Even after we’ve reached the point of financial independence—when we’ve accumulated sufficient wealth to cover our family’s needs for the rest of our lives—we may still practice smart money management. We may steward our wealth so as to maximize returns while minimizing risk as well as fees and taxes. That’s how we got here; why change now?
People tend to be less conscientious, however, when it comes to giving wealth away. We’ll respond, often generously, when a person or charity we know and trust makes the ask. But we don’t necessarily think through how to maximize the impact of our donations. The fact of the matter is how you give can be just as important to the outcome as how much you give, says Ron Haik, a senior financial advisor with Nicola Wealth in Toronto.
Would you believe it could be possible to contribute $100,000 to a charity of your choice at a net cost to you of less than $10,000? Residents of Ontario can, Haik insists, but before we get into exactly how, you need a better understanding of giving strategically—both now and after your passing.
Consider that, when you die, there will be three possible beneficiaries of your estate: your family, your designated charities and government. If you could choose two of the three to receive all your wealth, what would they be? Virtually no one chooses government.
As an old Morgan Stanley slogan goes, “You must pay taxes. But there’s no law that says you gotta leave a tip.”
CUTTING THE TAXMAN’S TAKE
So how can you keep from leaving money on the table? One way is the strategic use of life insurance. Consider two high earners, Mr. Brown and Ms. Smith. Both are 50 years old, with earnings of $750,000 per year. Mr. Brown takes his annual savings of $250,000 and plows it into a corporate investment account. Ms. Smith splits hers between investments and a participating whole life insurance policy.
Now consider what happens should either of these individuals die upon retirement at age 70. The corporate assets are subject to multiple levels of taxation paid both by the estate and the beneficiaries. But Ms. Smith’s estate receives a tax-efficient death benefit that brings her beneficiaries some five times what Mr. Brown left behind.
This is not to say every high net-worth individual should follow Ms. Smith’s example. Each person will have their own priorities and they won’t all be about the bottom line. That’s why it’s important to work with your advisor to develop an integrated financial plan that incorporates not only retirement saving but tax planning, succession planning for your business if you have one, estate planning and charitable giving, so that “all of these things are moving in tandem,” Haik says.
There are multiple ways you can leave a gift to a family member or charity. You can leave a bequest in your will for a fixed amount or a percentage of the estate to be given to a particular beneficiary. Or you can list a charity directly as the beneficiary of your RRSP or RRIF account or life insurance policy.
If the charities you support are unaccustomed to non-cash donations, or you just want more of a say in how the monies get spent, consider creating a private charitable foundation. Any registered charity can set up a donor-advised fund for you with guidelines of your choosing. Some specialize in this. Nicola Wealth offers clients the opportunity to set up their own fund within its Private Giving Foundation at no cost to either the donor or the recipients—they absorb the administration costs. It’s all part of the firm’s belief in doing well to do good, and vice versa.
DONATIONS IN KIND
Another way to reduce the tax take is to give assets in kind rather than cash. Say you bought stocks years ago for $10,000 that are now worth $50,000. If you sell them to raise the cash for your donation, the sum will be whittled down by the capital-gains tax you must pay. But if you give the securities themselves, there’s no capital gain, no tax paid and you still get a tax receipt for the full $50,000 amount. “This is a better outcome from the client’s perspective and from the charity’s perspective,” Haik says.
This brings us back to the challenge of making a donation for a certain dollar amount at a fraction of the cost. The strategy involves buying flow-through shares in a junior mining or energy company that takes advantage of the Canadian Exploration Expense tax credit from the federal government as well as a similar incentive from the Ontario government. The donor then donates shares to a charity, which promptly sells them to a pre-arranged third party. The charity gets the full value of the shares while the donor gets to claim investment tax credits in addition to charitable donation credits that reduce their taxes on other income. A purchase of about $422,000 of flow-through shares ends up costing the donor $9,950 after all tax credits and cash received back upon the sale of those shares. This net amount includes a donation to the charity of $100,000.
This arrangement will not suit every donor, but it gives you a glimpse of the possibilities when you combine the expertise of your accountant and financial advisor to harmonize your financial plan and leverage your giving to the greatest effect. You’ve worked too hard to let your legacy get diminished now and after you’re gone.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.