Last weekend’s column focused on the possibility of reducing the tax burden of an inheritance through testamentary bequests. But it is also possible to benefit from major donations made during your lifetime. “Good charity begins at home” is a saying that also applies curiously well to the field of philanthropy. So, if your income is significant and your current effective tax rate is very high, you should probably consider planned giving, which will allow you to take advantage of the gift credit during your lifetime.
If your family has a high net worth, you most likely have the flexibility to take on this big-hearted effort. Different strategies are possible. Let’s compare the characteristics that distinguish the charitable remainder trust and the charitable annuity.
Charitable annuity
Purchasing a charitable annuity combines the possibility of guaranteeing income over a fixed or lifetime period – with guarantee, depending on the options – while allowing the organization chosen by you to immediately benefit from your invested capital. How a similar annuity works is very simple: you make a lump sum donation in exchange for which you receive an annuity in return. This will be paid by the organization, if it manages its own pension, or an insurer.
The amount eligible for the credit is calculated by the difference between the market value of the donation and the cost of the annuity purchased. It is this amount which is made immediately available to serve the needs of the cause or foundation selected.
The main disadvantage of this form of planned giving is the fact that it is an irrevocable gift. A minimum precaution will be to evaluate the possibilities of joint and survivor annuities for the spouse, in order to check whether they are required in your personal situation.
On the other hand, if your financial situation is enviable and the imposition of an annuity is neither desired nor required in your retirement scenarios, it is possible to buy the annuity and take the concept further by subscribing a life insurance policy of which the charity will become the owner and beneficiary. He will thus be able to benefit, each year, from the credit on the amount of the premium paid with the annuity.
Although this type of planned gift is accessible without requiring millions, your financial needs should first be analyzed based on conservative retirement scenarios. In clear terms, the purchase of such an annuity should be made from an amount of capital available once your needs have been established based on your probabilities of surviving your life expectancy.
Charitable remainder trust
Setting up such a trust allows you to benefit from the tax breaks of the charitable donation credit and guarantee a living income for the donor. The organization or foundation benefits just as much, with the immediate guarantee of ownership of the assets transferred to said trust. The main advantage is to benefit from the credit during your lifetime. Once the trust is established, the value of the gift is established using the trust’s residual interest, which is calculated using the market value of the trust assets and the donor’s life expectancy.
This solution makes it possible to avoid disputes from the estate at the time of death, but above all to maintain full enjoyment of your property and the management of your assets during your lifetime. For example, you could transfer part of your securities portfolio there, from which you could benefit from the income generated. You will understand that this strategy is recommended for major donations, given the additional administrative and incorporation costs associated with it. This is an option to consider, in my opinion, if your donation exceeds $250,000.
The charitable trust is a strategy that must be rigorously analyzed beforehand, for the simple reason that the capital which will initially be invested there can never be withdrawn. In addition, the choice of the organization or foundation as beneficiary of the trust cannot be revoked. You will benefit from being well supported by your team of financial planners and tax and legal advisors to implement it.
In short, the annuity represents a strategy accessible to a greater number of donors, while the trust allows you to enjoy significant assets during your lifetime while having a significant philanthropic impact in the long term.
Financial planner, Sandy Lachapelle is president of the independent firm Lachapelle Intelligent Finances.