Professional Advisors Can Change the World

You have the power to change the world.

This article is about charitable gift planning. Charitable gift planning is the process of incorporating charitable giving into your client’s overall financial plan. It’s about giving money away in a thoughtful, meaningful and strategic manner. Charitable gift planning is often used interchangeably with the following terms: philanthropic planning, gift planning, and planned giving. Make no mistake about it. These terms are more or less the same. It’s how you choose to incorporate charitable gift planning into your practice where you can really make a difference.

Incorporating charitable gift planning into your professional practice is your choice. It’s a decision that can have a dramatic impact on you, your clients and your community.

Top 5 reasons to incorporate philanthropy in your practice:

Your clients are looking to you for direction. More and more Canadians are seeking ways to give back to their community through strategic, meaningful philanthropy. The average Canadian donor is much more aware of planned giving now than in the past. The baby boom generation is looking to move beyond “chequebook philanthropy” and they have the potential to usher in a golden age of philanthropy.

You will provide more comprehensive service. By discussing charitable giving with your clients, you are providing a wider spectrum of wealth management solutions.

You can determine your clients’ passions. Some advisors (including accountants) feel that charitable giving is a private subject, best left out of a financial discussion. This is a myth. By talking to your clients about charitable giving, you obtain a better understanding of their values, principles and dreams. Since when is getting to know your clients on a deeper level a bad thing?

Charitable Giving strategies have tremendous tax benefits. The income tax system is designed to recognize Canadians’ charitable donations. The tax laws governing charitable giving are based on a tax credit system and the federal government enriched the tax benefits throughout the 1990’s. In addition to making major donations at death, there are a variety of way that charitable giving can be structured during one’s lifetime – the options are much more diverse that simply donating a sum of money to charity.

You have the power to make a difference. I don’t want to wax philosophical on this point but as a trusted advisor, you have the power to direct and influence your clients’ thinking about important financial matters. Charitable giving is one of them. Self-directed giving can be a more efficient method of contributing to the general welfare of the country than paying tax dollars, the latter being spent by the government however it sees fit.

How do I bring up philanthropy with my clients?

It’s not hard to bring up charitable giving with your clients, especially when it is done in the context of an overall financial plan. Since charitable giving can be an integral part of tax and estate planning, it does not have to be an uncomfortable or touchy subject. Here are some suggestions:

“Tell me about your charitable giving”. If your client makes charitable donations of some kind (and over 90% of adult Canadians fall into that category), simply ask him or her to tell you a bit more about the motivations behind their giving. With this simple conversation starter, you will likely learn a lot about your client’s passions, values and history. Knowing your client on a more personal level allows you to provide better financial solutions. This leads to greater trust and retention.

Talk to your clients about “social capital”. The Canadian tax system ensures that a portion of each taxpayer’s wealth is going to be used for the general welfare of our country. Thankfully, our system allows Canadians, in part, to decide whether their social capital is directed to The Canada Revenue Agency or to charity. For many people, especially those who are extremely sensitive about paying taxes, this is a powerful argument.

Look for obvious cues. Your client may bring up some obvious suggestions or questions that can easily bridge the gap into a discussion about charitable giving. Some examples include:

I’m a Board Member at the local women’s shelter
I have season tickets to the symphony orchestra. I just love classical music.
Any other ways that I can save money on my taxes?

While these statements might not seem particularly obvious, they all speak either to a client’s potential support of a charitable organization or the desire to pay less tax. By taking the conversation further, you might be able to uncover new planning opportunities for your client.

Rely on your software. Most modern financial planning software contains a module on charitable giving or philanthropy. Use this module to introduce your clients to new concepts and strategies. Demonstrate to them through the software that any good financial plan requires a discussion on charitable giving.

When do I bring up philanthropy with my clients?

The most obvious answer to this question is “anytime”. Having said that, there are some times when it might be more appropriate to bring up the subject of charitable giving.

