Ways of Giving



Planned Giving Module

Ways to Give

March 13, 2008

Types of Gifts

1. Bequests

2. Annuities

3. Charitable Remainder Trusts

4. Life Insurance

5. Other Gifts – Chart from Planned Giving for Canadians

Bequests

Overview

• In Canada, bequests represent 4x the amount received from a combination of life insurance, charitable remainder trusts, residual interest gifts, and gift annuities

• More than 75% of bequests received were unknown to the recipients

➢ Bequests tend to be larger when the charity has prior knowledge

• When a person dies, all property is transferred to others

➢ A will does not cover the following:

▪ Real estate and bank accounts in joint tenancy

▪ Proceeds from life insurance and retirement plans payable to named beneficiaries

▪ Assets held in trust

▪ Shares held subject to shareholders’ agreement

➢ A will covers the following:

▪ Individually owned property

▪ Tenancies in common

▪ Proceeds from life insurance and retirement plans payable to estate

▪ Property payable to estate because of death

▪ Income due at time of death

• Reasons people hesitate to make a will:

➢ Don’t want to confront their own mortality

➢ Dislike dividing up property, even on paper

➢ Fear that a will is expensive

• A will can be made outdated by a number of events, including:

➢ Change in marital status

➢ New children or grandchildren

➢ Move to another province

➢ Change in financial situation (ie/ sale of business)

➢ Death of a beneficiary named in the will

➢ Named executor no longer able to serve

• Ways to amend a will without writing a new one:

➢ Add a codicil – a amending document that changes or deletes existing provisions

• Keep a list, referenced in the will, itemizing property with the name of the person to receive it

Types of Bequests

• Specific Bequests

➢ Gift of a particular property or a stated sum of money

• Residual Bequests

➢ A fit of all or a fraction of whatever remains after all debts, taxes, administrative expenses and specific bequests have been paid

• Contingent Bequests

➢ Only takes effect if the primary intention cannot be met (ie/ primary beneficiary doesn’t survive the testator)

Tax Implications

• Donation receipt may be issued for the amount of cash or fair market value of the property

➢ May result in a tax credit on the donor’s final income tax return

• Maximum amount of the donation that can be claimed for credit on the final return is 100%

➢ If there’s excess, it can be carried back by one year

Bequest Donors

• Only 21.2% of donors stated that tax and financial planning issues caused them to include a charitable bequest in their wills

• Best prospects are as follows:

➢ Unmarried individuals or married couples without children, over age 60

➢ National Committee on Planned Giving reported that 30% of people who included a charitable bequest in their will were in the age range of 45-59

➢ More women than men make bequests

• Giving history is not a very reliable predictor of bequest gifts

Establishing a Bequest Program

1. Understand fundamental estate planning concepts

2. Have your charity’s legal counsel draft or approve sample bequest language

3. Compile a list of everyone who is known to have made a testamentary provision for the charity

4. Create a filing system for bequest prospects and donors

a. Bequest Prospect

b. Bequest Donor

c. Pending Estate

d. Settled Estate

5. Adopt a policy for recognizing donors of bequests and other future gifts

6. Develop and implement a plan for encouraging bequests (ie/ written materials, testimonials, targeted mailings, wills seminar, etc.)

7. Follow up on notifications and inquiries

8. Keep a record of your progress in securing bequest provisions

9. Keep a record of realized bequests

Estate Administration

• The executor will send a notice to all beneficiaries named in the will during probate

• Development staff should send a letter acknowledging receipt of the notice

➢ As a residual beneficiary, the charity is entitled to the copy of the will

➢ If receiving a specified amount or property, the charity can only view the portion of the will addressing this topic

• Problems that could arise during estate administration:

➢ Charity is inadvertently misidentified

➢ Charity would have difficulty using bequest for stated purpose

➢ Will is challenged

➢ Problems with estate administration (ie/ mismanagement of estate, etc.)

