Planned giving can help family’s future

(September 2007) In recent years, there has been a significant increase in large, often multi-million dollar donations benefiting universities, health centres and other important institutions. For many, donating the big bucks is great place to put extra cash, but it also provides an opportunity to reinvest substantial tax saving.

One area where insurance advisors like to put their client’s tax savings, is into a life insurance policy because of the large amounts of capital this tool can provide at death. Insurance can also be used as a capital replacement and capital protection vehicle, in addition to a capital creation tool for planned giving.

The proliferation of mega-gifts has been helped by tax changes introduced in the 2007 Federal Budget. Clients are now allowed to donate securities or ecologically sensitive properties and receive a receipt for the fair market value (FMV) of the gift. This allows the donor to pay no tax on disposition (0% inclusion rate of capital gains for qualifying gifts after May 1, 2006.)

Consider the following example:

Fair market value	$500,000
Adjusted Cost Base	$300,000
Capital gain	$200,000
Taxable capital gain	$ 0
Other net income	$200,000
Eligible gift @ 75%	$150,000
Carry-forward donation	$350,000
If net income	$666,667
Eligible gift	$500,000
Tax savings (46% MTR)	$230,000

The tax savings from this gift can then fund life insurance premiums to replace the donated asset and maintain estate value. In this case, the $230,000 tax savings could fund a $1 million permanent policy for a 45-year-old male non-smoker (with most companies) or a $450,000 policy for a 65-year-old male non-smoker.

But not everyone wants to pass down their money after they die — some want to spend it now. In that case, we should consider deploying the tax savings to fund living benefits solutions; it’s an option that is often overlooked.

To accomplish this, we could fund products on an annual basis, or examine limited pay options that are more prevalent in the living benefits landscape across carriers. We could recommend using the lump sum tax savings to fund a term-certain annuity or invest in an income fund, using the distributions to pay the insurance premiums (6% payout from $230,000 = $13,800).

Another option — which some might consider the best of both worlds — is to use the tax savings to fund both life insurance and living benefits premiums, thereby preserving one’s estate and protecting one’s lifestyle.

With a corporate donation, the donor receives a deduction for the gift’s FMV and an additional capital dividend account (CDA) credit for the non-taxable portion of capital gains. Here, the entire amount of the capital gain creates a CDA credit, allowing for a tax-free payout of this credit in the future.

Example as above, business is earning in excess of the Small Business Limit:

Asset FMV	$500,000
Capital gain	$200,000
Taxable capital gain	$ 0
Tax savings (36% tax rate)	$180,000
CDA credit	$200,000

Again, the tax savings can be used to fund life insurance premiums to replace capital, although the supportable amount of coverage will be lower, due to the lower tax rate and tax savings in comparison to a personal donation. Life insurance proceeds can pay out from a corporation tax-free, since the death benefit (in excess of the ACB) also credits the CDA.

In addition, we could consider using the tax savings to fund corporate living benefits solutions, including supplementary disability coverage to enhance group coverage for executives, additional health insurance benefits for staff or various tax-advantaged grouped individual accident and sickness programs.

The CDA generated by the gift offers a conduit through which tax savings could be paid out immediately to the shareholder. The CDA could also fund myriad personal protection options for the donor or the donor’s family, including disability, critical illness, long term care, health and dental, or travel coverage. Again, limited pay options could be considered, and bundling multiple protection products together is an option. One example would be bundling supplemental health benefits for retiring individuals with long term care. This way, future health needs are covered, including assisted living arrangements.

As we have seen, charitable giving allows a donor give to his or her community and, in return, receive a personal tax benefit that can be used to mitigate cost of the donation, either with life insurance or living benefits products. With a legislative environment that encourages planned giving, we have more opportunity than ever to support and protect our charitably-inclined clients.

Chris Paterson is vice-president, sales, at Manulife Financial.

(09/04/07)