Strategic Giving: Donating Retirement Assets
As the global economy recovers and we all grapple with the “new normal”, many Canadians are revisiting their retirement strategies and reviewing how best to plan their philanthropic legacy.
The term ‘legacy’ can mean different things to different people. For some, it means leaving behind a gift for a loved one, while for others is means contributing to a cause that can have a lasting impact.
When it comes to transferring wealth to the next generation, registered accounts such as Registered Retirement Savings Plans (RRSPs) and Registered Retirement Investment Funds (RRIFs) are among the most heavily taxed assets. This is why establishing the right giving strategy can be a powerful tool for donors interested in donating retirement assets to help meet their philanthropic goals.
The following strategies are a great starting point to help donors and their advisors with their planning.
Gifting a registered account
As with many types of charitable giving, a donor may have concerns about future cash requirements, both during their lifetime and that of their spouses, especially during these uncertain times.
Spouses can name one another as beneficiaries of their registered accounts (think: RRSPs, RIFFs, and TFSAs) and the assets will transfer on a tax-deferred basis. However, the estates of the surviving spouse and any individuals such as children must pay taxes on all remaining amounts in their registered accounts upon passing. One option to minimize the taxes for the estate while maximizing a donor’s charitable legacy is to consider gifting a registered account to charity—this can be achieved in a couple of ways.
- Name the donor’s estate as beneficiary – A donor can leave the residual capital in their RRSP, RRIF, or TFSA to charity by naming their estate as the beneficiary and include a specific charitable bequest in their Will. However, unlike other forms of gifting, bequests are subject to normal issues of the estate process. This can mean administration costs, tax liabilities, succession laws, and probate, among other stipulations. Donors should speak with their financial advisor to understand the estate process and all that it entails.
- Name a charity as beneficiary – If a donor intends is to leave the residual capital in their retirement asset to charity, it makes sense to simply name that charity (or charities) as the beneficiary prior to the donor’s death. In this case, the donor should consider that most registered account providers limit the number of beneficiaries that can be named on a single account. Upon the donor’s death, the residual capital flows directly to the named charity or charities by-passing the donor’s estate and avoiding any estate related issues.
Gifting a Registered Account using a Donor Advised Fund
Donors who read the above options for donating their retirement assets and would prefer to avoid having their charitable gift subject to probate and other estate issues will be pleased to know there is a third option.
Placing the residual capital of a retirement asset in a Donor Advised Fund (DAF) enables the donor to enjoy receiving income from their registered accounts for life while granting them the ability to support their preferred charity after they pass away. The knowledgeable professionals at Gift Funds Canada can assist donors and their advisors in setting up their DAF and once established the donor will receive a donation receipt, offsetting any taxes payable on the proceeds of the registered account.
In accordance with the donor’s written recommendations, which can be updated at any time during the donor’s life, Gift Funds Canada will open a DAF and make grants that will help fulfill a lasting philanthropic legacy for future generations. While there is limited ability to name multiple beneficiaries on registered accounts, a Donor Advised Fund offers donors the opportunity and flexibility to request charitable grants to an unlimited number of charities over time.
Let’s talk life insurance
Another strategy for donating retirement assets is to gift some or all of the regular income from the donor’s registered account and purchase a life insurance policy. With Gift Funds Canada as the owner of the policy, the premiums paid to support the policy become tax deductible. The proceeds from the policy would be paid directly outside of the donor’s estate upon their passing. The donor would leave written recommendations with Gift Funds Canada regarding their wishes about the future granting of funds. In the case where the donor retains ownership of the policy and names Gift Funds Canada as the beneficiary, the cost of premiums would not be deductible however a donation receipt would be issued to the donor’s estate for the full amount of the proceeds upon receipt.
Consider wealth replacement insurance
If a donor is most concerned with preserving their family’s inheritance, they may also name a charity as the beneficiary of a registered account while simultaneously purchasing wealth replacement insurance that would be paid directly to the donor’s heirs upon the death of the donor.
In this case, the residual proceeds of the registered account would go directly to the designated charity by-passing probate. A donation receipt would be issued offsetting any tax liabilities and the life insurance proceeds would go directly to the donor’s heirs, tax-free. All of this takes place upon the death of the donor without passing through the donor’s estate or any of the estate processes mentioned earlier.
Gifting retirement assets in life
For most donors, seeing the impact of their philanthropy is the ultimate return. A donor not requiring the income from their registered account may consider gifting the capital to a Donor Advised Fund during their lifetime. The donor would have rights to identify a preferred asset manager and make grant recommendations to qualified organizations for the fund’s assets. A donation receipt would be issued at the time of making the donation to their DAF that would be applied to reducing the tax liability resulting from cashing out their registered account.
Additionally, donors wishing to gift their registered account assets during their life and who are in possession of appreciated securities may choose to donate the appreciated securities to charity while withdrawing an equal amount of cash from their RRSP or RRIF. The capital gains tax liability on the gifted securities is eliminated and the resulting donation receipt for the fair market value of the donated securities will fully offset the tax liability attributed to funds withdrawn from the registered account.
Planning one’s philanthropic legacy has not been made easier by recent events and the resulting market conditions. However, starting the conversation between a donor and a trusted financial advisor, aided by the experienced team at Gift Funds Canada, donors are establishing giving strategies that meet their immediate needs and achieve their long-term philanthropic goals.