➢ Charity not kept informed about administration of the estate

Definitions

Probate - Court supervised process of validating the will

Intestate - A person who dies without a will is said to die intestate

Testator - Person with a valid will

Testamentary Gift - Any gift made under a will

Inter vivos - A gift made during life

Executor - Person named in the will to administer the estate. In Quebec, this is called the liquidator and in Ontario, called the Estate Trustee. This person is entitled to receive compensation. In general, neither charities nor their staff should agree to serve as an executor.

Annuities

Overview

• Gift Annuity is an arrangement under which a donor transfers a certain sum to a charity in exchange for fixed, guaranteed payments for the life of the donor and/or other person or for a term of years.

• Two types of annuities:

➢ Self Insure

▪ The charity invests the donated assets and use earnings on the assets (and capital if necessary) to make annuity payments

▪ Whatever remains of the original donated assets is used for charitable purposes

▪ If donated assets are exhausted before the donor’s death, the charity must make annuity payments out of its general funds

➢ Reinsured or Gift Plus Annuity

▪ The charity splits the gift and purchases a commercial annuity.

▪ Whatever remains of the original gift after the purchase is used for charitable purposes

▪ The insurance company makes the annuity payments and is liable for payments above and beyond the original purchase

• Jurisdiction is under provincial superintendents

➢ The Canadian Charitable Annuity Association (CCAA) work with regulators to clarify regulatory environment

• Foundation shave been unable to offer gift annuities

➢ An annuity is considered a debt obligation, which foundations cannot incur

➢ Two ways of getting around this:

▪ Foundation works with the charity (ie/ the agreement is between the hospital and the donor)

▪ Contract would be between the donor and the insurance company – the foundation is not party to the agreement. A problem because it takes the charity out of the relationship.

Donation Receipt

• Two methods of determining receipt value

➢ Before December 21, 2002, the receipt is based on the amount over the total annuity payments

➢ After December 20, 2002, the receipt is based on the difference between the contribution and the total cost of the annuity.

▪ Challenge in that the receipt value may differ because each insurance company may provide a different quote for the same situation

• QUALGA – Quotation Algorithm of Gift Annuities

➢ Developed by the CCAA that calculates the value of an annuity based on the Annuity 2000 Tables

➢ Helps establish more consistent valuations

• Most gift annuities are funded with cash, but with changes in federal legislation, gifts of appreciated listed securities could provide a higher return

Administration of Annuities

1. Present financial illustration

2. Advise prospect to discuss plans with financial or legal adviser

3. Prepare gift annuity agreement and have prospect sign it

4. Have the donor transfer assets

5. Depending on situation:

a. If self insuring, invest contributed assets

b. If reinsuring, have insurance agent select a highly rated company from which to purchase annuity

• Whatever is leftover, invest in charity or in endowment

6. Send donation receipt

7. Make payments to annuitant or track payments

Annuity Donors

• Gift annuities appeal to charity’s oldest donors

➢ Average person who contributed is 78

• Appeal is primarily receiving ongoing payments that are substantially tax free

• Annuities are within the range of possibility for many donors because the minimum contribution does not usually exceed $10,000

Definitions

Annuitants - Individuals who receive annuity payments, also known as beneficiaries

CCAA - Canadian Charitable Annuity Association; work with regulators to clarify regulatory environment

Charitable Remainder Trusts

Overview

• Charitable remainder trusts are still relatively uncommon in Canada

• Generally a charitable trust is any trust where all portion of the remaining trust assets are distributed to a charity at the termination of the trust

• A trust generally includes the following parties:

➢ Settlor – person who establishes the trust

➢ Trustee – person or institution that holds and invests the property transferred by the settlor

➢ Income Beneficiary(ies) - person(s) entitled to the earnings of the trust

➢ Remainder Beneficiary(ies) – person(s) or institution(s) that receive the remaining principal after the trust terminates

• A trust can be:

➢ Inter vivos – established during lifetime of the settlor

➢ Testamentary – established at the death of the testator

➢ Revocable – settlor retains the right to amend or terminate trust

➢ Irrevocable – once trust is established, it can’t be terminated

Donation Receipts

• Trusts that do not qualify for a donation receipt include:

