Philanthropy and Legacy Planning: Making a Meaningful Impact

Canadians who want to benefit society with some of their wealth have a range of options. Alignment with personal values, tax, family involvement and your vison for what you want to achieve are all key considerations for planning your legacy.

An initial choice is between responsive and intentional giving, the first being when individuals respond in the moment, perhaps quite generously, to a request: “writing a cheque”. Intentional, or strategic, philanthropy matches financial resources with specific goals over time. Donor-advised funds, private foundations and charitable trusts are some common vehicles for doing this, and executing a successful strategy requires careful preparation and expert advice.

Establishing priorities

Philanthropy can be straightforward (making a substantial, one-time donation) or complex, such as setting up a foundation that will actively sustain your legacy for many years after your death. However you proceed, there are several important initial considerations:

• Alignment
• Tax efficiency
• Family involvement
• Creating a lasting legacy

Alignment

What do you deeply care about? Education, community, the environment, healthcare, and the arts frequently motivate Canadian philanthropists. Is there a specific issue or related organization that is particularly meaningful for you? What is its current financial profile? Do its activities and priorities align with yours? Detailed research can be an important first step in the evolution of your thinking about a major financial commitment.

Tax efficiency

Wealthy individuals and families can often draw upon diverse asset portfolios to fund major donations, including investments, real estate, art or the sale of a business. For all of these, tax efficiency in the sale and transfer or conversion of assets into a donation is a key consideration. Charitable giving offers significant tax benefits, allowing donors to reduce their taxable income while contributing to societal good. Tax-efficient giving can also help preserve your wealth for further contributions in the future.

Family involvement

Do you want your family to embrace your vision? Engaging the next generation can develop shared values and stewardship best practices to enhance the longevity and impact of the wealth you have created. This can be particularly relevant if you choose to establish a family foundation that you hope future generations will play a role in.

Creating a lasting legacy

There can be a significant difference between giving during your lifetime and extending it beyond your death. While making major donations today can involve detailed preparation, sustaining the impact of your philanthropy past your own lifetime (through a foundation, for example) requires extensive planning involving legal, tax, and asset management advisors in coordination with the organization or vehicle you select for executing your vision. This process should also be integrated into your estate planning.

Some tools for strategic philanthropy

A Doner Advised Fund (DAF) is a vehicle that allows you to donate to a public foundation and receive an immediate tax receipt, while keeping the ability to recommend which registered Canadian charities should receive grants. Your donations are typically invested for growth and you can contribute more in the future. Some advantages of DAFs include:

• Your donations are eligible for immediate tax credits. If you donate securities that have appreciated in value, there is no capital gains tax.
• DAFs are easy to establish and maintain compared to private foundations.
• Grants from the DAF can be made over time, which allows you as the donor to support charities strategically.

One drawback is that you do not have legal control of the DAF and the sponsoring organization has ultimate authority over grants. A DAF is not suitable if you want to control funding decisions or establish a “public” legacy.

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A Private Foundation is a registered charitable organization funded and controlled by an individual or family. It provides a formal structure for philanthropy, enabling you to create your own charitable entity to support your priorities. Income generated by the assets that you contribute to the foundation is used to disburse money to eligible grant applicants or to fund the foundation’s own charitable programs. Advantages include:

• You have full control over the foundation’s operations, including investment decisions and grant-making priorities.
• A foundation can bear your family name, ensuring a public legacy.
• Donations qualify for charitable tax credits.
• The foundation’s income is tax-exempt.

An important and long-term issue is that establishing and managing a foundation involves significant administrative and legal expenses. It is wise to carefully consider the governance model of the foundation to ensure alignment with your personal goals and values (and to account for any relevant family dynamics) after your death.

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A Charitable Remainder Trust (CRT) allows you to set aside assets for both charitable and non-charitable beneficiaries, blending philanthropy with legacy planning. A CRT can be tailored to specific financial and philanthropic goals. Advantages of a CRT include:

• Income for you during your lifetime. Your donation is placed with a trustee, often an institutional or professional trustee, and you receive the income generated by the management of those assets.
• The capital stays intact and when you die the named charity receives it and the CRT ends. Assets you transfer to a CRT are no longer part of your estate and are not subject to probate fees and other estate costs when you die.

The ability for you to receive income from the CRT is an attractive benefit but should be part of a broader income strategy. You can’t withdraw any of the capital you originally donated so having other income sources could become critical if the CRT income falls below your needs. An example would be period of very low interest rates at a time when your personal expenses, perhaps for medical or personal care, are rising. Setting up and managing a CRT requires legal and financial expertise and once established, they are typically irrevocable, limiting your flexibility.

Professional advice

Given the potential complexities of philanthropic planning, the advice and coordination of your wealth management, legal, tax, and estate planning advisors is crucial. They can provide strategies that align with your goals, ensure compliance with legal requirements, and help maximize the impact of your donations.

If you expect to fund your charitable giving from investment assets tell your advisor to include this topic in your regular portfolio reviews. Together, you can create a plan for what you can give annually and how to finance it. Throughout the year, your advisor can identify investments that can be used to fund (either in cash from sales or donated securities) your philanthropy budget in the most tax efficient way.

Alternatively, you may foresee the sale of a business providing the capital for a major philanthropic initiative. Such an event is often the origin of family foundations and integrating those intentions into the structuring of the sale with your legal advisors can be beneficial from a tax perspective. A slightly different approach funded the largest gift ever made to a Canadian charity by an individual, with a bequest to The Winnipeg Foundation of all the shares in a privately held business valued at $500 million.

Conclusion

Philanthropy and legacy planning can empower Canadians to make a meaningful impact with their wealth beyond securing their family’s financial future. Tools like donor-advised funds, private foundations, and charitable trusts offer various degrees of flexibility and control, enabling donors to align their giving with their values and long-term objectives. Incorporating professional expertise can ensure you achieve your philanthropic goals and create a lasting and transformative legacy.