Creating a lasting legacy
The giving spirit is alive and well in Canada. Due in part to an aging and affluent Baby Boomer population, increasing numbers of people are taking steps to create a lasting legacy for themselves and their families.
“We’ve definitely seen an increase in proactive legacy planning over the last five years, says Tony Maiorino, vice-president and head, RBC Wealth Management Services. “To some extent that has to do with the large cohort of baby boomers who have accumulated wealth and want to get more involved in charitable organizations.”
Many high-net-worth individuals turn to structures such as charitable trusts or foundations so they can create a sizable legacy without having to be involved in the job of administering multiple contributions every year, Maiorino says.
By way of explanation, a charitable foundation trust is created by a trustee. Typically donors make a lumpsum donation based on a minimum requirement and receive a tax receipt for the year the contribution is made. In this scenario, trustees make the decisions about disbursements of funds to the charities, and have the ability to issue cheques and receipts for contributions made. “The rules are very clear in terms of who they can and cannot give contributions to,” says Brenda Lee-Kennedy, tax partner with PwC in Toronto.
If i ncome is a concern, some may opt for a charitable remainder trust. This provides the donor with the tax relief at the time of the contribution, but the individual can continue to benefit from the income of the assets in the trust during their lifetime. “Essentially the donor has a life interest in the asset, but is able to benefit from the tax receipt today,” Lee-Kennedy says. “The charity generally has to wait until the life interest of the beneficiary ends.”
While there are obvious tax benefits to setting up a charitable trust, according to Ron Kelly, chief financial officer for Gift Funds Canada in Kingston, Ont., it’s not tax benefits that are driving the interest in philanthropy. “A recent Association of Gift Planners study indicated that a tax benefit was the last reason for setting up a charitable trust,” he says. “There is a strong driver to increase the capacity to give.”
Commercial donoradvised (CDA) programs — in which financial institutions or investment management firms manage the funds — have shown substantial growth compared to community foundation programs (i.e. funds created by communities for funding local charities) and private foundations, Kelly says. CDA programs have experienced a 28.8% compound annual growth rate from 2006 to 2011, and total just under $600-million.
“These programs are great for both the charities and for individuals,” Maiorino says. “They can be an effective way for people to get the tax benefit while allowing charities to receive money they might not have been able to previously because they lack the administrative infrastructure.”
Most foundations require a lump sum amount, so timing is a critical consideration. Generally it’s best to choose a year in which you can optimize the tax savings. For example, someone selling a business may donate a portion of the proceeds of the sale in that year to lower their tax obligations.
There is a strong driver to increase the capacity to give
Contribution minimums vary from program to program, Kelly says. These can range from $25,000 to $100,000. “A $10,000 capital contribution simply won’t generate very much income to provide annual grants.” Programs will also vary in terms of the types of contributions they will accept (e.g. cash, assets or shares).
Foundations such as the RBC Charitable Gift Program also provide the ability for people to fundraise, Maiorino notes. Any family members making contributions will get a tax receipt in lieu of direct payments to individual charities. “If I had a large family, I could go to different members to make contributions each year. For some it’s a more meaningful way to honour the family’s name.”
This also helps to maximize the compounded earning and contribution power of the funds over time, he adds. “If a brother contributes $10,000 a year to different charities, why not make one donation to a family foundation? Everyone benefits that way.”
Another important factor is flexibility in the level of input the person wants to have in the process, Maiorino says. “The first thing we ask clients who have a charitable intent is how involved do they want to be, and how long do they want the gift to benefit charities?” For example, donors can leave the disbursement decisions to the fund, specify individual charities or identify charitable categories (e.g. environment, health care, education, religion).
One thing to remember when planning your contribution is that the gift is irrevocable. “It’s just as if you made it to any other charity. But it is a way to structure your philanthropy so that grants are awarded according to you instructions over the longer term.”