What is Planned Giving?
Planned giving is an ongoing method of providing a gift of funds to a charity with the emphasis on building a long-term relationship. This may include current and deferred gifts but in all cases benefits both the donor and the charitable organization.
With current outright monetary gifts the charity has the immediate ability to use the funds to carry out important projects. The donor can see the benefit of donated funds at work immediately. Funds are utilized at present value rather than at a reduced value under deferred donations. Current income tax is
also reduced for the donor by obtaining immediate income tax credits of approximately 40% to 46% of the donation rather than it being claimed in a donor's final income tax returns, as is the case with deferred gifts. Deferred gifts however are also important. The value of testamentary gifts such as insurance and bequests continue to be significant to charities.
What are the available Planned Giving options?
The following options, which cover current and deferred donations, are the typical vehicles for planned giving: Cash donations, Gifts in Kind, Publicly Listed Securities, Bequests, Life Insurance, Registered Plans, Charitable Remainder Trusts, Residual Interest Trusts and Charitable Annuities. In many cases there are generous federal and provincial income tax provisions that exist to significantly lower the donor's taxable income, thus maximizing the value of your donation.
When and How Should the Gift be made?
Once the decision has been made to make a gift it is important to consider how and when the donation should be made. One should consider their capital and income requirements, their beneficiaries' needs as well as their present and future income tax obligations in making the decision as to how to make the gift and when to make it. Should the donor's present capital and income position allow an immediate donation; the donation receipt can be used now or in the next five taxation years. Keep in mind that income tax can be reduced by as much as 40% to 46% of the gift.
Donations of a Property
It is often more advantageous to make an outright donation of property (gift in kind) than of cash as this would give a higher tax credit. For example, there would be more to donate with a direct donation of the property than if the proceeds on the sale were donated, after tax. Examples of this type of donation may include real estate, antiques, or art. The value of the donation is for the full market value of the donation.
Donations of Publicly Listed Securities
This method of Planned Giving is a specific type of Gift in Kind and is also quite advantageous. Since May 2006, transfers of listed securities to a registered charity not only give a donor a tax receipt for the market value of the securities donated, but also exempt the donor on the capital gains realized on the disposal of the securities. In transferring securities, as opposed to simply making a cash donation, donors can further maximize the value of their donation. Note that the securities must be donated and not sold prior to the donation.
Bequests to Charities
A gift via bequest is an extremely important donation method that includes a specific asset on part of one's estate. This ordinarily allows you to make a larger donation, the credit for which reduces the donor's income tax in the year of death and the previous taxation year. One should make sure that there will be sufficient income in those years to take full advantage of the tax credits. If there is some doubt, then consideration should be given to making part of the donation earlier. It is important to have a proper Will in place to assist the executor and reflects the donor's intentions so that the estate is allocated appropriately. Needless to say, a large bequest can greatly improve the financial situation of a charity.
Donations of Life Insurance
In some cases, a credit can be received now with a lump sum being given to the charity on death. Life insurance is such an alternative where there is a choice as to when the tax credit(s) is taken as well as the donation amount for tax credit purposes. This can be a gift of an existing policy or a new insurance policy. In both cases the charity becomes the owner and the beneficiary of the policy and receives insurance proceeds on the death of the insured. Life insurance can be a substantial gift to the charity at little cost to the donor.
Donations of Registered Plans and Trusts
These are other gifting methods. In the case of some trusts, donation receipts could be issued immediately but income from or use of the property is still available to the donor.
Charitable Annuity
An individual can obtain a lifetime income and make a valuable contribution to a charity via a charitable annuity. The annuity can also be guaranteed for a number of years. In addition, there is usually reduced income tax on the annuity payments received. In many cases, life insurance can be taken out to replace the capital used for the annuity.
The Decision
There are many options for planned giving. An individual should review the options before they make the their contributions and can choose which method is best suited to reduce their income tax obligations while ensuring they are benefiting his/her charity.
The content of this article was provided by Ted Prowse, CA, CFP, a retired partner of Collins Barrow Ottawa LLP and an advisor to the Roman Catholic Archdiocese of Ottawa.
Contact your Collins Barrow advisor for more information on Planned Giving.