GIVING THROUGH
ANNUITIES...
by John Jordan, CFP
In today’s low
interest rate and negative-return investment environment, retirees
are exploring ways to increase after-tax income while preserving the
value of their estate and fulfill their philanthropic wishes.
Well, there is a way that
you can “have your cake and eat it too”! It’s called the Charitable
Insured Gift Annuity. Unlike a Charitable Gift Annuity, which is
suited to those who do not have a need to preserve capital in their
estate, this strategy will replace the capital that would otherwise be
lost upon death. This strategy involves three components; a gift to your
charity, a prescribed annuity, and a life insurance policy. Compared to
traditional interest-bearing investments, such as GICs and T-bills, this
approach can significantly increase your after-tax income and guarantee it
for life!
Here is a situation.
Betty Charity, a BC resident, is 75 years young and in good health. She
has 3 grown children, and was recently widowed after her husband, Barney,
died from a long battle with cancer. Her retirement income is made up of
work pensions (both her’s and Barney’s), a RRIF, Bonds, T-Bills, a
moderate equity portfolio, Old Age Security and Canada Pension Plan. Her
income was reduced after Barney passed away as there was a 60% survivor
benefit on his work pension and his CPP. Barney’s OAS also ceased at his
death. Betty would like to make a sizeable donation to the Hospital
Foundation but would have to give up a good portion of interest income in
order to do so. From a $150,000 10-year Government of Canada Bond Betty
holds, it produces $6,900.00 interest per year and with an approximate
marginal tax rate of 35.00%, she nets $4,485.00 after-tax.
Betty called upon her
financial planner, John, to explore her options. After a few meetings and
much discussion, John recommended a Charitable Insured Gift
Annuity. The reasons for recommending this fit Betty's goals as follows:
-
Betty will
give an immediate gift of $37,500 ($150,000 x 25%) to the Hospital
Foundation and receive a donation receipt to offset income tax. Betty’s
tax credit will amount to $16,387.50. If all of the donation receipt
cannot be utilized at one time, she can carry it forward for 5 years.
-
Betty will
receive an increased lifetime after-tax income of $5,697.92 from a
prescribed annuity with the capital of $112,500 ($150,000 - $37,500)
being preserved for her children by the use of a life insurance plan.
-
The
annuity will make up part of her fixed income portfolio to stabilize her
annual income.
-
A $112,500
GIC would give Betty an annual after-tax income of $3,363.75; $2,334.17
less than the Charitable Insured Gift Annuity
-
In
comparison, a interest bearing investment would have to yield
7.79% in order to equal the after-tax income of the Charitable
Insured Gift Annuity. This return is guaranteed for life.
-
The
Charitable Insured Gift Annuity yields $1,212.92 more after-tax income
than the $150,000 GOC Bonds.
-
Betty
finds great satisfaction in realizing her gift during her lifetime.
Some donors
may wish to make the charity beneficiary of the life insurance plan. The
estate would receive a donation receipt equal to the amount left to the
charity, which would offset income tax in the estate. Be sure to consult
with a professional advisor experienced with these issues before entering
into a Charitable Insured Gift Annuity.
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