• Learn
  • Perspective

Introduction to Bobby’s Gift Planning Forum with PearTree Canada

PearTree has asked me to create this forum, to help stimulate more philanthropy and success for Canadian charities (and to make an added donation to Canadian charities in the form of knowledge).

I am known as a ‘Gift Planning Technical Nerd’ (yes, I am called a nerd by my confreres) and it is true. I can explain how to do private company shares, mining flow through, charitable remainder trust and other gifts but I am constantly reminded by donors that I have relationships with them because I am trusted. It is not the knowledge of Planned Giving (PG), it is the trust and understanding that the knowledge is used to help and protect the donor – what is best for them! Thus, the emphasis in this Forum will be to understand the donor. Of course, there will be the ‘nerdy stuff’, but only to understand why a donor has use for the stuff. I am going to start by defining Planned Giving – and this is different than most definitions. Usually charities see PG as a set of products, marketable securities, or will gifts.

You have visited Ms. Johnson and asked her to consider a $100,000 gift to a programme. Three weeks later you receive an email from the finance department with good news. The institution has received $100,000 for the programme OR the institution has received a copy of a codicil to Ms. Johnson’s will containing a $100,000 gift for the programme.

Are These 2 Options Planned Gifts?

Usually the answer is that the immediate gift is not PG and the will gift is. The accurate answer is that we do not know in either case. How did the $100,000 cash arrive? Did Ms. Johnson donate preferred shares and the shares were redeemed for $100,000 – or did she simply write a cheque without analysis? Did she review her estate planning and pick the best approach to the estate gift or did she simply have a codicil done without analysis? A will gift is not a PG by itself. It is a deferred gift.

What we do know in the above situation is that the fundraiser has no clue. The fundraiser did not suggest that Ms. Johnson avail herself of donation options, did not get closer to the donor, did not build a relationship, did not learn much about the donor. PG is a process to determine the most effective way to gift. The end result could be a $100,000 cheque, but if that is the result of the process it is a PG.

Why is This Process Important to the Charity?

We live in a fast-changing world. How we purchase things is very different from even five years ago. If I walk into Aldo and the shoe I want is not in the store, the clerk will go on the computer, find where the shoes are, and promise to deliver them to my house (of course without shipping charges). They will take my email address and put me on the friends list to receive great offers. Retailers use artificial intelligence (AI) to continue to sell – I bought a watercolour book on Kindle so I receive an email two weeks later suggesting other watercolour books. In essence retailers are developing relationships electronically.

Charities are also trying to create relationships but focusing on money opportunities. Moves management was developed as a methodology to move donors to gifts. Client relationship computer models like Salesforce, gave way to computer Donor Relationship Models (DRM) added as modules to charity software systems.

We all intuitively know relationship building is a key to success. In a very competitive environment, PG can be a tool to start, enhance and cement relationships with donors.

In this Forum we will examine how to use PG to build relationships. We all intuitively know relationship building is a key to success. In a very competitive environment, PG can be a tool to start, enhance and cement relationships with donors. Please respond with questions and scenarios which we will respond to in the Forum.

The Gift of Old Insurance Policies

Just so I do not lose my nerd status we will conclude by looking at a gift which has become popular in the last few years – the gift of old insurance policies. Insurance is a terrific vehicle, and in future forums we will look at insurance and the profiles of donors who are best able to make this gift.

Canadians buy insurance occasionally as an investment but often to protect against an unforeseen calamity, either for personal or business purposes. Thirty years later the children are grown up, and the businesses do not need the personal insurance – premiums are still payable (assuming a term to 100 policy). There are a group of Canadians who are retired and find it difficult to finance the premiums.

These policies were taken out when interest rates were high and thus the values today are surprisingly high. A gift of the policy yields a very high donation receipt and usually a tiny, or zero income inclusion. Proceeds of disposition is the cash surrender value which is usually small and less than the policies’ cost; thus, no income inclusion.

The donor receives a terrific receipt which can wipe out their taxes for many years. Also, they no longer will pay the premiums. The donor achieves a terrific cash flow benefit to benefit their lifestyle.

