When it comes to giving, you've got many ways. Some involve tax receipts and others are pure gifts. Last time, we looked at donation guidelines for billionaires from Warren Buffett, Bill Gates and Melinda Gates.
We don't have quite as much money to give, which makes the use of effective strategies more important.
There will be certain people who have been successful and if you can show them how their money might be leveraged, that really appeals to them. The leverage aspect is important. --- Warren BuffettLeveraging lets you do more with less.
Conventional Ways To GiveThe approaches here are simplified and focus on money. They are meant for people with a giving heart who are willing to bear some cost. Otherwise the donation is not a genuine gift. If you're looking solely for tax advantages, you may not be satisfied. Though, when it comes to giving, do the reasons matter?
In Canada (and probably other countries), your dollar goes farther when you
- give to registered charities, which usually gives tax credits or tax deductions
- give money to poorer countries
- use matching gifts: your employer or some other donor may match your gifts
- gift public shares: you don't pay tax on the capital gains
An Overlooked WayLife insurance provides an exceptional form of leverage: a small premium provides a large death benefit. Did you think of insurance in those terms before?
Suppose you want to donate $100,000 to a charity. Giving cash or equivalents may not be possible. An alternative is to buy a $100,000 life insurance policy on yourself and donate the death benefit to the charity. Your small premiums are usually tax deductible but you forfeit the big tax savings from the death benefit.
There are three drawbacks for the charity:
- your gift doesn't help with current needs
- if you stop paying the premiums, you create a dilemma: does the charity throw the insurance away or pay premiums with funds earmarked for pressing uses like repairing the roof?
- the charity doesn't know when they'll receive the lump sum
EnhancementsThere's another way if you have cash or the equivalent: donate the $100,000 now. The charity rejoices because you've eliminated all surprises and and let them work on current projects. You're happy because you're helping now, getting recognition now and getting tax savings now. You may even spur other donors to follow your lead. You no longer need to worry about investing the $100,000 or paying tax on the investment returns --- a nice bonus.
But you no longer have the $100,000.
Here's a way to get that back. Why not use the tax savings to offset the value of your gift with life insurance? The death benefit could be $100,000 or a larger amount if you want to replace the growth you could have earned if you donated at death. The tax savings may not be enough to pay the entire premium, but certainly offset the cost.
Here you control who receives the death benefit. Right now, you may want the proceeds to go to your family. When you're retired and they are settled, you may might want to donate the death benefit to a charity. That creates more tax savings, which leaves more of your estate intact.
Here Tomorrow?Governments want our money too. If they're not satisfied with what they're collecting, they're bound to find ways to grab more from us. In their parlance, we're "taxpayers". The tax incentives that encourage charitable donations could easily be reduced or eliminated.
By donating now, you lock in today's tax advantages. The incentives could be enhanced, but how likely do you think that is --- especially if billionaires deplete tax coffers with hefty donations.
How horrible to plan and find the vagaries of the tax system work against you. Giving now eliminates those risks.
"… the giver must make a sacrifice, create an uneven exchange, … and do it all with the right spirit. To do anything less … doesn't rise to the magical level of the gift." --- Seth Godin, Gifts, misunderstoodLeverage reduces your sacrifice, which boosts the value of your gift. With conventional financial leveraging, you create tax deductions by borrowing to invest. That magnifies gains … and losses. Leveraging for charitable giving need not.
Podcast 73 (5:19)
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PS Feel free to share other ideas