MAKING A DIFFERENCE – CHARITABLE GIFT PLANNING

Anybody who says you can make money by giving it away is probably wrong. But by careful financial and tax planning you can make your gift go a bit farther than perhaps you had thought. This is about Planned or Deferred Charitable Giving. This is the 101, an introduction, or even an invitation for you to relate it to yourself to see how you can make a difference. And to be in touch if you think some of this applies to you.

As Canadians we tend to be a bit less generous with our charitable institutions than our American cousins. Most likely not because we are more tight-fisted, but probably because we have not generally been as innovative in our gift planning. This is gradually changing and I hope this helps the process of change.

As a primer in gift planning, this will explore several mechanisms you can use to get a bigger bang for the charity buck. Not fundraising functions, charity raffles, and silent auctions, which are wonderful, but rather in the spirit of quiet and serious philanthropy.

I hesitate to use the word philanthropy since you may think philanthropy to be the province of the very rich. And it used to be. But I am talking about something you can start with as few as 10 people each giving as little as $10 each, every month for ten years, to create a gift of $100,000 for their favourite charity or church. Or you giving $100 monthly for ten years. $100,000 counts as philanthropy and you can do it! You probably already donate within that range to one charity or another.

There is no magic in gift planning. But charities live and work in a tax exempt environment and this really seems like magic to those of us burdened with a heavy tax load. Any monies they have invested are normally untaxed. Their most valuable asset is their charitable registration number that allows them to provide tax receipts for donations. Without it they would be out of business, probably.

How can you make a difference? A bequest in your will is one of the most commonly used mechanisms. You simply state in your will that a specified sum, or a percentage of your estate, is to be donated to a specific charity after your death. Most of the larger charities have bequest forms available for wouldbe donors. You should check with your lawyer to be sure the bequest is not in conflict with other provisions of your will. And you should notify the charity that you are making them a beneficiary of your will. And again, if you change your mind, you should also notify the charity. This is a down-the-road gift but most of the great endowment funds have been built up this way over the centuries.

Something more immediate might be a stripped, or “zero coupon” bond. Or even a strip coupon. What are they? These are usually government bonds that have had their interest coupons stripped off. For example a $10,000 Government of Canada bond, with no interest coupons attached, due in fifteen years, might be worth $3,500. You can buy this and give it to the charity, receive a tax receipt for the $3,500, and the charity will receive the full $10,000 at the end of fifteen years. The gain from $3,500 to $10,000 is tax free in the charity’s hands but would be fully taxable in yours. A small group in a church might do this at the retirement of a favourite minister or music director, to mature on the occasion of his or her eightieth birthday.

Think about a church choir or a Sunday school class perhaps buying a coupon from such a bond, yielding say $100 in five years. The cost might be $65. The maturity might coincide with their confirmation or their first communion. Perhaps it doesn’t make much financial difference, but it does bring awareness to young people of the need to support charities and could develop a commitment in some of them, as they mature, to that particular charity’s work. Especially if the church or charity keeps track of the children who donated the gift and invites them to an occasion marking the maturity of the stripped coupon. Stripped bonds and coupons are available from most banks and stockbrokers.

Another of the most common planned gift mechanisms is a memorial donation. Often in death notices you will see a direction that memorial donations may be made to the deceased’s favourite charity. When planning this, it is important that you include the full official name of the charity and its address and postal code. Funeral directors would be well advised to remind their clients of this need since those who might wish to donate may have difficulty in finding the named charity, particularly if it is not a national organization. So the moment passes and the donation is not made. The recipient charities would be well advised to locate the deceased’s loved ones, through the funeral director perhaps, to thank them for directing the donations and, perhaps, advising them of the total amount received. The survivors might like to include a reference in their thank-you notes to those who donated. The more direct and personal contact the charity has with its donors, and those who directed the donations, the better, since it enhances awareness and may bring more donors on stream down the road.

A gift of property is a possibility. You might have a valuable painting that could be donated to the charity and sold by it to further the charity’s work. Or a portfolio of securities, a stamp collection, a silver tea service. You need to have it assessed as to its market value and then you can donate it and receive a tax receipt for the fair market value of the donation. The charity can sell it and use the funds to further its valuable work.

