Example: The Gift that Keeps on Giving
Assume you are considering making a charitable gift of $1 million. If you made that gift today, you would receive an income tax credit for this amount and receive a refund of $500,000, leaving a net cost of $500,000.
You could also just make a gift today of $250,000 and buy a prescribed life annuity with the remaining $750,000. With the annual payments from the annuity, you could fund a permanent joint life insurance policy on the lives of yourself and your spouse for a much larger amount. The charity would then benefit from this if gifted at second death. This is how it would work in your case:
|
Step |
Impact to You |
Benefits to Charity |
|
Receive tax refund of $125,0001 | Immediate gift of $250,000 |
|
Receive annual after-tax payments of $40,000 for life2 | N/A |
|
Life insurance coverage with growing estate benefit and growing cash value. | N/A |
|
Receive annual tax refunds of $20,000. | Ongoing annual gifts of $40,000 from year 16 until both of you have deceased. |
|
Estate receives a tax refund of $850,000. | Charity receives a final gift of $1.7 million. |
If we assume you both pass away at age 90, under this strategy you will have made gifts of $2,550,000 throughout your remaining lifetime rather than $1,000,000 today. Your net cost would actually be a gain of $275,000. This doesn’t seem possible. One reason is this analysis doesn’t take into account the time value of money. If we discount all cash flows at 2.5% after-tax, it breaks down like this:
|
Net Cost of Your Gift |
Present Value @ 2.5% |
|
| Initial one-time donation |
$1,000,000 |
$1,000,000 |
| Initial tax refund |
$125,000 |
$125,000 |
| Tax refunds from years 16-30 |
$300,000 |
$175,253 |
| Tax refund on insurance estate benefit |
$850,000 |
$415,362 |
| Total cost |
($275,000) |
$284,385 |
Let’s see how this plays out for the charity.
|
Gift to Charity |
Present Value @ 2.5% |
|
| Initial one-time gift |
$250,000 |
$250,000 |
| Annual gifts from years 16-30 |
$600,000 |
$350,506 |
| Gift of insurance estate benefit |
$1,700,000 |
$830,724 |
| Total Charitable Gift |
$2,550,000 |
$1,431,230 |
In summary, this strategy comes with a lower net cost to you and a larger gift to the charity.
[1]2015 combined Federal and Ontario Tax Brackets including Surtaxes at taxable income of $220,000 is 49.53% rounded to 50% for this example
2This assumes joint a joint and survivor life annuity for a male aged 71 and a female aged 61. Actual amounts will vary.
3This assumes a joint last-to-die Sun Par Protector policy which would be fully funded after 15 years at the current dividend interest rate less 1.0%.
4This assumes the current dividend interest rate less 1.0% and a claim in year 30.