the seven faces of philanthropy by tim cestnick
DESCRIPTION
This presentation shares insights into different motivations for giving, and how these decisions impact when and how donors should give.TRANSCRIPT
July 8, 2014
Tim J. Cestnick FCA, CPA, CFP , TEP
The Seven Faces of Philanthropy
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Where We’re Going
• Real wealth is broader than you think
• Focus time on social capital
• The Seven Faces of Philanthropy
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Real wealth is broader than you think.
Financial Capital
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Six Types of Capital
Financial Capital
Human Capital
Structural Capital
Spiritual Capital Family
Capital Social Capital
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Recognize the hierarchy of planning.
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Hierarchy of Objectives
Financial Independence
SocialCapital Legacy
FamilyLegacy
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2
3
ExcessWealth
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Focus time on social capital.
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CharitableGifts
Self Directed
PersonalCapital
Tax Social Capital
GovernmentDirected
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The Seven Faces of Philanthropy
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Communitarians Doing good makes sense
The Devout Doing good is God’s will
Investors Doing good is good business
Socialites Doing good is fun
Repayers Doing good in return
Altruists Doing good feels right
Dynasts Doing good is a family tradition
Source: Russ Alan Prince, Prince & Associates
Seven Faces of Philanthropy
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So what?
Understanding your faces of philanthropy – that is, understanding WHY you give –will help in decisions like:• Who should receive your gifts?• What should you give?• Where should you give from?• When should you give?• How should you give?
Seven Faces of Philanthropy
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• Jack is a successful business owner• The community in which he lives has
supported his business for many years and he wants to give back
• Jack wants his business to benefit from his decision to give
Faces: Communitarian, investorWho: The Community FoundationWhat: Cash giftsWhere: From his corporationWhen: Each yearHow: Making pledges, with recognition
Seven Faces of Philanthropy
Jack Sprat
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• Alice has a strong faith and attends a local church regularly; married to Allan
• For Alice, giving back reflects her faith and feels like the right thing to do; it makes her feel good
Faces: Devout, altruistWho: Local church and related ministriesWhat: Securities and cashWhere: From personal income and capitalWhen: Weekly and on deathHow: Making pledges, no recognition
Seven Faces of Philanthropy
Alice Wonder
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ALICE’S PRESCRIBED ANNUITY WITH GIFT
Use a prescribed annuity instead of GICs or similar interest‐bearing investments
Allows Alice to make a donation without affecting cash flow required for daily living
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Earns 6% before tax, and 3.24% after tax annually Married couple, and both spouses are age 60
ALICE’S PRESCRIBED ANNUITY WITH GIFT
$1,000,000 in interest‐bearing securities
$32,400 / year
(3.24% after taxes)
Alice &
Allan
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Alice uses $690,000 to purchase a joint life annuity Annuity provides a return of $49,000 per year, of which
$30,400 is taxable. After‐tax cash flow: $32,584
ALICE’S PRESCRIBED ANNUITY WITH GIFT
$310,00 in interest‐bearing securities
$690,000 invested in life annuity
$32,584 / year
(3.26% after taxes)
Same after‐tax cash‐flow as
before
Alice &
Allan
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Alice donates $310,000 to charity Receive $142,600 in tax savings from donation (have five
years to use up donation)
ALICE’S PRESCRIBED ANNUITY WITH GIFT
$690,000 invested in life annuity
$32,584 / year
Alice &
Allan
$310,000 to charity
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Problem: Alice has given up liquidity Kids won’t inherit the $1 million as previously
ALICE’S PRESCRIBED ANNUITY WITH GIFT
$690,000 invested in life annuity
$32,584 / year
Alice &
Allan
+ $142,600 in cash tax savings
$310,000 to charity
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Solution: Alice purchases a life insurance policy using the $142,600 in tax savings, to fully or partially replace the $1 million of capital upon death
ALICE’S PRESCRIBED ANNUITY WITH GIFT
$690,000 invested in life annuity
$32,584 / year
Alice &
Allan
+ $142,600 in cash tax savings
$310,000 to charity
Life insurance policy
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• Wilma is active in the community and enjoys interacting socially with many different people in the area
• Wilma’s family has, for many years, been significant contributors to many worthwhile causes
Faces: Socialite, dynastWho: Community foundation, the local
hospital and a shelter for women What: Securities and cashWhere: From the family trustWhen: MonthlyHow: With recognition and involvement
Seven Faces of Philanthropy
Wilma Flint
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WILMA DONATES SECURITIES
Federal Budget of May 2, 2006 Eliminated capital gains on donation of publicly
traded securities Wilma may want to sell a particular security, but
wants to reinvest proceeds in something else Wilma wishes to donate some, but not full amount of
securities to charity A partial donation can still eliminate tax
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Example: Wilma owns shares in XYZ Corp. worth $100,000
and ACB of $50,000 Wilma wants to sell XYZ Corp. Wilma wants to donate some of the value If Wilma sells, triggers tax of $11,500 (marginal tax
rate of 46%) Cash in hand, after taxes = $88,500
WILMA DONATES SECURITIES
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Idea: Wilma can donate $20,000 worth of XYZ shares to
charity, then sell the balance worth $80,000Results: $9,200 in tax on $80,000 worth of shares sold No tax on shares donated to charity Donation tax credit of $9,200 from donated shares
WILMA DONATES SECURITIES
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Cash in hand after the donation (no taxes) = $80,000 How much cash did Wilma give up due to donation?
