The Mystery and Magic of Life Insurance As A Gift Planning Option

Transcription

1

2 The CAGP Niagara/Golden Horseshoe Roundtable Presents: A Professional Development Luncheon The Mystery and Magic of Life Insurance As A Gift Planning Option David Wm. Brown CLU, ChFC, CFP, RHU, TEP Wednesday, May 7, 2005

3 AGENDA/GOALS 1. The Climate for Charitable Giving Demographics Government Incentives Professional Organizations Publicity/Awareness 2. Advantages of a Life Insurance Gift 3. The Policy Designs Life Insurance... A Gift that Lasts Forever 4. Structuring The Life Insurance Gift Personal/Corporate Owner/Beneficiary 5. Wealth Replacement using Life Insurance 6. Transferring Existing Policies 7. THE ESTATE PRESERVATION PROCESS The Charitable Asset Transfer Plan The Charitable Foundation Multiplier Plan The Corporate Charitable Foundation Multiplier Plan The Charitable Retirement Savings Plan

4 AGENDA/GOALS (Cont d) 8. Building a Charitable Life Insurance Team 9. Next Steps 10. Questions Philanthropist Planned Giving Professional Advisor Associate Lawyer/Accountant Segment Donors Find a hero Design and Present

5 CLIMATE FOR PLANNED GIVING IN CANADA Extremely Favorable Graying of Population 1 out of 8 people over 65 Significant concentration of wealth Those over age 50 own 70% of Canada s personal wealth Over one trillion dollars in the next 2 decades will be transferred More and more Canadians are touched by the charitable sector Increase of essential services offered to vulnerable citizens More charitable organizations are establishing an endowment arm staffed with professionals

6 THE CLIMATE FOR CHARITABLE GIVING 90,000 registered charities in Canada $8.5 billion in charitable donation in million Canadians claimed donations on 2006 tax return Median donation $ % of donors over age 45

7 THE CLIMATE FOR CHARITABLE GIVING Government Incentives Significant indirect tax benefits Tax system encourages gifts Tax credits for individuals Tax deductions for corporations Improved regulatory framework for registered charities

8 THE CLIMATE FOR CHARITABLE GIVING Government Incentives Individuals are entitled to a federal tax credit of 15.5 percent on the first $ of charitable donations and 29 percent on any remaining donations Subsection 118.1(3) After including the surtax and provincial tax, at top income levels tax savings is approximately 50 cents in Ontario for each $1.00 donated in excess of $200.00

9 THE CLIMATE FOR CHARITABLE GIVING Government Incentives The 1996, 1997, 2000, 2006 and 2007 federal budgets introduced additional incentives to encourage tax payers to contribute even more to charities

10 THE CLIMATE FOR CHARITABLE GIVING Government Incentives Increased annual limits to 75% of net income Donations of ecologically sensitive land and Canadian cultural property still 100% of net income Incentives to give capital property to charities

11 THE CLIMATE FOR CHARITABLE GIVING Government Incentives Cont d Limit for donations in year of death increased from 20 percent of net income to 100 percent of income for donations made in year of death and preceding year Gifts made by will are deemed to be made in year of death

12 THE CLIMATE FOR CHARITABLE GIVING Government Incentives Cont d Donation of: Publicly traded securities Shares or units in mutual funds Interest in segregated funds Stock option benefits

13 THE CLIMATE FOR CHARITABLE GIVING Government Incentives Cont d Capital Gain Inclusion Rate reduced to zero on donation of publicly listed securities to public and private foundations Full non-taxable portion of capital gain credited to corporation CDA where applicable

14 THE CLIMATE FOR CHARITABLE GIVING Significant Increase in Awareness Professional Organizations more prominent Charities more competitive Government Public Intervention More Press

15 Life Insurance A Gift That lasts forever Single Premium Joint Life, Second Death Vanishing Premiums Universal Life Adjustable Life Term 100 Whole Life

16 ADVANTAGE OF A LIFE INSURANCE GIFT Gift does not form part of estate No probate necessary (EAT), legal fees, tax, administrative charges Cannot be contested Not subject to Family Law Act (Ontario)

