Tuesday, May 6, 2008

Planned Giving

Quote of the week:
Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies. - Groucho Marx

Commentary for the Week:

I thought it best to change gears a little bit this week and move towards some timely advice that we can all use. As people that want to do good things in the world, we are frequently called upon to be charitable. We are not always aware however, of how we can be charitable efficiently. What follows is an article on Planned Charitable Giving under the present tax regime. As you are no doubt aware, we are into the second week of December and this is the last month to make a charitable donation that can be claimed for this year (unlike the RRSP contribution deadline). Hopefully it will inspire you to be generous to the causes and organizations that you believe in ...

Planned Giving

My in-laws have a problem that makes them quite uncomfortable, and it is not just me. They are charitable people with solid philanthropic credentials, but they do not trust the phrase 'planned giving'. This mistrust is the result of a seminar sponsored by their favourite charity where the evident message was to convince the audience that the best way to 'financial freedom' was to give all their money away. Needless to say, something got lost in the translation.

The idea behind planned giving is not to give your retirement savings away, living a spiritually meaningful but financially destitute life. It is to maximize one's after tax income or estate, while still meeting or exceeding charitable goals. This is done with the help, not loopholes, of laws pertaining to charitable giving. The phrase itself - 'planned giving', means little more than being charitable while knowing the consequences and being aware of alternative strategies of philanthropy. In other words, to plan is to know smarter ways of accomplishing similar goals. The Government has a whole bureaucracy dedicated to raising funds through taxes, many individuals do not even hire a tax accountant.

While the area itself has much scope for a professional to help your particular situation, here is one general strategy I have discussed with my in-laws. Perhaps it applies to your situation as well.

As they are charitable people, they give over $4500 in cheques to their favourite charities. These funds are from income that they have earned and have already paid taxes on. Thus, to be able to donate $4500, they must have had to earn more. At the 31.15% tax bracket (combined Federal & Provincial), to be able to pay $4500 in charity, they have had to earn around $5901.75. While $5901.75 is what their philanthropy has cost them on a cash basis, their charitable credits are based on $4500 only. Knowing that the 'tax-man' has mysteriously swallowed the difference causes them no end of discomfort at the 'unfairness' of this system. But knowing their situation, perhaps we can ensure that what the government takes away from them with one hand, it gives back some with the other.

My in-laws also have an unregistered portfolio of shares, bonds and mutual funds that they have been invested in for some time. Most of their investments have appreciated in value significantly, but some have performed miserably. Conversely, one of the companies they have held for over 30 years is about to be taken private at a premium. This will leave them with a large capital gains tax bill, which they would like to lessen as well. In order to improve their cash-flow, tax exposure and philanthropy, we need to think just a little bit outside the box. Also, let's call the investment that has increased in value 'Company Up' and the investment that has gone down in value 'Company Down'

Instead of donating cash to their charities of choice, we could do any combination of two things. One way could be donating $4500 worth of the shares of 'Company Up' instead of cash. As the donation is a direct transfer of shares to the charity - as opposed to a sale of shares and transfer of cash - no capital gains tax would apply to my in-laws. They would not have to donate $4500 of after-tax dollars, which represents $5901.75 in income, for a benefit of $4500 to their charities of choice. They could donate shares instead, which cost them much less than $4500 originally. From the perspective of the charity, it would receive $4500 in shares that could easily sell for cash. Furthermore, there would be less of a capital gain on their total holdings of 'Company Up' because they would then hold fewer shares. To summarize benefits, their annual cash flow would improve, the charity would receive the same amount, and their capital gains exposure would be lower. To summarize costs - instead of having less spendable cash, they would have fewer shares of the company in question.

Another strategy would be to be to donate securities that have not performed well for them and are presumably not the kind of investment they would like to keep (Company Down). Similar to the first scenario, donating $4500 worth of shares directly would crystallize their capital loss, allowing them to claim it against their impending gains from Company Up. This will bring down their capital gains exposure from Company Up's shares. Furthermore, since the value of $4500 has been donated, they would be able to claim that as a charitable tax credit. This way, they get to write off a capital loss and claim a charitable donation. Again, the charity would receive $4500 in stock, which it could easily sell for $4500 in cash.

From the charity's perspective, the shares it receives do not have to be a good investment. Most charities would sell whatever stock they had received in donations to finance cash-flow anyway. As long as the market value of the shares donated is $4500, the charity should have no preference as to whether it receives cash or stock in Company Up or Down.

In either case, whether my in-laws decide to donate Company Up or Company Down shares, both strategies are more tax -efficient and cash-flow friendly ways to transfer some of their wealth. This is not a scheme to donate their wealth and keep it too. Rest assured, that would be too good to be true. Remember, they are still giving away, just not as much to the 'sometimes hidden but always present' tax-man. Happy Giving ...

Finance News:
1. Some good advice on making one's investment income more tax-efficient ... http://www.theglobeandmail.com/partners/free/globeinvestor/income/tax_free_living.html

2. Remember I asked for some focus on the Rio Tinto buyout? ... Well, things just got a lot more interesting. Why would Chinese companies sit back and watch one of their largest suppliers get bought out? That would mean higher input prices and lower negotiation / control / leverage. The question here seems to be not just what is the price of the company, but what is the price of control? ... http://www.theglobeandmail.com/servlet/story/LAC.20071205.IBCHINASTEEL05/TPStory?cid=al_gam_globeedge

3. The TSX and MX finally get together ... If the marriage is anything like the courtship, much therapy will be required ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071210.wexchanges_deal1210/BNStory/Business/?cid=al_gam_nletter_maropen

Economic News:
1. Some insight into why the US$ is treated differently than other currencies ... why its fall recently has been so mild compared to that of the Thai baht in 1997 for example ... The comparison is not totally inappropriate because Real Estate lending was behind the collapse in Thailand as well ... http://www.economist.com/opinion/displaystory.cfm?story_id=10215040

2. Is this Round 2 from subprime? ... or just the tail end of the first of many rounds ... UBS writes down $10B ... what I find particularly problematic is that once again the bailout has been from the Middle East ... Shaikh Sahb, at least wait for the stock price to come down a bit before you fall all over yourself to give away your money ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071210.wubs1210/BNStory/Business/home or http://www.economist.com/daily/news/displaystory.cfm?story_id=10276499&top_story=1

3. Now we see why the Chinese Govt. bought a piece of Blackstone earlier this year ... Blackstone may be putting together a bid for Rio Tinto ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071210.wriotinto1210/BNStory/Business/home

Islamic Finance:
1. The Economist analyzes the qualities that make charities more effective ... http://www.economist.com/daily/columns/businessview/displaystory.cfm?story_id=10238702&fsrc=nwl

2. The possibilities of solar power - storage for a daily use basis ... http://www.economist.com/displaystory.cfm?story_id=10241549

1. Disagree with some of his more extreme solutions but he writes about the science involved in climate change quite well ... (he is also an old professor of mine so ...) http://www.theglobeandmail.com/servlet/story/RTGAM.20071130.wcoessayclimate1201/BNStory/specialComment/home/?pageRequested=all

2. Interesting news on company structures ... where does innovation in a company come from? The R&D department or from everywhere else? (think Toyota) ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071207.wstrategyintel1210/BNStory/robAtWork/home

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