Year-end tax planning. Typically, most Canadians think about tax planning during the last quarter of the calendar year. This focus by Canadians on year-end planning stems largely from a realization of the fact that they might face the burden of a large bill if they do not take steps to reduce their taxes. Charitable giving is one of the most powerful (and simple) tax saving methods available to Canadians.

Sale of a business. There aren’t many events greater than the sale of a business that speak to the need for effective tax planning. The substantial capital gains that often result from the sale or transition of a private business may provide the necessary motivation for a large charitable gift. This combination of genuine philanthropy and effective tax planning benefits both your client and the community.

Sale of real estate. Like the sale of a business, the disposition of real estate can often result in a substantial tax bill. Effective charitable gift planning can relieve your client of some the tax burden resulting from the sale.

Inheritance. When a client inherits a large sum of money, the first and most obvious question is what to do with it. Do I invest it? Do I spend it and if so, how much? Do I give it away? To whom? An inheritance is an opportune time to talk to your clients about their overall financial plan. Since their inheritance will likely generate new taxable income, part of the planning strategy should be how to reduce that taxable income. Charitable giving can help achieve that goal.

Philanthropic Solutions – Making a Difference

Basic Canadian Tax Law

Over the last decade, the Federal Government has made several changes to the Income Tax Act which provide incentives for Canadians to give back to the community. Most notably, the Federal Government has:

Increased the amount of the individual donation tax credit against net income to 75% from 25%. This dramatic (and surprisingly unheralded) change also allows individuals to claim a tax credit against income tax of up to 100% of net income in the year of death and the year immediately preceding death. This latter change allows for some powerful estate planning opportunities.
Reduced the capital gains inclusion rate on appreciated stocks, bonds, mutual fund shares and other public securities that are donated to charity from 50% to 25%.

What does this mean? Depending on the province that you live in, the actual (after-tax) cost of a charitable gift is actually much less than the donation itself. For example, the after-tax cost of a $10,000 gift for a resident of Ontario is only $5,359! For BC residents, the cost is only slightly higher ($5,630).

There are many significant vehicles that Canadians rely upon in order to make significant gifts to their favourite charitable organizations. These gifting vehicles include:

Outright Gifts – Cash, cheque, credit card and donations of publicly listed securities

Bequests – Naming a charity as a beneficiary in your Will

Life Insurance – Naming a charity as the beneficiary of a life insurance policy

Gift Annuities – a combination of a charitable gift and a traditional life annuity

Charitable Remainder Trusts – an inter vivos trust with upfront tax benefits and a charitable distribution upon the death of the settlor

Donor-Advised Funds – Growing in Popularity

I’ll spend a bit more time discussing donor advised funds because they are slowly starting to take hold in Canada. A donor advised fund is a fund established within a charity. The donor receives an immediate tax receipt for all contributions but retains the right to advise the charity on how the income is to be allocated.

At the time the fund is established, the donor can name the fund and even the charitable organization or causes that the fund will support.

Donor advised funds offer incredible flexibility when it comes to philanthropic planning. Donor advised funds have been offered by community foundations for many years. Here’s how they work:

As a result a conversation with his/her financial advisor, lawyer or accountant, an individual (or individuals) chooses to donate a sum of money into a donor advised fund. The person is typically able to name his/her own fund – e.g. The John Smith Charitable Fund.
The donor receives a tax receipt equal to the donation to the Fund.
The client relinquishes ownership of the funds to the Charitable Foundation (the legal charitable entity).
Each year, the Foundation advises the donor advisor of the amount that the Fund has available to grant to charities. The fund must grant a minimum of 3.5% each year (actually, the formula is more complicated). For example, with a $100,000 Fund, the donor would be advised that his/her Fund has $3,500 to grant.
The donor recommends which charities should receive the amount that is available to grant (the funds must go to registered Canadian charities).
The donor may typically add to his/her fund at any time as well as make a bequest gift to the fund in his/her will.
The donor may usually name successors (e.g. children) that would make granting decisions upon the donor’s death or incapacity.

Benefits of Donor Advised Funds

Flexible – Donor-advised funds allow for the support of different charities each year.