17 LIFE INSURANCE GIFT Cont d Can be tailor-made to fit desires and cash flow of donor Annual lifetime premiums Vanishing premiums Single premiums Tax efficient Income tax deductible

18 LIFE INSURANCE GIFT Cont d No maintenance costs such as trust fund might incur Small annual premium provides for a substantial future gift Self-completing in the event of disability (Waiver of Premium available) Controlled by organization/donor

19 LIFE INSURANCE GIFT Cont d Various methods of distribution Lump sum donation Distributed according to schedule Philanthropic fund Existing policy may be transferred

20 The Basics Life Insurance Components 1. Mortality 2. Interest 3. Expenses

21 All you need to know to be the insurance company is: How long you will live? What you will earn? What are your expenses?

22 Life Expectancies. CIA Mortality Table Age Last Birthday Ultimate Only

23

24

25 Money Growth Periodic Deposit

26 Policy Designs Term Insurance 1/5/10/15/20/25 year Automatic Renewal /Re-entry Convertible to permanent plan Term To 100 With values/without values Whole Life Limited Pay Life Universal Life

27 Life Insurance A Gift That lasts forever Single Premium Joint Life, Second Death Vanishing Premiums Universal Life Adjustable Life Term 100 Whole Life

28 Policy Structures Individual Life Joint Life Last to Die First To Die (Mortgage Insurance) Premiums to 1st Death Premiums to 2nd Death

29 FEMALE 55 NON SMOKER $1,000,000 A 10 Year Term Renewable to Age 80 Convertible to Age 81 B Term to Age 100 C Guaranteed 10 Payments D Universal Life 5 3% E Universal Life 1 3% Age 55 - $2,110 $10,834 $26,155 $53,034 $250,313 Age 65 - $12,535 Age 75 - $4,7691 No Cash Values No Cash Values Cash Values Fund Value Fund Value Age 65 - $ 94,320 Age 75 - $333,180 Age 85 - $523,250 Age 65 - $209,372 Age 75 - $170,336 Age 85 - $124,688 Age 65 - $209,372 Age 75 - $170,336 Age 85 - $124,688

30 MALE 55 NON SMOKER $1,000,000 A 10 Year Term Renewable to Age 80 Convertible to Age 81 B Term to Age 100 C Guaranteed 10 Payments D Universal Life 5 3% E Universal Life 1 3% Age 55 - $2,995 $14,033 $32,605 $67,350 $318,332 Age 65 - $19,950 Age 75 - $63,025 No Cash Values No Cash Values Cash Values Fund Value Fund Value Age 65 - $122,450 Age 75 - $406,200 Age 85 - $590,930 Age 65 - $265,855 Age 75 - $216,263 Age 85 - $158,260 Age 65 - $265,855 Age 75 - $216,263 Age 85 - $158,260

31 FEMALE 55, MALE 55 NON SMOKER $1,000,000 A Male 55 Term to Age 100 B Female 55 Term to Age 100 C Joint Life Female 55/Male 55 Last to Die Premiums Until 1 st Death D Joint Life Female 55/Male 55 Last to Die Premiums Until 2nd Death $14,033 $10,834 $10,570 $6,515 No Cash Values No Cash Values No Cash Values No Cash Values

32 SINGLE LIFE INSURANCE FACE AMOUNT $100,000 Level Guaranteed Premium For Life No Cash Value Male Age Non-Smoker s Rates Smoker s Rates 55 $1,527 $2, $2,106 $3, $2,974 $4, $4,065 $5, $5,540 $6, $9,066 $10, $14,342 $14,813 *Rates effective May 2008 *Rates subject to change *Rates assume standard insurability E. & O.E.

33 SINGLE LIFE INSURANCE FACE AMOUNT $100,000 Level Guaranteed Premium For Life No Cash Value Female Age Non-Smoker s Rates Smoker s Rates 55 $1,199 $1, $1,695 $2, $2,372 $2, $3,320 $3, $4,540 $5, $6,588 $7, $10,508 $10,508 *Rates effective May 2008 *Rates subject to change *Rates assume standard insurability E. & O.E.

