Planned giving – the allocation of funds to charity in a will – is the lifeblood of many charitable organizations. But proper planning can deliver excellent financial benefits to the donor during their lifetime, too.
Aeronn Zlotnik, a financial advisor with ZLC Financial, said proper planning can ensure more money for a donor’s favorite charity and less money for Canada Revenue Agency.
“There’s a whole bunch of different vehicles we can use to make the experience much more tax efficient and better for the client,” he said. “For instance, you might be able to make a donation but then they’ll turn around and buy you an annuity so that you have some income on a go-forward basis.”
Buying an investment fund that is willed to the charity is another alternative. It could be structured so that the donor receives income tax-free. For instance, Zlotnik said, a $100,000 investment might provide $100 a month in income, which is designated return of capital, rather than new income, and is, therefore, tax-free.
“There are rules in place where you could donate securities and not have to pay for capital gains and so, effectively, you could increase your income today and make a charitable donation later and everybody wins,” he said.
The top rule of thumb, Zlotnik explained, is having a conversation with an advisor about intentions. There are other ways to decrease or eradicate taxes owed on an estate. Better still, there are ways to maximize the benefits while we’re still around to appreciate them.
Designating registered retirement savings plans or a registered retirement income fund to charity means the estate will avoid being taxed at the highest marginal tax rate of the deceased person, while at the same time generating a tax benefit for the plan’s total value. The dead have a tax advantage over the living, in that a tax credit arising from a bequest can be applied in its entirety to the estate’s tax bill, compared with a rate of 75% for a breathing taxpayer.
Transferring a life insurance policy to a charity allows the premiums to qualify for a tax benefit. Annuities, if arranged properly, can benefit the donor during life by providing interest income and a tax receipt for the donation to boot. In the end, the charity gets the principal.
The significance of planned giving to charities is crucial, according to Marcie Flom, vice-president, financial resource development for the Jewish Federation of Greater Vancouver.
“These planned gifts ensure the long-term stability and viability of not-for-profit organizations,” she said. “They provide resources that the charity can count on as a stable source of funding to carry out its mandate, its charitable work. By having a stable source of funding for their core mandate, it enables them to allocate resources to take some risks, to try new programs. It provides that stability.”
Endowed funds, which are a common product of planned giving, let an organization breathe a little easier, knowing that there will be guaranteed income at a certain level each year.
“Obviously, that’s the benefit for those agencies,” Flom said.
For the donor, in addition to the tax benefits, this approach is also a statement of philanthropic vision, which can continue even after they are gone.
“It’s a wonderful way,” said Flom, “for them to create a legacy in the community that reflects their charitable giving through their lifetime … and then, again, for the organization, it provides that long-term, stable funding that is so critical to the organization’s operations.”