Some wealthy clients are setting up donor-advised funds, which allow them to get an immediate tax benefit and have funds flow to several different charities.Deagreez/iStockPhoto / Getty Images
Should philanthropic clients make significant charitable donations in their lifetimes or in their estates?
In the past, advisors presented planned giving options as an either-or situation. But today, more clients are opting for a hybrid approach.
“Intention is the most important factor today – being clear about why you wish to give,” says Parvathy Nair, associate vice-president, charitable giving program for Solus Trust Company at Raymond James Ltd.
“What impacts do you hope to have and how does it fit within the wider financial and estate arrangements?”
Doug Farley, senior vice-president and portfolio manager at Guardian Capital Advisors LP in Toronto, says that in the past, gifts were often monolithic one-and-done cheques directed toward a specific institution.
Now, he sees more wealthy clients setting up donor-advised funds, which allow them to get an immediate tax benefit and have funds flow to several different charities.
“We have the latitude in the selection and timing as to how we are going to bestow those gifts,” he says.
Give now
Charitable donations allow clients to claim non-refundable tax credits on their tax returns up to 75 per cent of their net incomes, Mr. Farley says.
Donating securities in-kind means the money is transferred directly to the charity with no capital gains triggered to the client, who then receives a charitable donation tax credit.
Mr. Farley calls significant donations within a person’s lifetime the “warm hands” approach. Clients witness the direct impact of their gift.
“You get the gratitude, the direction, the response, and you’re having the impact in the moment as opposed to some indefinite period in the future,” he says.
Giving now also encourages family involvement and conversations with relatives about values, Ms. Nair says.
“It’s helpful for the family to understand what causes are important to the person,” she says.
Malcolm Burrows, head of philanthropic advisory services at Scotia Wealth Management in Toronto, says that if family members see a relative involved with a charity and giving consistently, they may be less likely to contest a will that lists a charity as a significant beneficiary.
“It doesn’t eliminate the risk of litigation, but it greatly reduces it,” Mr. Burrows says, as the charity would be known to the family.
“Often when there are estate challenges, there’s this perception that choosing to give to a charity was a last-minute decision.”
Give later
Some charitably minded clients may worry about their financial security and feel more comfortable making a meaningful contribution in their will.
According to a Canadian Association of Gift Planners study, the proportion of Canadians making a charitable bequest has doubled to 10 per cent from 5 per cent in the past five years.
Ms. Nair has several clients who don’t have children or other close relatives to be direct beneficiaries. In those cases, planned giving is often a strategy in tax and financial planning discussions.
“It can be an efficient way for them to direct remaining wealth toward causes and values that were important to them during life,” she says.
Mr. Burrows notes that it can be more tax-effective to give large amounts at death. A larger tax bill often awaits an estate, and a significant charitable bequest can offset taxes with fewer restrictions.
“Canada has the most generous tax regime in the world for donating at death,” he says, as clients can claim charitable donations up to 100 per cent of net income in the year of death.
The alternative minimum tax also doesn’t come into play for large donations on death, he says. With regular donations, AMT is triggered for those who earn more than $177,882 in annual income and the charitable donation tax credit is limited to 80 per cent, reducing tax savings.
Mr. Farley says clients need to be careful with the actual giving strategy for the estate. He has observed several cases in which charities received donations after investments were sold and taxes paid.
“All the capital gains get assessed and the taxes have to be paid,” he says. “Then, you get a tax deduction thereafter. That’s an ineffective and inefficient way of doing it.”
He notes that poor planning often occurs when people aren’t working with a financial professional who understands the nuances of planned giving.
A better strategy, Mr. Farley says, is naming a charity as a beneficiary.