34 JOINT LIFE INSURANCE FACE AMOUNT $100,000 Level Guaranteed Premium For Life Benefit Payable on Second Death Premiums Payable Until Second Death No Cash Value Male/Female Age Non-Smoker s Rates Smoker s Rates 55/52 $648 $ /57 $938 $1,330 65/62 $1,334 $1,677 70/67 $1,783 $2,148 75/72 $2,430 $2,951 80/77 $3,237 $3,949 85/82 $4,387 $5,283 *Rates effective May 2008 *Rates subject to change *Rates assume standard insurability E. & O.E.

35 Gift of Life Insurance Existing policy New policy Charity: Owner and Beneficiary Charity: Direct Beneficiary Charity: Beneficiary through estate

36 DONOR OWNED POLICY For deaths after 1988 a donation tax credit extends to the individual immediately before death for direct beneficiary donations on: Group insurance Life insurance policies RRSP s RRIF s Subsection 118.1(5.1) Subsection 118.1(5.3) Avoids probate fees (EAT), estate creditors, estate litigation and administrative issues.

37 TRADITIONAL GIVING STRUCTURES FOR LIFE INSURANCE CONTRACTS OWNER BENEFICARY TAX BENEFIT (LIFETIME) TAXPAYER ESTATE (BEQUEST IN WILL) NONE CHARITY CHARITY PREMIUM DONATION TAX BENEFIT (AT DEATH) DEATH BENEFIT DONATION NONE TAXPAYER CHARITY NONE DEATH BENEFIT DONATION

38 EXISTING POLICY Ownership transferred by absolute assignment Charity appoints itself as beneficiary Donor entitled to receipt for cash surrender value minus any policy loans, plus dividends and interest which are assigned Transfer considered disposition income inclusion for donor. Subsection 148(1) Policy not capital property, therefore subject to 75 percent income limitation.

39 As a matter of tax Charitable donation of life insurance CRA s new position The CRA has decided to change its position regarding gifts of existing life insurance policies. Until now, the CRA has taken the position set out in Interpretation Bulletin IT-244R3 Gifts by Individuals of Life Insurance Policies as Charitable Donations. It states that the gift of an existing life insurance policy takes place at the policy s cash surrender value (CSV). Several prior statements reinforced this point of view. The most recent of these prior comments involved the context of a T-100 policy with zero CSV where the policy had been owned for many years and, by implication, would likely have a fair market value that exceeded its CSV (See AAMOT entitled Valuing a policy donated to charity from 2006). At the APFF Conference, on October 5, 2007, the CRA announced a change in position in response to Question 1 of the Roundtable dealing with the taxation of financial strategies and financial instruments. An unofficial translation of the statement it made is as follows: In accordance with the legislative proposals contained in Bill C-33 (now Bill C-10), total charitable gifts are a function of the eligible amount of a gift. Under proposed paragraph 248(31) ITA the eligible amount of a gift is the amount by which the fair market value of the property that is the subject matter of the gift exceeds the amount of the advantage, if any, in respect of the gift.

40 The CRA referred to the factors listed in Information Circular IC-89-3 relating to establishing the value of a life insurance policy when held by a corporation as among the factors that should be considered in establishing a policy s fair market value. (For a full discussion of these factors see Tax Topic entitled Transfer of an Insurance Policy Involving Corporations and a Shareholder or Employee ). The CRA also confirmed that for purposes of calculating the donor s policy gain under 148(7) of the Act in respect of the gift, the term value found in 148(9) of the Act would be applicable. This term is defined as a policy s CSV or, if there is none, then zero. So, there is a mismatch between the two provisions. Any policy gain is calculated using CSV, if any, and the donation receipt is calculated using fair market value. This opens the door to some positive tax consequences to a donor, particularly in situations where a policy may have no CSV but, due to other factors like the health of the individual or the duration of the policy, may be quite valuable. However, as in all questions of value, seeking independent advice (in this case actuarial) to establish a policy s fair market value for these purposes would be prudent. This document is protected by copyright. Reproduction is prohibited without Manulife's written permission. November 2007

41 WEALTH REPLACEMENT WITH LIFE INSURANCE Balancing philanthropy and duty to family Insurance resolves conflict, encourages life plan Necessary tax-free capital guaranteed Insurance replaces donated asset Insurance retrieves donated asset May be self financing (premium paid by tax savings)