➢ Testamentary Spousal Trusts

▪ Provides for the testator’s surviving spouse

▪ Charity can issue the receipt after the spouse has passed away and the donations have been issued from the trust, unless the distribution was mandated by the testator

• A Testamentary Trust can qualify for a donation receipt if it:

➢ Irrevocably commits the trust remainder to a charity

➢ Provides only the net income to the beneficiaries

➢ Permits no encroachment on the capital

• Charitable Remainder Trusts that qualify for a receipt must meet the following conditions:

➢ The transfer is irrevocable

➢ Property must vest with the recipient organization at the time of transfer

➢ Value of the residual interest given to charity must be ascertainable

➢ No encroachment on the capital – fees must be paid out of the interest, not capital

➢ Donation receipt is calculated by: P = V

(1 +i)n

• P = Present Value

• V = Fair market value of the property transferred to the trust

• i = appropriate discount rate (some charities use prime rate)

• n = life expectancy of income beneficiaries or number of years the trust will operate

Administration of Charitable Remainder Trusts

• The trustee of a charitable remainder trust is a trust company, the charity, an individual selected by the donor or even the donor

• Some universities or large charities are sometimes willing to act as trustee, but should be entered into with caution

Life Insurance

Overview

• Next to bequests, life insurance is the most common deferred gift received by Canadian charities

• Types of Life Insurance:

➢ Term Insurance

▪ Written for a specific period and pays death benefits if insured dies within the term

▪ No cash value is built up

▪ Cost of insurance increases over time, usually every 5-10 years

➢ Term-to-100-Insurance

▪ Protection continues through to the insured’s entire lifetime and premium remains level

▪ No cash value

➢ Whole Life Insurance

▪ Protection until insured dies and only lapses because of non-payment of premiums

▪ Builds up cash value

▪ Premiums remain level

➢ Universal Life Insurance

▪ Provides insurance protection for life and a tax-deferred investment account managed by the policy owner

▪ Cash value is not guaranteed – depends on how it’s invested

▪ Policy owner has flexibility on the amount of premiums paid

Types of Life Insurance Gifts

1. Transfer ownership of a paid up policy

|Value to Charity |Tax Benefits |Prospects |

|Equivalent to an outright gift of cash |Donation receipt for the total cash |Individuals who purchased policies to provide |

|Charity can either: |surrender value |protection for children, but children have |

|surrender policy for cash | |grown up |

|retain policy and collect death benefits | | |

2. Transfer ownership of an existing policy on which premiums are still owed

|Value to Charity |Tax Benefits |Prospects |

|If policy has been in force for 2+ years, |Donation receipt for the total cash |Individuals who feel that they have enough |

|it will have cash value |surrender value and subsequent premium |assets and other investments to meet family and|

|Assuming donor keeps paying premiums, cash|payments |business needs |

|value goes up and charity will collect |Charity needs to find mechanism to | |

|death benefit if it retains the policy |track that donor is paying premiums | |

3. Purchase a new policy, initially naming the charity as owner

|Value to Charity |Tax Benefits |Prospects |

|No initial cash value |Donor entitled to receipt for premiums |Individuals who want to make a major gift, but |

|Only has death benefit, if donor keeps |paid to insurance company |don’t have capital to outlay |

|paying premiums | | |

4. Name the charity as primary beneficiary of a policy

|Value to Charity |Tax Benefits |Prospects |

|As long as owner keeps policy in force and|Receipt is issued to the estate upon |Individuals without heirs or have provided |

|doesn’t change beneficiary, charity will |receiving death benefit |sufficiently for family and want access to the |

|receive the death benefit | |cash value of the asset if they need it |

5. Name the charity as a co-beneficiary to share the death benefits with others

|Value to Charity |Tax Benefits |Prospects |

|Charity may receive death benefit if |Donation receipt is issued for amount |Individuals who may have other charitable |

|policy is kept in force |of death proceeds received |commitments or family responsibilities |

