Planned giving offers plenty of options

(May 2007) With so many charitable giving options available, there’s a good chance your client is clueless as to how to best donate their assets. So don’t just say “sure” when one suggests giving stocks; let your client know about all the choices.

Of course, it might be hard to convince a client that there are other ways to give than just offering up stocks — according to Care Canada, about 11% of Canadians donate securities, while they haven’t seen anyone donate life insurance this fiscal year.

It’s not hard to understand why equity donations are on everyone’s mind. Last May the federal government announced that they were removing the capital gains tax on certain gifts, suddenly making security donations an easy way to give. But there are myriad, tax-efficient ways of giving that don’t involve lightening your investment portfolio.

David Burnie, CFP and managing director of National Review Workshops, says he sees a lot of people donating material things like cottages and buildings. The reason? “You’re leveraging government sponsorship programs by gaining wealth from assets while you’re alive,” he says. “And you can feel good about yourself because you’re giving something away upon death.”

The best way to donate property, says Burnie, is to set up a charitable remainder trust. A trust allows a donor to roll over assets, such as a cottage, between the price it was bought for and its fair market value.

“Let’s say somebody bought the building for $1 million and it’s worth $2 million,” he says. “In essence the taxpayer can roll over the adjusted costs. And if they choose to price it at $1 million there wouldn’t be any taxable capital gains.”

But the most enticing aspect to donated property is that it won’t affect cash flow, and the donor can live in the place until death. “This allows the donor to receive income from his property and he can live in the building. He’s not being kicked out,” Burnie explains.

Colleen Bradley, president of Planned Giving Solutions Inc., says charitable remainder trusts are worth looking at if clients want to donate part of their estate now, “but don’t want to give it to a charity yet. They still want the income from it.”

This also applies to securities donations. Bradley cites a case where a nurse wanted to give stocks to charity, but still wanted control over her investments. Her advisor suggested taking part of her portfolio and putting it in a trust and designating herself co-trustee so she could still manage her equities. “She thought it was a fantastic idea,” says Bradley. “She could play with it, she’d know it would go to her favourite charity and she could get it out of her portfolio without triggering anything.”

In this case, the woman wound up donating the income she received from the trust back to the charity as well — another reason to set up a CRT, says Bradley. “She gets the income from it, but if the donor doesn’t need that income, it can flow right back to the charity.”

When it comes to property, the tax savings can be huge. If a donor gives a $1 million house to charity, he’d get a tax receipt for that amount now, even though he’s still living in the place and the beneficiary, which is the charity, won’t get the building until he passes away.

In Ontario any gift over $200 triggers a tax credit of 46% of the donation. On $1 million that’s close to $460,000, which can be used over the next five years. “He’s probably not going to pay any tax,” says Burnie.

Another benefit of a CRT is there’s no 21-year rule. Normally, when a trust is created, the assets are deemed to have been sold every 21 years, which means they’re taxable every couple decades. In a roll-over trust, this isn’t the case.

While a CRT is one of the more popular alternative giving vehicles, it’s not the only one.

Another interesting option is donating life insurance. Bradley says this method of giving is a good way to go if your client doesn’t have a lot of liquid capital.

“In one case someone’s dad passed away and the son wanted to do a gift, but he didn’t have the funds,” says Bradley. “He said, ‘When I pay those monthly premiums, that’ll be a reminder to me how much my dad meant.’ He couldn’t just write that cheque, yet he wanted to do something significant.” This strategy requires the donor to list a specific charity as the beneficiary. The donor gets a tax receipt for every paid premium. “Another great thing,” says Bradley, “is that life insurance is a contract. When you have a beneficiary designated, that bypasses probate so it goes directly to the charity within 10 to 15 days.”

Donating life insurance sits well with Burnie’s “cash flow is king” rule. As an advisor, he’s not going to let a client severely disrupt cash flow, so if he can find a way for his client give to charity, while not changing the donor’s current lifestyle, then everyone wins.

He cites an example of a woman who donates $2,000 a month to her church. She is happy to give, but she wants to donate more. In this case, transferring a life insurance policy to a charity is ideal. “While she’s alive, there’s no difference in cash flow,” says Burnie. “My client is still spending $2,000 and still getting a tax receipt for it. So it made her feel satisfied that when she dies, her church is going to get a very large sum of money.”

Clients can also transfer an RRSP or RRIF to a charity, or use charitable gift annuities. But some more unconventional “schemes” as Burnie calls them, are available to both altruistic givers and tax-avoiding citizens. One of these alternative giving methods involves donating drugs to developing countries. The donor buys medication in bulk at wholesale prices, then donates the drugs at fair market value.

“If you bought it at wholesale and give it a way at fair market value, you get a tax receipt at fair market value,” says Burnie. “If you’re in a large enough scale the receipt could be quite large. When you apply the credit to your tax return it will produce enough tax savings to wipe out what it cost you actually buy the drugs plus some more, so you’re ahead of the game.”

While this type of giving might sound interesting, Burnie warns that these schemes haven’t been tested in court yet and, “at the end of the day the CRA doesn’t really like it and they may find ways to poke holes in it” as some might use these options solely to pay avoid paying tax.

With so many ways to give, there is no shortage of options. It’s up to the advisor though to figure out which method suits the client best. “The client has already decided that they want to give money to someone else,” says Burnie. “What happens now is they want to find the right mechanism to make the greatest use of their after tax dollars, which will give them the best benefit today, while giving the charity the best benefit upon death.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(05/29/07)