42 NOTICE TO READER The Estate Preservation Process is Trademark Protected by Al G. Brown and Associates. The Estate Preservation Process contains proprietary information. You are permitted to discuss the contents with your financial advisors. This document is confidential and may not be copied without the agreement of Al G. Brown and Associates

43 The Estate Preservation Process

44 The Goal The goal of The Estate Preservation Process is to PROTECT and PRESERVE your estate value and to CREATE an everlasting legacy for your family and your favorite charities

45 THE ESTATE PRESERVATION PROCESS 1. The Asset Enhancement and Preservation Plan 2. The Immediate Financing Arrangement 3. The Intergenerational Asset Transfer Plan 4. The Charitable Asset Transfer Plan 5. The Charitable Foundation Multiplier Plan 6. The Corporate Charitable Foundation Multiplier Plan 7. The Charitable RRIF Replacement Plan 8. The Insured Retirement Plan 9. The Corporate Insured Retirement Plan Manulife T

46 THE CHARITABLE ASSET TRANSFER PLAN Module 4

47 The Charitable Asset Transfer Plan The goal of The Charitable Asset Transfer Plan is to assist you in making a significant contribution to your own charitable foundation or to a public foundation. In doing so, you will also be protecting your estate from the eroding affects of inflation and taxation.

48 The Plan The Charitable Asset Transfer Plan utilizes the special tax status of a Universal Life Insurance policy in conjunction with amendments in the Canadian Income Tax Act. Together, a win/win result is achieved for you, your estate, your foundation or your favorite charity or charities. The Charitable Asset Transfer Plan will benefit both your favorite charity and your estate.

49 The Charitable Asset Transfer Plan One of the major advantages of The Charitable Asset Transfer Plan is that it can be designed to integrate with your overall estate plan. With input from your accountant, lawyer and estate planner, The Charitable Asset Transfer Plan will be tailor-designed to meet your own needs and goals. It will reduce your taxes and increase your estate.

50 The Charitable Asset Transfer Plan Options 1. Deferred tax credit used to offset taxes on death. 2. Current tax credit used on an annual basis to offset annual taxation. 3. Split dollar scenario donation and tax deferred accumulation of income. 4. Replacement of asset donated to a charity.

51 The Charitable Asset Transfer Plan Guaranteed Investment Mutual Fund Bank Balance Certificate Stocks Bonds $ Cost of Insurance Guaranteed for Life Tax Sheltered Investment Interest Tax Sheltered Investment Option linked to Guaranteed Investment Certificate Stock Funds Bond Funds Mutual Fund At Death, Investment and Insurance paid out Tax Free to charity/beneficiary

52 The Charitable Asset Transfer Plan Mr. and Mrs. Jack Jones May 2008 Donation $200,000 Before Charitable Tax Credit End of Year Assuming 3% Interest After Tax Internal Rate of Return Assuming 6% Interest After Tax Internal Rate of Return 5 $1,175, % $1,206, % 10 $1,157, % $1,229, % 15 $1,136, % $1,263, % 20 $1,112, % $1,312, % 25 $1,085, % $1,393, % 30 $1,051, % $1,512, % 35 $1,008, % $1,684, % The Internal Rate of Return specifies the actual after tax rate of return earned on the initial investment at selected years based on the total payout value of the contract.

53 End of Year The Charitable Asset Transfer Plan for Mr. and Mrs. Jack Jones May 2008 Donation $200,000 After Charitable Tax Credit * Actual cost of Donation $107,228 Assuming 3% Interest After Tax Internal Rate of Return Assuming 6% Interest After Tax Internal Rate of Return 5 $1,175, % $1,206, % 10 $1,157, % $1,229, % 15 $1,136, % $1,263, % 20 $1,112, % $1,312, % 25 $ 1,085, % $ 1,393, % 30 $1,051, % $1,512, % 35 $1,008, % $1,684, % The Internal Rate of Return specifies the actual after tax rate of return earned on the initial investment at selected years based on the total payout value of the contract. *Assuming maximum rate of taxation 46.41%

54 The Goal Through The Charitable Asset Transfer plan you will create a significant legacy for your foundation or designated charity. You will offset taxes otherwise payable. You will increase the ultimate value of your estate while making a significant charitable gift.