For example, you might donate an historic local painting to your local hospital. The hospital, not being an art gallery, would prefer the funds. But perhaps the patients in the hospital, or those visiting, might benefit from being able to see the picture. So perhaps the hospital could find a purchaser for the painting who would then arrange for the picture to be displayed in a secure part of the building but where the public, and indeed those convalescing, could see and appreciate it. This is really a double donation in which the hospital gets the money as well as the benefit of being able to display the original gift-in-kind.

Some people plan to donate their home to charity following their death. Col Sam McLachlan, founder of General Motors of Canada, did this with his estate, Parkwood in Oshawa, Ontario. He left it to the Oshawa Hospital that was next door. Being a place of national historic interest, it was not possible to sell the property in the conventional manner and the estate is now operated as a tourist attraction and as a venue for business and personal gatherings. Whether or not the current use provides a flow of income to the hospital, it does create awareness that the hospital next door needs support. And it provides of a place of beauty and tranquility in the midst of a busy city.

Coming back to more normal people, you might consider gifting your home to your favourite charity in return for a present value charitable receipt. Or leaving it in your will. If you are thinking of this, there are a few considerations. For example, your children might not expect to inherit the actual house but they probably are looking for the value of it to be included in their inheritance. If you are not concerned about that, best to make the gift yourself during your lifetime, but with provision to occupy it for the duration of your life or until you no longer wish to do so, whichever comes first. If you are concerned about it, you might consider life insurance on yourself and your spouse, in an amount approximately equal to the value of the house. This would be an estate-replenishment vehicle, topping up the estate to offset the donation of the house to the charity. At death, the charity would get the house, which they could use or sell, and your heirs would receive the death benefit of the life insurance instead.

In the case of a large capital item such as the family home, the family business, or a large portfolio of securities, a charitable remainder trust might be a good idea. This mechanism allows you to use the asset for the duration of your lifetime as if it was yours. You receive a receipt for the present value, for tax benefits during your lifetime. Then the asset passes directly to the charity at the time of your death. Gifts of securities are now treated similarly to the principal family residence when gifted, in that the capital gain is no longer taxed.

When giving major capital items it is important that family members be on side with your charitable intentions. No charity wishes to become embroiled in a dispute with heirs of the would-be donor since it attracts adverse publicity, which can impede the well-intentioned work of the charity.

A simpler way to deal with this might be a life insurance policy in which the charity is named the irrevocable beneficiary and is noted as the owner of the policy. Then you donate the equivalent of the premium to the charity each year, in return for a charitable receipt and the charity pays the premium. On your death the charity receives the death benefit. A policy that is paid up in a short period of time is usually better; say ten years, as this more easily unencumbers the insurance proceeds on receipt by the charity.

The advantage of giving a life insurance policy is that it provides a lot of money to the charity out of a relatively painless cash flow. The disadvantage is that, while the charity knows it will get the money, it does not know when, which makes planning difficult. One way around this is to have another donor make an interest-free loan to the charity with the specific intent of it being repaid from the proceeds of a specific life insurance policy. Then the charity can use the money immediately, knowing the loan will be repaid from the life insurance. And the lender knows that either they or their estate will be repaid down the road. Interest-free loans to charities to not provide a tax re-ceipt since they are not a donation, but neither do they provide a taxable income to the lender.

Often folks have some old life insurance policies, perhaps purchased by their parents when they were children. It is estimated that there are literally millions of such policies extant, on which the premiums are still being paid. But usually they bear little relationship to the actual financial planning needs of their owners. You might be paying $100 annually on an old policy on your life, bought 30 years ago, providing a $10,000 death benefit, but with cash and accumulated dividend values of more than $6,000. To cash it out you would be taxable on a large portion of the accumulation. Donating it to a charity in return for a receipt for the cash value, probably, would leave you as well off after the income tax deduction as you would be if you cashed it in. Then the charity could cash it in, tax free. Or you could keep paying the premiums by way of donation to the charity and the full death benefit would inure to the charity on your death. A very painless way to donate!

Gift annuities can work wonders for charities that are set up to accommodate them. Very few charities are equipped to actually issue annuities themselves but they can still benefit. The way it works is that the donor has some capital upon which they are dependent for a stream of income. If the income they need for their lifetime is less than the income this capital sum will provide from a commercial annuity, they can donate the capital to the charity and the charity can “re-insure” the annuity with a life insurance company. The difference between the donation and the cost of the annuity would be a donation attracting a tax receipt.