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Advisors can help their clients leave a philanthropic legacy

By Rosemary McCracken | November 26 2015 07:00AM

Financially successful Canadians are eager to give back to society, and they need their advisors’ help to put effective philanthropic plans in place. But many advisors are shying away from the task.

Many advisors believe that millennials “have no money and ask too many questions,” but 15 years from now they will be the largest demographic group in the country and should not be summarily dismissed as clients, a conference has been told.

“Studies show that only one in 10 advisors are raising the subject of philanthropic giving with their clients,” said Keith Thomson, Toronto-based managing director and financial advisor at Stonegate Private Counsel and a member of the board of directors of the Canadian Association of Gift Planners. There are several reasons for this, he added:

  •  They don’t think they have the expertise.
  • They think they’ll lose assets under management.
  • They have difficulty broaching the topic with clients.
  • They think it’s none of their business.

“Advisors who don’t believe they have the expertise to help clients integrate charitable giving into their financial plans are probably correct,” Thomson said. “They may not be familiar with the tax considerations or the most appropriate gifting vehicles. If that’s the case, they should make it their business to familiarize themselves with these topics by joining an organization such as the Canadian Association of Gift Planners, and attending conferences such as Mindpath [an annual educational conference on philanthropic giving for the financial services industry], and developing networks of professionals to whom they can refer clients.”

Advisors who are concerned they’ll lose assets under management if clients make charitable gifts are in the wrong line of work, said Chris Winrow, a financial planner and lawyer with Assante Wealth Management in North Bay, Ont. “Do we do what’s good for us or what’s good for our clients? We’re here to serve our clients, and if we do it right, the assets will take care of themselves.”

Thomson added that many gift-planning initiatives are financially remunerative to advisors, such as insurance strategies. “I’ve made money helping clients help others,” he said.

Susan St-Amand, founder and president of Sirius Financial Services in Ottawa, makes philanthropy one of the questions she asks in the process of getting to know her clients. “Are you philanthropic? What are you currently doing in the way of charitable giving? Sometimes the financial plan comes first, but sometimes the philanthropic plan is a new client’s priority.”

Karen Bjerland, president and chief executive of FaithLife Financial in Waterloo, Ont., says the subject of charitable giving invariably arises as the advisor-client relationship deepens. Given FaithLife’s Christian mandate [FaithLife is a fraternal society that provides financial services to Canadian Christians], our members are pre-disposed to supporting their churches and charities.”

Thomson said he shows clients a pie chart with a breakdown of how the federal government spends a dollar raised through taxation. “I slide it across my desk and ask, ‘If you had choice, is this how you would choose to spend your money?’ The answer is always, ‘Of course not!’ Then I ask, ‘Would you like me to help you to re-direct your involuntary philanthropy to voluntary philanthropy – without disinheriting your family?’ ”

“I honestly think it’s a financial planner’s duty to broach the subject of charitable giving with clients. They need to find out if there are causes that are near and dear to their hearts that they wants to support,” Winrow said.

Thomson was even more emphatic. “Advisors who choose not to discuss philanthropic giving with clients risk losing them to the competition,” he cautioned. “Canadians, especially the baby boomers, want to give back and leave a legacy. They want to move from success to significance.”

Advisors usually find that clients have no difficulty embracing the idea of giving back through charitable giving, said St-Amand. “It’s difficult to go through life without being touched by someone in need. What clients do need is direction in the best way to provide philanthropy.”

Tax regime fosters philanthropy

In addition to wanting to give back, many baby boomers can afford to do so. “Many will be selling their businesses in the coming years and facing large capital gains,” said Carole Bezaire, vice-president, tax, estate and strategic philanthropy at Mackenzie Investments in Toronto. Some don’t have family to leave their wealth to; some have received inheritances they don’t need.”

The federal government provides incentives in Canada’s Income Tax Act that facilitate philanthropic giving. The tax breaks triggered by their donations can make your clients’ gifts go even farther so advisors need to familiarize themselves with the tax rules on philanthropic giving.

Clients who make annual donations can donate up to 75% of their income for the year in order to receive a tax credit. “If donations have exceeded this amount, they can carry them forward for up to five years,” Bezaire said.

In the year of death, donations of up to 100% of the deceased’s net income can be claimed on the terminal tax return. If donations exceed this amount, the estate can carry the donations back to the tax return of the year before the client’s death. And, beginning in 2016, Bezaire noted, “the client’s executor can use the tax credit on any donation made after death to minimize tax in the estate or use it on the terminal return. This change recognizes that the donation tax credit cannot always be utilized due to low income.”

In 2006, the federal government eliminated capital gains tax on publicly traded securities donated to registered Canadian charities. “The client pays no tax on the capital gains and receives a receipt for the full fair market value of the securities, Bezaire said. “This could be a consideration for clients with high capital gains on the sale of a business.” And beginning in 2017, she added, any portion of the proceeds from the sale of private company shares or real estate donated to charity within 30 days of the sale will have the corporate gain on the portion donated eliminated from taxation.

