings Plans, also known as  RRIFs are a popular choice for clients with maturing Registered Retirement Savings Plans (RRSPs).  RRIFs can start at any age but must do so no later than the end of the year in which the taxpayer reaches age 71.  So much for the basics. Here are some examples of how they can be used:

Blake is now 68 and married.  He has decided he needs more income to maintain his chosen lifestyle and so is looking to withdraw money from some un-matured RRSPs.  He has three choices – take lump sum withdrawals (which of course are taxable), buy an Annuity (fixed, taxable monthly payments for the rest of his life) or purchase a RRIF (flexible, taxable payments for as long as the funds last).

Lump sums are a possibility but they don’t qualify for any pension tax credits and can only be made up to Blake’s age 71 when he has to make a final choice regarding the RRSPs.  The annuity option probably isn’t the best choice at this time for Blake as there is no flexibility in the payments – they are fixed, arrive on a monthly basis and last for life.  A RRIF seems to offer Blake the best of all worlds – flexible payments that are still taxable but the payments are eligible for all of the pension tax credits and pension income sharing when he does his tax return each year.

RRIF holders must take a minimum amount of money each year and it is based on a formula of percentages that are published regularly by the Ministry of Finance through the Canada Revenue Agency (CRA).  The minimums are determined on January 1st of each year however the taxpayer can take out more than the minimum at any time.  From Blake’s perspective, the RRIF option makes more sense since he wants income (so the minimum requirements are not an issue) and wants to take more money to spend on a random basis for his chosen lifestyle.

Another taxpayer, Rose is married – she is 71 while her husband is only 62.  RRIF minimums are based on the age of the taxpayer however there is a choice of whose age to use.  In most instances, the age of the younger spouse is used because the minimums are smaller.  While her husband Ron is going to be considered as the “measuring life”, the income is still Rose’s and is taxable in her hands.

Some important Income Tax information.  All payments from RRIFs are taxable.  Minimum payments are not subject to mandatory withholding of tax however it is a good idea to have tax remittances set up with the issuing institution so you don’t get a big surprise come April 30th of each year.  As the lowest combined Federal and Provincial/Territorial tax rate is 20%, this is a good starting place for your calculations.  Additional payments above the minimum amount will be subject to a withholding tax that ranges from 10 to 30% (outside Quebec) depending on the amounts withdrawn.

Would you benefit from assistance in planning your retirement income?

Mutual funds and/or approved exempt market products are offered through Investia Financial Services Inc. 

Insurance products are provided through multiple insurance carriers.

Beneficiary “Benefits” – Where’s the Money?

Beneficiary “Benefits” – Where’s the Money?

Did you know that all your assets are deemed to have been disposed of one minute prior to death?  This has significant repercussions for those left behind to sometimes scrounge to find money to pay the terminal tax return or to pay bills that were not taken care of.

Money on deposit with a life insurance company is treated the same as a life insurance policy.  This means that a beneficiary can be named and proceeds will be paid directly on death without the need for probate or the services of a lawyerA beneficiary designation can be changed at any time avoiding the cost of re-writing a Will. Deposits with a life insurer can also be protected from creditors by using certain beneficiary designations.

Here are some examples where this type of solution worked effectively for these individuals:

PAT

Pat died in mid-2015 and most of her assets passed through her Will and were therefore subject to probate.  More than $200,000 was in GICs and a fairly rapid transfer of this money to her heirs would be expected. Unfortunately, they had to wait until the spring of 2017 to receive the funds.  Not only did the GICs attract legal and probate fees in excess of $10,000, but while they were waiting for their share, her kids had to pay income tax on interest earned on the money.  This proved to be a hardship for some of them who were of limited means or single parents.

Pat also had two life insurance policies.  The claim forms for the insurance were sent to the insurer on within 2 weeks of her passing and cheques were delivered to the named beneficiaries less than 4 weeks after her death.  What a difference.

