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.”
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
Losing a spouse through death or divorce can be an emotionally devastating experience. And yet it’s typically a time when many financial matters require your immediate attention. To help avoid making emotionally driven – and potentially harmful – financial decisions, it’s important to be prepared should you find yourself suddenly single. Here are five important action steps that can help protect your personal finances.
- Update your financial accounts.
When you lose a spouse, whether, through death or divorce, you’ll likely need to change the registrations on any financial accounts that are owned jointly. Such ownership changes typically require certain documentation. It’s best to initiate this process early on, as registration changes can take weeks to implement. A word of caution: Pay attention to the conditions under which you divide assets and/or shift ownership. You could face significant tax burdens when splitting up highly appreciated assets, or risk losses by selling in volatile markets. You should consult your tax advisor.
- Divide or roll over retirement assets. Pension and retirement account assets have their own set of rules when it comes to shifting ownership from one spouse to the other, or splitting the assets. Generally, upon the death of the account owner, retirement account assets pass directly to the beneficiary (often the spouse, for those who were married) designated on the account, while in cases of divorce, retirement assets are often split up as part of the divorce settlement.
- Adjust your income and budget.
In many cases, being suddenly single could mean reduced household income. You may need to adjust your budget accordingly. Start by listing your essential expenses (housing, food, insurance, transportation, etc.) and your discretionary expenses (dinners out, vacations, clothing, etc.). Try to match reliable sources of income (salary, support payments, pension, etc.) to your essential expenses, and see where you might trim your discretionary spending. Speak with your financial advisor to help you set up a budget that works for you.
- Evaluate your insurance needs. What you’ll have and what you’ll need for insurance can change dramatically when you lose a spouse through death or divorce. It’s important to take a careful look at all the different types of insurance that are available, to see where you may need to adjust your coverage. Be sure to review the following:
LIFE INSURANCE – If you are the surviving spouse and the beneficiary on your deceased spouse’s life insurance policy, you will typically receive the proceeds, tax-free. But if you are still caring for children, you may want to either purchase or increase your own life insurance coverage to make sure they will be protected in the event of your death. If you divorce, you have to consider (1) changing the beneficiary on your life insurance, if it is currently your ex-spouse, and (2) purchasing or modifying your coverage to adequately protect your children if either you or your ex-spouse dies.
HEALTH INSURANCE – Even if your spouse carried your family’s health insurance coverage, you should be able to continue it for a period of time, whether you are divorced or become widowed. Talk to an insurance expert to ensure you have adequate coverage to meet your unique needs.
DISABILITY INSURANCE – What if you were injured or sick and couldn’t go to work? Disability insurance is designed to protect you and your loved ones against loss of income.
LONG-TERM CARE INSURANCE –If you’re in your 50s or older, you may want to consider buying long-term care insurance to help keep potential costs of nursing home stays and home health care from depleting your income resources if you become seriously ill or injured.
- When you’re suddenly single, your credit can be among your most valuable assets, so protect it wisely. After a divorce or the death of a spouse, you may want to request a copy of your credit report to take inventory of all the accounts that are open in your name and/or jointly with your former spouse.
If you’re divorced, you’ll want to close joint credit accounts and shift to single accounts, so that an ex-spouse’s credit score won’t affect your credit rating. If you’re widowed, contact both Canadian credit bureaus (Equifax Canada and TransUnion Canada) to let them know that your spouse has passed away, in order to keep others from falsely establishing credit in his or her name.
Article courtesy of Fidelity Investments Canada. https://www.fidelity.ca/fidca/en/valueofadvice/gvga/divorcedwidowed
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 lawyer. A 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. Pat died in mid-2015 and most of her assets passed by 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.
Ban 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.
A couple 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.
Hussein has other concerns. He 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?
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.
|Burial Case or Vault
|Grave Plot *
|Opening and Closing of Grave
|Funeral Home Attendants & Professional Services
* 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.
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?
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.
||Copying and certifying fees
|Paid searches for titles, etc.
||Legal notification to potential heirs
||Legal notification to creditors
|Asset Transfer fees
||Estate Accounting fees
||Terminal Tax Return fees
|Estate Tax Return fees
||Rights & Things Tax Return fees
||Ongoing tax Return fees if estate not settled within 12 months
|Testamentary Trust Tax Return fees
||Preparing 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 expenses
||Valuation fees – real estate, listed personal property, personal property, real estate and other capital and/or depreciable property
||Transfer 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 necessary
||Commissions paid to investment advisors for selling stocks and bonds not held in managed-money accounts
||Income 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 spouse
||Shrinkage of realisable asset value due to 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 Probate
||Court costs if you die intestate
||Property Transfer Taxes
|Rental fees – safety deposit box or other secure location and Bank fees – estate and trust bank accounts
||Funeral, memorial and related costs – cultural, faith-based, community or family expectations. Wake or similar
||Costs to collect promissory notes owed to deceased – loans to family members and businesses
|Terminal health care costs not covered by Government, group or personal plans
||Legal and Court costs to defend will is challenged or contested
||Payment of all legally enforceable depts. – including ones you guaranteed or co-signed
|On-going pet care
||Costs 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 sold
||Short-term emergency funds and ongoing income for survivors
||General insurance costs for vehicles, property, valuables, etc.
||Contract 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:
- your estate will have at least one cost not included here;
- you will be very unpleasantly surprised at the total amount of money (and time) involved;
- your estate will be cash-poor – not enough cash in the bank to pay these costs when means that;
- 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?