55 THE ESTATE PRESERVATION PROCESS Preserve, Protect and Increase your Estate while Creating an Everlasting Legacy

56 Creative Uses of your Registered Retirement Savings CASE STUDY Sam and Rebecca Wantogive RRSP value $250,000 each, $500,000 total Transfer funds tax free to joint life annuities or level RRIF at age 71 At age 72 must begin to receive income Annuity or RRIF income $36,000 annually Net proceeds after tax $19,000 (46%) Annuity continues for joint life, ceases on death or minimum 15 year guarantee or RRIF continues until exhausted

57 Creative Uses of your Registered Retirement Savings Do nothing OPTION A Annuity continues for as long as Sam or Rebecca live with 15 year minimum guarantee or RRIF until exhausted (Age 92 assuming 4% interest ) No charitable gift or legacy After guarantee period or after exhaustion of RRIF there is no residual value to estate or beneficiary

58 The Charitable Retirement Enhancement Plan OPTION B Purchase Joint Term Life insurance contract for $1,000,000 Annual cost $19,000 Premiums funded by net proceeds of annuity $19,000 (assumes 46% Tax Rate) Designate $500,000 of proceeds to beneficiary or to insurance trust in estate. (Proceeds tax free and probate exempt) Designate $500,000 of proceeds to Jewish Federation of Greater Toronto Donation generates $500,000 charitable tax receipt to offset other income

59 Charitable Retirement Enhancement Plan Annuity Or RIFF ($500,000) Income $36,000 Annually Insurance $1,000,000 Cost $19,000 Annually Tax $17,000 Annually $500,000 $500,000 Insurance Trust Or Beneficiary (Family)

60 The Charitable RRIF Replacement Plan Option C At age 71 purchase RRIF with RRSP funds Income commences Age 72 $36,000 annually Net $19,000 (46% tax) Purchase $500,000 Joint Life Term policy $9,500 annually Designate Jewish Federation of Greater Toronto beneficiary for policy. Upon death of last survivor balance of RRIF is included in estate Subsection 146(8.8) Charitable gift will offset income inclusion in year of death or previous year.

61 Charitable RRIF Replacement Plan RRIF $500,000 Income $36,000 Annually $19,000 Tax $17,000 Annually $500,000 Insurance Cost $9,500 Annually $9,500 Spend On Vacation Somewhere warm

62 As my father planted for me so will I plant for my children... Talmud

63 The following organizations are among the beneficiaries of charitable endowment bequests as a result The Estate Preservation Process for our clients by Al G. Brown & Associates Associated Hebrew Schools of Toronto Baycrest Centre for Geriatric Care Baycrest Hospital Foundation Ben Gurion University Canadian Friends of Hebrew University Canadian Friends of Jerusalem College of Technology Canadian Opera Foundation Canadian Shaarei Tzedec Hospital Foundation Eitz Chaim Schools Hospital for Sick Children Foundation Jewish Community Foundation of Greater Montreal Jewish Family & Child Service of Toronto

64 Cont d Jewish National Fund Mount Sinai Hospital Foundation Ner Israel Joseph Tanenbaum Yeshiva of Toronto Ner Israel Yeshiva College of Toronto Organization for Rehabilitation and Training of Canada Shaarei Shomayim Congregation Temple Sinai Foundation Toronto General Hospital Foundation Toronto Western Hospital Foundation United Israel Appeal United Jewish Welfare Fund of Metropolitan Toronto United Way of Greater Toronto University of Toronto

65 ADVANCED CHARITABLE ESTATE PLANNING Gifts of Private Company Shares Gifts of Capital (Land) Gifts of Securities Gifts of Retirement Savings Plans Gifts of Registered Retirement Income Plans or Annuities

66 Building The Team Philanthropist Donor Planned Giving Associate Life Insurance Advisor Accountant Lawyer

67 Next Steps Segment donors Target market based on segmentation Find a hero Design presentation Present concept Follow up

68 Questions?