BEN

Ben used named beneficiaries as part of his estate plan to ensure that his money went where he wished without the need for legal fees or probate costs and delays.  When he died, his wishes were granted within a matter of a few weeks with no cost to his estate or beneficiaries.

GARY & SIMONE

Gary & Simon had to file for personal bankruptcy and most of their assets were seized including bank accounts and GICs.  Their life insurance policies and investment plans (both RSP and non-RSP) were safe since they were with an insurance company.  As life insurance policies with each other named as beneficiary, they were protected in this circumstance.  As husband and wife, they are “preferred” beneficiaries, which is one of the reasons their plans with the life insurance company were protected from seizure.

HARRY

Harry worries about his beneficiary’s ability to manage money and wants to make sure that the insurance proceeds will last.  He also wants to avoid the cost and potential tax issues of establishing a trust after he dies.  Hussein was able to address his concerns by utilising special beneficiary arrangements.  He directed that the death benefits would be paid out over a period of years in equal monthly instalments – no management costs, no trustee or legal fees and no ability for the beneficiary to get a lump-sum.

The option to provide income rather than a lump sum may be more appropriate in many situations.  Another option is a lump sum for part of the proceeds (to provide for the immediate cash needs) and the rest paid out as a lifetime income.

 

Would you like assistance in protecting your assets and reducing estate costs?

The “If” or “When” Insurance debate

The “If” or “When” Insurance debate

Many people ask this question but the answer is far from simple.  Every individual has unique circumstances and therefore there is no one answer that fits everyone.  There are two types of life insurance – “if insurance” and “when insurance”.

“If”  insurance is used to cover needs that have relatively short durations – typically 20 to 25 years or less.  Needs such as Debt Elimination – don’t leave your heirs with debts to pay – mortgage, car loans, lines of credit, credit cards – you get the picture.  If you have children, then both child and home care together with education funding come into play.  All of these are usually for a defined period of fewer than 25 years unless you have a special needs dependent.

“When” insurance is available to cover those costs that will be around for 20 years and longer.  Items such as final expenses in settling your estate, special needs, charitable bequests and lifetime survivor income requirements all fall into this “when” category since they never go away and usually increase in cost due to inflation if for no other reasons.

Needs such as continuing income for a surviving spouse, actually need some of both types of insurance.  Some “if insurance” to provide income up to the spouse’s retirement age and “when insurance” for the rest of his or her life.

Our most insidious heir – the Canada Revenue Agency (CRA) – never relinquishes its’ hold on our financial legacy (unless we die completely broke) so “when” insurance is best suited to cover their claims.

What is “if insurance”?  “If” you die within a specific period, the insurance is available.  It is generally the least expensive type since the level of risk to the insurance company is constantly decreasing the longer we live.  Available in terms from 5 years to 30 years – or to some fixed age such as 75, this is more commonly called term insurance.  It gets its name from the fact the coverage is only in force for a specific period or term.  Premiums increase periodically depending on the type of term insurance chosen.

So what about “when insurance”?  This provides benefits “when” you die, regardless of your age – more often this is called permanent insurance or whole life insurance since it lasts for the whole of your life.  It is more expensive than term insurance and the reason is the coverage never runs out, so it costs more.  This type of insurance generally has level premiums and includes the option of increasing the death benefit each year so it can offset some higher costs and inflation adjustments.

 

Would you benefit from assistance making the best choice for you and your family? 
Then and Now…a funeral costs HOW much?

Then and Now…a funeral costs HOW much?

A friend in the funeral industry shared some interesting information with me recently – the difference in costs between a funeral for a child in 1920 versus 2014.  While there is no exact comparison of all services and items, I have illustrated the similar items today.

Item                                                                                                                                     1920                           2014

Casket      $12.50    $2,999.00
Burial Case or Vault       $2.50     $795.00
Family Car       $5.50     $295.00
Hearse      $1.50     $395.00
Grave Plot *      $6.00   $4,999.00
Opening and Closing of Grave      $3.00     $695.00
Funeral Home Attendants & Professional Services      $2.50  $1,989.00
Total     $33.50 $12,167.00

* If available – costs vary widely!

