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financial facelift

Amber Bracken/The Globe and Mail

Jill, who is age 88 and a widow, has 80 acres of pine woods in northern Alberta that she and her husband bought years ago for $5,000. She estimates it’s worth about $100,000 today but she doesn’t want to sell it outright.

“I wish to donate the property to a conservation organization,” Jill writes in an e-mail. “I want to know how this will affect my estate because I am not in a position to be too generous.” The acreage has been ravaged by wildfires and would not be attractive to buyers looking for recreational property, Jill writes. “My family agrees with my making the donation.”

Jill has three children and four grandchildren. She gets more than $90,000 a year of private and government pension income on which she pays about $18,000 a year in income tax.

If Jill makes an outright donation, there would be no capital gains tax to be paid, she says.

“Depending on the appraised value of the property and any other charitable donations I might make, my income tax could be reduced to zero in year one, and I could carry forward the balance for up to 10 years,” she writes. Alternatively, she could leave the property to her estate, in which case capital gains tax would have to be paid.

If Jill donates the land, “the savings I make by not paying income tax would go to my estate,” she adds. “What I want to know is how many years it would take for this amount to be the same as if the property were sold on my death – bearing in mind I am healthy, but 88.”

We asked Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto, to look at Jill’s situation.

What the expert says

If Jill donates land valued at $100,000, she will be able to deduct that amount from her taxable income, Mr. MacKenzie says. If she spreads the deduction over three years, reducing her income from about $90,000 a year to less than $60,000, the tax benefit would be about $10,000 a year or $30,000 over three years, he says. That’s based on her estimated marginal tax rate of about 30 per cent.

Jill asks how many years would it take for the income tax savings to equal what the property would generate if sold by her estate, Mr. MacKenzie says. “The answer is the savings/tax reduction from the donation receipt, and the investment earnings on the savings, would never grow enough to equal the amount that her heirs would get if she hangs onto the property.”

Divided among her seven heirs, though, the difference would be small, the planner says.

If the land is sold, either by Jill or her executor, it would net about $80,000 after paying capital gains tax. That assumes no substantial inflation. “If Jill donates the land, all she would get is the value of the tax deduction, or about $30,000,” he says.

In preparing his forecast, the planner assumes the land qualifies as ecologically sensitive land. He assumes that Jill donates it, even though doing so will mean $50,000 less for her heirs ($80,000 from a sale versus the $30,000 tax saving that would result from the donation).

“I made this assumption because she seems to want to do what is best for her heirs,” the planner says. Donating the land may not be best in a purely financial sense, but it would set a good example of giving back to the community, he says. For the grandchildren, “a few dollars more in five to 10 years’ time will not be as important as the lesson from their grandmother about protecting the environment.”

“Ideally, she would like to make the property donation and also assist her children and grandchildren,” Mr. MacKenzie says. “There is a way to do this that will be good for the environment and also be better for her heirs than holding on to the property until it is eventually sold by her executor.”

Jill’s pension income leaves her with a surplus after her core living expenses, which she adds to her investment accounts, including her tax-free savings account. She also gives generously to family and charity, which she can continue to do, the planner says. She takes comfort from her financial cushion but it is almost certain that she has more than she needs, he adds. “If she ever decides to move to a retirement home, or if she requires nursing home care, she can sell her house or use a reverse mortgage to provide the necessary cash flow to be able to pay for ‘top of the line’ health care,” the planner says.

Jill’s investments are nearly all in guaranteed investment certificates earning a low rate of return, “which is taxable and which increases the clawback of her Old Age Security benefits,” he says. The net return on her investments is not keeping up with inflation, so with these investments she is losing purchasing power each year.

“One sensible strategy would be to use some of these non-registered investments to give her family an advance on their inheritance,” Mr. MacKenzie says.

If she gives her children and grandchildren part of their inheritance in advance, Jill will get to enjoy seeing the good her gift can do, Mr. MacKenzie says. “She may be giving funds to the children and grandchildren when they can most use some help.” She will see whether they are using the money wisely. “If the grandchildren invest the funds, it will give them some experience in managing money,” the planner says. This would reduce Jill’s taxable income and the clawback of OAS.

Having a family meeting to review the terms of her will might remove the possibility of any disagreement, the planner says. “When timing the liquidation of assets, there is always the possibility of a disagreement,” he says. When an heir is also the executor there may be a conflict of interest, so Jill might want to consider appointing a corporate executor.

Jill’s non-registered investments could keep up with inflation if she moved from GICs to a balanced and well-diversified mutual fund or exchange-traded fund (suitably weighted to cash and fixed income), Mr. MacKenzie says. This would give her the possibility of a higher and more tax-efficient return. “Because the market is near its high, she should make this change by dollar-cost averaging into a more diversified asset mix,” he says. That means investing gradually over the next 12 months. “She’d be buying on the dips, and in any event her financial independence is secured by her indexed pensions,” the planner says.

“Using conservative assumptions, if Jill lives to age 100, donates the land, gives inheritance advances and incurs three years of expensive health care, she will still leave an estate of over $1-million, in today’s dollars.”


Client situation

The people: Jill, 88, and her children and grandchildren

The problem: Would it be better for her heirs if she gifts the acreage to a conservation group and gets a tax refund or should she leave it to her estate?

The plan: Gift the acreage even though it will mean a little less money for her heirs. Shift her savings to include suitable mutual funds or exchange-traded funds. Consider giving her heirs an advance on their inheritance.

The payoff: A better financial situation all around and an important example for the grandchildren.

Monthly net income: $7,000

Assets: GICs $356,785; TFSA $190,525; residence $585,000; land $100,000; estimated present value of pension plan $400,000. Total: $1.6-million

Monthly outlays: Property tax $500; water, sewer, garbage $150; home insurance $155; heat, electricity $400; maintenance, security $340; garden $250; transportation $465; groceries $400; clothing $100; gifts $1,600; charity $700; dining, drinks, entertainment $350; personal care $100; subscriptions $100; health care $350; communications $245; TFSA $700. Total: $6,905

Liabilities: None

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

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