$8,500 ($88,500 ‐ $80,000) How much does charity receive?
$20,000 This is a “charitable arbitrage opportunity”
WILMA DONATES SECURITIES
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How to determine the amount to give to charity:
Donation (FMV)(FMV – ACB)
(3FMV – ACB)=
WILMA DONATES SECURITIES
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How to determine the amount to give to charity:
Donation ($100,000) ($100,000 ‐ $50,000)
(3) ($100,000) – ($50,000)
=
= $20,000
Formula is approximate in some provinces
WILMA DONATES SECURITIES
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• Jed is a retired business owner who sold his busienss a few years ago.
• He is a man of faith who is thankful for the good years in business that he had and wants to repay some of what he has received.Faces: Devout, repayerWho: Local university, his synagogue,
and the community foundationWhat: Securities and insurance proceedsWhere: From his holding companyWhen: Each year and on deathHow: Making pledges, with recognition,
and some involvement
Seven Faces of Philanthropy
Jed Clampett
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JED’S INSURED BEQUEST OF SHARES
Allows Jed to donate shares of his private company to charity
Results: Significant donation to charity No tax to CRA Greater value to heirs
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Trust
Holdco
Jed
Frozen shares FMV = $2 M
Common shares$1 M Life Insurance Policy
JED’S INSURED BEQUEST OF SHARES
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Holdco is owner and beneficiary of life insurance policy
Policy is a joint last‐to‐die policy
Annual level cost for insurance coverage = $9,521 for life (both spouses age 60 today)
Total cost of $238,025 to age 85
Alternative: $24,766 per year for 10 years
JED’S INSURED BEQUEST OF SHARES
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On death of surviving spouse (Jed): deemed sale of frozen shares. Tax of $464,100
Will of surviving spouse (Jed): leaves bequest of $1M of frozen shares to charity (half of frozen shares)
Tax credit on terminal tax return of surviving spouse; tax savings of $464,100
JED’S INSURED BEQUEST OF SHARES
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Death benefit from life insurance of $1M paid into Holdco; tax free receipt; increases CDA of Holdco
Holdco uses proceeds to redeem shares bequeathed to charity
Holdco then repurchases remaining $1M of frozen shares from Estate (within 1 year of death) for a promissory note
JED’S INSURED BEQUEST OF SHARES
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Results: Deemed dividend to Estate of $1M (no tax since
we can use CDA)
Capital loss in Estate of $1M (stop loss rules apply to reduce loss to $500,00; loss will save deceased $116,000 in tax
JED’S INSURED BEQUEST OF SHARES
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Trust
Holdco
Estate
Common shares
Gift shares Charity
$1 M Cash
X
JED’S INSURED BEQUEST OF SHARES
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Trust
Holdco
Estate
Common shares
$1 M Cash
$1 M Note X
Charity
JED’S INSURED BEQUEST OF SHARES
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Trust
Holdco
Estate
Common shares
$1 M Note
JED’S INSURED BEQUEST OF SHARES
$1 M Cash
Charity
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No GiftBequest of Shares
Insured Bequest of Shares
Value to heirs
Value to charity
Value to CRA
$1,535,900
$ 0
$ 464,100
$1,000,000
$1,000,000
$ 0
$2,000,000
$1,000,000
($ 116,000)
JED’S INSURED BEQUEST OF SHARES
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Where We’ve Been
Real wealth is broader than you think.
Focus time on social capital.
The Seven Faces of Philanthropy
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Contact us
WaterStreet Family Offices
Toronto
Burlington
Calgary
Vancouver
Victoria
T 416.865.6115
T 1.877.974.7687
w www.waterstreet.ca
July 8, 2014
Tim J. Cestnick FCA, CPA, CFP , TEP
The Seven Faces of Philanthropy