Using the Bank of Canada’s Inflation Calculator,  $33.50 in 1920 should cost $357.43 today – here is a screen clip – a 996.95% increase with an average annual inflation rate over 94 years of 2.55%!  However, funeral costs have risen at a much greater rate.  I will leave you to figure out the rate at which those costs have increased over 94 years.

cost-of-goods

Have you considered your wishes for the future – and do you have resources (read cash) set aside to handle your passing?  And don’t forget to add something for catering, flowers and the no-host bar along with meeting your cultural, faith, community and family expectations.  It is not unusual today to see funerals and memorials cost more than $100,000!

Is it time to review your plans?

What do you mean dying isn’t free?

What do you mean dying isn’t free?

I know this sounds a bit irreverent or flippant however it is meant to stimulate some hard thinking about the real costs of dying.  Sure, there are lots of lists around, but I haven’t found one yet that covers everything I have seen in years in this industry.  Is this list perfect?  Absolutely not, but it will get you thinking about your own and your family’s situation.  Remember, not all of these will apply to you – but some will – and the costs range widely:

Probate FeesLegal FeesCopying and certifying fees
Paid searches for titles, etc.Legal notification to potential heirsLegal notification to creditors
Asset Transfer feesEstate Accounting feesTerminal Tax Return Fees
Estate Tax Return feesRights & Things Tax Return feesOngoing tax Return fees if estate not settled within 12 months
Testamentary Trust Tax Return feesPreparing and filing tax election fees (estate and personal)Executor and Trustee fees (annually until Estate and all Trusts closed)
Executor and Trustee disbursements – Required Bonding costs, copying, telephone, faxing, certifications, mileage, parking, travel expensesValuation fees – real estate, listed personal property, personal property, real estate and other capital and/or depreciable propertyTransfer costs for title transfer to Executor and/or Trustee and eventually to residual beneficiaries.
Commissions paid for asset sales:  real estate, estate sale, sale of listed personal assets as necessaryCommissions paid to investment advisors for selling stocks and bonds not held in managed-money accountsIncome taxes payable – terminal tax return, estate tax return(s), Rights and Things tax return, Trust tax return(s)
Tax due on transfers of pensions and registered assets to other than spouseShrinkage of realizable asset value due to the urgency of sale – tax paid on FMV, not $ received – must replace lost $Account closing fees on nominee and self-directed investment accounts
Court Fees for ProbateCourt costs if you die intestateProperty Transfer Taxes
Rental fees – safety deposit box or other secure location and Bank fees – estate and trust bank accountsFuneral, memorial and related costs – cultural, faith-based, community or family expectations.  Wake or similarCosts to collect promissory notes owed to deceased – loans to family members and businesses
Terminal health care costs not covered by Government, group or personal plansLegal and Court costs to defend will is challenged or contestedPayment of all legally enforceable depts. – including ones you guaranteed or co-signed
On-going pet careCosts of care for children and other dependents (maybe your parents!)Costs to close your social media accounts and profiles
Payment for ongoing business management until it is soldShort-term emergency funds and ongoing income for survivorsGeneral insurance costs for vehicles, property, valuables, etc.
Cash BequestsContract cancellation fees – vehicle lease, cell phones, internet, television, etc.Murphy is alive and well – expect a visit along with family discord!

 

I can promise a few things about this list:

a) your estate will have at least one cost not included here;

 b) you will be very unpleasantly surprised at the total amount of money (and time) involved;

 c) your estate will be cash-poor – not enough cash in the bank to pay these costs when means that;

 d) the net value of your estate, without proper planning and a source of replacement tax-free cash, could even be bankrupt which means your family and heirs would get zero.

  Would you benefit from assistance in planning your estate? Please contact me: