Insured Annuity & Charitable Giving - A creative approach to problem solving

The Insured Annuity is a financial planning strategy designed to increase cash flow to your clients when they’re alive while making sure they have funds to leave a legacy when they die.

This strategy is often recommended in situations where a client has fixed-income non-registered investments (GIC’s). If the client is spending the annual interest earned, has no intention to access the investment funds while living and intends to gift the funds when they die, then they may want to consider an Insured Annuity.

But what happens if the facts of the case are somewhat different? Can a slight change in assumptions result in a different solution? The answer to that question is “yes”. Let’s understand why by considering the following situation.

Mr. Client is 70 years of age and a non-smoker. He has a $1 million GIC earning 4%. When he dies the GIC funds will go to his heirs. At this time the net interest from his GIC plus his other sources of retirement income provide Mr. Client with the cash flow he wants.

Mr. Client is also charitably inclined and would like to give more to his favorite charity but he does not want to do this in

a way that might impact the $1 million going to his heirs. Is there a way for Mr. Client to maintain what he has today while providing a benefit to his favorite charity?

Option 1 – Insured Annuity, a typical approach

If Mr. Client uses the funds in the GIC to implement the Insured Annuity strategy he will be able to increase his net cash flow from $20,000 to $31,472, an increase of $11,472. Mr. Client can use this excess cash to make a gift to his favorite charity without impacting the cash flow he wants to maintain. Mr. Client will also benefit from this structure because the annual gift to the charity will result in a tax benefit that reduces the amount of his tax payable.

Option 2 – Insured Annuity, a not so typical approach

With this option Mr. Client uses a portion of the funds in the GIC to implement the Insured Annuity strategy. He is able to maintain his net cash of $20,000 but by reducing the annuity purchase price to $843,050 he has freed up $156,950 that he can gift to his favorite charity today and receive the resulting tax benefits.

In many situations doing what’s best for your client often means being creative and providing options. In this situation there were two effective ways to meet Mr. Client’s need. It is now up to him to consider the tax consequences of each option and decide whether to benefit the charity over a period of time or with a large, one-time gift.

Date: March 2016