Strategic – Donor-advised funds allow the donors to plan their philanthropy in advance and create meaningful long-term impact.

Continuity – Donor-advised funds allow philanthropic values to be passed on to the next generation.

Easy – Donor-advised funds take the administrative burden of charitable giving away from the donor.

Inexpensive – Donor-advised funds are cost effective and are typically far less expensive than setting up a private foundation.

Gift Planning Strategies

Case study

Julia Montaine has been actively involved in her church since she was a young child. Julia’s mother, Gwen, died last year from breast cancer. Gwen’s death had a dramatic impact on Julia. An only child, Julia inherited a sizeable amount from her mother’s estate and has been looking to create an everlasting tribute to her mother’s memory.

Julia is a successful marketing executive with an annual income of $150,000. She is 49 years old, divorced with two children. A review of Julia’s financial profile reveals the following information:

Home – market value of $450,000 – no mortgage
RRSP – $375,000
Non-registered investments – $750,000 (including $500,000 inheritance)
Annual income of $150,000 – including investment income

So let’s listen in on the conversation between Julia and her financial advisor, Charlie Manley.

Charlie: So what’s up for the weekend, Julia?

Julia: Actually, something a bit different. I’m taking the kids to the church. The entire congregation is getting together. Kind of like an old “roof raising”, except we’re repairing the old roof, not building a new one.

Charlie: So what’s your job going to be?

Julia: We’ll, I’m pretty handy so I’ll be up on the ladders. The kids are helping with the bake and yard sale which is helping to finance the new roof. Every year, the old church seems to need something. Next year, we need to redo the driveway and parking lot. Would you believe that job will cost our congregation $125,000?!

Charlie: I know that you have been looking to do something major to honour your mother’s legacy. What did you have in mind?

Julia: Well. The church was her heart and soul. Everyone in the congregation knew her. She did everything from singing in the choir to sitting on the Board. She left $25,000 to the church in her Will which it is using to help pay for the roof. I’d also really like to do something to support breast cancer research. We’ve made such dramatic strides in the fight against that disease over the last decade. I’d like to help continue the fight.

Charlie: Tell me a bit more about how you’d like to help. What are your timeframes?

Julia: Well, I’d like to do something now but I’d also really like the legacy to continue for generations to come. I’d like to pass philanthropic values down to my children like my mother did to me.

Charlie: I think that I might have just the solution.

Conclusion: With a large upfront gift of $200,000, Julia established the Gwen Montaine Memorial Fund, a donor-advised fund. . Each year, Julia plans to make an additional donation of $10,000 to the Fund in order to fulfill her philanthropic objectives. Julia has also named the Fund in her will as the beneficiary of 10% of the value of her estate. Julia hopes that through these contributions, the Memorial Fund one day will have a value of approximately $1,000,000.

Julia’s Legacy: Each year, the Gwyn Montaine Memorial Fund will distribute a portion of its income to Canadian registered charities. The total of the annual donations will grow as the value of the Fund increases. Each year, Julia will recommend which registered Canadian charities will receive this income. For the first year, Julia has decided to recommend that the grants be distributed to her church as well as the local teaching hospital to support breast cancer research.

Julia hopes that her children will one day succeed her as the donor advisor for the Fund. Julia is planning to get her children involved in the annual decision-making process.

Tax: While tax savings don’t motivate Julia’s philanthropy, the powerful tax benefits simply cannot be overlooked. Julia’s initial gift to the Memorial Fund will generate a tax credit of $200,000 which in Ontario will generate tax savings of over $90,000 (In Julia’s case, she will likely carry her tax credit forward for at least one year to maximize the tax savings since the maximum creditable amount is 75% of her net income). Furthermore, her additional gifts to the Fund will continue to generate significant annual tax savings over the years.

Conclusion

Leaving a legacy is a tradition that pervades virtually every culture, nationality and religious affiliation. In our wonderfully diverse country, increasing numbers of Canadians from all backgrounds are beginning to think and dream about the legacy that they can leave to this world. Their advisors can, and should, help shape these dreams.