The charity takes on the premium payments. But if the receipt is large it actually equates that the gift after the premium costs are large. The charity would only take this on if there is a large profit margin involved and it is prepared to invest long-term.

The following is a real example:

Mr. B owns a $2M term to 100 policy. He is 76 with a mortality (table) of 13 years. Premiums are $51,000 annually. Market interest rate is 2.5%.

Assuming the mortality is his lifespan, the value of the policy is:

  1. Present value of the death benefit – $2M at 11 years and 2.5% is $1,529, 200 less:
  2. Present value of $51,000 payments for 11 years; 2.5% is $497,355

Equals $1,026,924 of value (an actuary will do the valuation for receipt purposes)

Mr. B will receive a great receipt; charity receives an over $1M gift.

 Should the Charity Actually Take the Policy?

It assumes that Mr. B will live to 100. Thus, the present value is based on 24 years and the assumed premium payments are 24. The new value is $170,813. So even in an almost worst-case scenario the transaction is positive.

Should charities do this? Those that are on legacy campaigns with senior volunteers and donors should have this gift in its arsenal and ask the question in the legacy discussion. Do you have a life insurance policy that you do not need? The answer may be surprising, and the donor may continue to pay premiums. If they do not wish to pay the premiums, yes test the assumptions, and create worst-case scenarios to ensure there is a safety net. The donor entering into this transaction will feel totally part of your family and as those tax savings are achieved may continue and add to the generosity.

To start such a programme the charity should:

  • Develop a Gift Acceptance Policy: The policy will be different depending on whether the donor will continue to pay the premiums or not. If paying, the risks to the charity are minimal. Payments of the premiums by the donor are tax receiptable (the donor of course can pay the premiums by donating assets to the charity; it can be a gift of appreciated securities or mining flow-through shares). If the donor will not pay the premiums, then the gift acceptance policy should set out a number of tests for acceptance:
  • Calculation of value (see above) which clearly indicates a substantial gift;
  • Calculation of value using an assumption that the donor will live longer than the charts indicate, to 100 for example. The resulting calculation may indicate a lesser gift but there should still be an upside;
  • Calculation of value using an interest rate which is above market, say 6%, is another protective test. The value should be less but we still want to see upside.
  • The policy should indicate how the receipt is calculated – namely an actuary calculation of value. The cost of the valuation should be borne by the donor, either directly or by a cash donation to the charity.
  • The board should ratify the programme and set out the maximum annual premiums which the charity could assume annually. This could start minimally, say $50k, which will allow the administration to get in the game without assuming too much risk. As numbers increase the programme can be revisited.
  • A gift contract template should be created which will contain the identifying data of the policy, description of who will continue to pay the premiums, designations of use of fund in the charity with recognition features (if the donor will continue to pay the premiums), a description of the receipt to be given, and a clause requiring the family (or executor) to provide the necessary death certificates to the charity upon the death of the insured.
  • Educate major and legacy fundraisers in the team. Educate allied professionals, particularly insurance brokers. Insurance companies do not like this gift. Old policies carry more liability than benefit for them. They prefer the policies lapse. Brokers though lose income on the lapse. They are quite motivated to help effect this gift, not just for the income, but also to turn a lemon into lemonade for the insured, and to benefit the charity.
  • Add the possibilities to marketing materials.
  • This gift provides an opportunity to speak to a group of donors. The premise is that lemons can be turned into lemonade. The objective is the discussion. The end result will in most cases, not be an insurance gift, but typically a normal legacy gift, and a more intimate relationship with the donor. It is not about the product, but the process of discussion, opportunities, relationship and trust.

Please direct any questions to askbobby@peartreecanada.com and the answers will appear in upcoming Forums.


Legal Disclaimer

This report / article has been prepared for general information purposes only. Any opinions herein reflect the views of the Analyst and/or Author as at the date appearing above, and does not constitute a recommendation or individual investment advice, nor should it be considered a solicitation for the purchase or an offer of securities. Information contained in this report is derived from sources believed to be reliable, but its accuracy cannot be guaranteed. The information provided herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country including the United States, where such distribution or use would be contrary to law or regulation or which would subject PearTree to any registration requirement within such jurisdiction or country.