6. Name the charity as a contingent beneficiary to receive the death benefits only if the primary beneficiary(ies) is (are) not living

|Value to Charity |Tax Benefits |Prospects |

|Charity has a remote chance of receiving a|Donation receipt is issued for amount |Individuals who may want to secure other |

|benefit |of death proceeds received |commitments, but are philanthropic |

Advantages and Disadvantages of Life Insurance Programs

• Advantages:

➢ Life insurance gifts are relatively easy to administer

▪ Just need to monitor that premiums are being paid

➢ Donors generally understand life insurance

➢ When charity own policy, it’s more secure than a bequest because it’s irrevocable

➢ Highly leveraged because it produces a greater amount than originally invested

➢ As policies build cash value, charities have a greater cash reserve

➢ Some donors will die prematurely, resulting in an earlier distribution to charity

➢ Donors feel like they’re major donors

• Disadvantages:

➢ May take away from charities annual fund bottom line

➢ Participants tend to be younger, which means longer timeline for realization of gift

➢ Present value may be a small fraction of the face value

➢ Some donor seek recognition based on face value – may be a disincentive to make major outright gifts

➢ Donors may not continue to make premium payments, forcing charities to decide whether it should continue to pay them or not

➢ Premium for a mass-marketed policy is higher than premium a healthy donor would pay for a policy with same coverage, but with normal medical qualification

➢ If charity does business with particular insurance company or agent, may alienate other agents within its constituency

Quiz

1. Which of the following assets are not covered by a will?

a. Individually owned property

b. Proceeds from life insurance and retirement plans payable to estates

c. Real estate and bank accounts in joint tenancy

d. Tenancies in common

e. None of the above

2. Which planned gift vehicle would be most attractive to a charity’s oldest donors?

a. Bequests

b. Life Insurance

c. Charitable Remainder Trusts

d. Annuities

e. All of the above

3. Which of the following is not a criteria for establishing a Planned Giving Program?

a. Favourable federal government legislation

b. Charity is well established and is perceived to have a long term future

c. A constituency of more than 1,000 over 50 years old

d. A committed board

e. Several hundred donors who give over $100 each year

4. Which of the following planned gifts are revocable?

a. A fully paid up life insurance policy that has had its ownership transferred to the charity

b. A residual bequest

c. A life insurance policy that has named the charity as primary beneficiary

d. B and C

e. Only B

5. What is the minimum percentage that a charity must spend of its investment assets for charitable purposes?

a. 4%

b. 5%

c. 80%

d. 50%

e. 3.5%

6. Which of the following is not a disadvantage of life insurance programs?

a. Present value may be a small fraction of the face value

b. Requires the charity to work with insurance companies

c. May be a disincentive to make major outright gifts

d. Donors may not continue to make premium payments, forcing the charity to decide whether to continue paying them or not

e. May take prospects away from charities annual fund programs

7. Name the three types of bequests:

a.

b.

c.

8. What types of organization cannot accept annuities?

a. Foundations

b. Universities

c. Religious organizations

d. Hospitals

e. None of the above

9. Name two ways to integrate planned giving in the development office?

a.

b.

10. What does CAGP stand for?

a. Canadian Alliance for Gift Planning

b. Canada-American Gift Planning

c. Canadian Association of Gift Planners

d. Canadian Association for Gift Planning

e. Canadians Asking for Gifts Please

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Female donor, age 78, contributes $50,000 for a gift annuity. She will receive a guaranteed annual annuity of $3,700, paid in quarterly instalments of $925 for the balance of her life. The cost of purchasing from an insurance company an annuity paying to her $3,700 per year for life is $36,000.

Before December 21, 2002

Amount contributed $50,000

Life expectancy 11.9 years

Total expected return 44,030

($3,700 x 11.9)

Donation receipt 5,970

($50,000 – 44,030)

Tax credit 2,770

($5,970 x 46.4%)

After December 20, 2002:

Amount contributed $50,000

Cost of annuity 36,000

Donation receipt 14,000

($50,000 – 36,000)

Tax credit $6,496

($14,000 x 46.4%)

The annual annuity paid by the charity and the cost of purchasing the annuity from an insurance company will vary depending on the rate a given charity offers and the premium cost of the annuity at a given time.

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