Donor-advised funds

Long-term charitable giving became easier for some donors when donor-advised funds were introduced in Canada in 2006. This gifting option offers investors many of the tax advantages of private charitable foundations, and consolidates gifting, tax reporting and record-keeping. “And they’re spared the expense of establishing and maintaining a private foundation, which can run as high as $80,000 in lawyers’ fees and administrative costs,” Bezaire said.

Working with his advisor, the client determines which charities he will support and his foundation account is set up. At Mackenzie, donations to the Mackenzie Charitable Giving Fund are invested in any one of eight balanced mutual funds that offer the potential for donations to grow over time. The initial minimum contribution to the Mackenzie fund is $25,000, but other companies have different thresholds.

Clients receive a tax deduction for their initial contribution and for subsequent donations. They can add to or change the charities they support, and they can name family members to run the foundation account after their death.

“Every time a grant is sent to a charity, the name the client chooses for his foundation account is cited as the source of the gift,” Bezaire said, “for example, The Evans Family Charitable Giving Fund. “But many clients don’t use their own names in order to avoid solicitation from other charities. They use names like the In Good Faith Foundation.”

Clients can also take advantage of insurance planning around donor-advised funds, she added. When permanent ownership of a whole life policy is assigned to the client’s foundation account, a tax receipt is immediately issued for the fair market value of the policy. After the client’s death, the full death benefit is paid to the account.

And if the client names the foundation account as the beneficiary of the life insurance policy but doesn’t assign ownership – leaving the door open should he change his mind – no tax receipt is used during the client’s lifetime but, upon his death, his estate will receive a tax receipt for the full death benefit of the policy for use on the terminal tax return.

St-Amand serves on the board of directors of the Community Foundation of Ottawa, and often suggests that clients who have a specific charitable interest, such as a concern about homelessness, approach the community foundation to speak to players in the city who are conversant on that issue. They can donate to a community fund that supports a specific social program, or start a fund in their own names. Ottawa is just one of more than 180 community foundations across Canada that connect donors to the various needs in their communities. St-Amand cites the Community Foundations of Canada as a valuable resource for financial advisors. Its website, communityfoundations.ca, discusses charitable gifting options, and their benefits to donors and recipients.

Whatever the gifting strategy, “you’ll need first to determine whether planned giving is right for your client at this stage in his life,” Winrow said. “Even though he’s a high-net-worth individual, he may be carrying a high debt load, or be responsible for a family member with a disability.”

The 60-second bequest

Thomson favours a simple strategy that he calls the 60-second bequest. It starts with a request for an RRSP/RRIF multiple-beneficiary designation form from the plan administrator. Then the client completes the form, naming his spouse and a favourite charity or charities as beneficiaries. “In my case, my wife will get 80% of the value of my RRSP upon my death. The remaining 20% is divided among four charities, and my estate will receive four tax receipts from the charities. It takes a minute to complete, costs nothing, and doesn’t involve probate or require lawyers. And you can change your mind about the beneficiaries at any time.”

Life insurance can dramatically increase a client’s charitable donation. Bjerland described how transferring ownership of a new or existing life policy to a charity does this: “At the age of 40, Ms. Jones decides to make a substantial gift to a church or a charity. She purchases a permanent policy with a $100,000 death benefit and names her church or a favourite charity as the owner. She pays annual premiums of $1,400 for the next 20 years, and receives a tax receipt every year. When she dies at age 60, she has spent a total of $28,000 on premiums. Subtracting a tax credit of $11,200 at an assumed tax rate of 40%, the total cost of Ms. Jones’s gift was only $16,800. And her church or charity gets the $100,000 death benefit.

“And, unlike a will,” Bjerland added, “life insurance that is in the name of a beneficiary is not subject to the claims of the donor’s creditors. The policy is not subject to probate fees or income tax, unlike the estate. And life insurance proceeds are often paid out earlier than the disbursement of the estate.”

Thomson detailed how a charitable donation can be multiplied in size with the purchase of an annuity: “The client purchases an annuity for $25,000, but instead of living off the income stream, it goes to fund the premium on a life insurance policy that names his favourite charitable organization as its beneficiary. When he dies, the policy pays the beneficiary $100,000, in effect multiplying his $25,000 gift four times. And his estate will receive a charitable tax credit for $100,000, resulting in an ultimate tax saving of approximately $50,000, meaning that his children will end up with much more of their inheritance than would have been the case had he not been so charitable.”

A family legacy

One of the great rewards of philanthropic planning, Winrow said, is building a family legacy. “At our branch, we set up family meetings with members of two generations, the family’s lawyer and accountant, and two of our advisors,” he said. “Mom and Dad discuss their charitable gifting wishes – they can talk about percentages of the pie if they don’t want the children to know how much they have in assets. The children will understand what Mom and Dad want, and their questions are directed to the advisors, rather than to their parents, removing much of the emotion from the situation. Unless the philanthropic gift is stipulated in the will, there is always a possibility that it will be undone by the children down the road. But with a family meeting of this kind, we find that is less likely to occur.”

At a meeting of this kind, members of the younger generation may also offer their ideas about what charities they’d like the family to support, St-Amand added. “Discussions like these can teach everyone a lot.”

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