The Seven Faces of Philanthropy by Tim Cestnick

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

1

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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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?


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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


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


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


$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


$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)



$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



$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



$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


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


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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


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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”


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How to determine the amount to give to charity:

Donation (FMV)(FMV – ACB)

(3FMV – ACB)=


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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


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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


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


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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


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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


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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


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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


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Trust

Holdco

Estate

Common shares

Gift shares Charity

$1 M Cash

X


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Trust

Holdco

Estate

Common shares

$1 M Cash

$1 M Note X

Charity


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Trust

Holdco

Estate

Common shares

$1 M Note


$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)


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Where We’ve Been

Real wealth is broader than you think.

Focus time on social capital.


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Contact us

WaterStreet Family Offices

Toronto

Burlington

Calgary

Vancouver

Victoria

T 416.865.6115

T 1.877.974.7687

E [email protected]

w www.waterstreet.ca

July 8, 2014

Tim J. Cestnick FCA, CPA, CFP , TEP


The Seven Faces of Philanthropy by Tim Cestnick

Government & Nonprofit

Transcript of The Seven Faces of Philanthropy by Tim Cestnick