Planner: Charitable giving options

Here are some ways to help clients connect the dots about different approaches to charitable giving.

Learn the pros and cons of giving cash, life insurance and gifts in kind. Or setting up donations of remainders of a trust, donor-advised funds and philanthropic foundations.

Understanding your charitable giving options

Thinking about making a charitable gift? Before you donate, get familiar with the pros and cons of some of the more common ways to give. This ensures the structure you choose fits your personal financial circumstances. So let’s review:

Cash

Probably the simplest type of giving structure: you hand off cash or write a cheque, and the charity gives you a tax receipt acknowledging your donation.

Pros – You can make gifts when you can afford to, and you can give when the charity needs it most.

Cons – Cash gifts receive no special tax treatment, other than the donation tax credit.

Gifts in kind

The official name for gifts of stocks, mutual funds, real estate, or other tangible property; the tax credit you receive is based on the property’s fair market value.

Pros – A good option, particularly with gifts of securities, which receive preferential tax treatment on any capital gains realized when they’re donated to a registered charity.

Cons – Assessing the value of securities is easy; but the value of other in-kind donations can be more difficult to determine. Canada Revenue Agency has been particularly vigilant pursuing fraud allegations related to hyped-up valuations of art, cultural property, and certain forms of real estate donated to charities.

Life insurance

There are several ways to use life insurance to make charitable donations. You can make a charity the beneficiary of an existing life insurance policy; or do the same with a new policy. Or you can make your estate the beneficiary of a life insurance policy, and include a provision in your will for the donation. Each of these strategies has different implications for tax credits.

Pros – Extremely flexible. An excellent way to leverage cash donations—policy proceeds may be far greater than the amount of cash that could otherwise have been donated.

Cons – Complicated and requires professional set up. For certain types of policies, premium payments can rise exponentially late in the donor’s life. If a donor waits to long to establish policies, this strategy can become cost prohibitive.

Charitable remainder trust

You pass property intended for a charity to a trust. You receive an immediate tax receipt for the property, but retain the right to use and derive benefits from the property while you’re still alive. Upon your death, the property passes directly to the charity.

Pros – Ideal for assets you need during your lifetime. Example: the family cottage, or a bond portfolio.

Cons – In most cases, once assets are passed into a trust, they are irrevocable. And assets passed into trust can’t be bequeathed to heirs.

Donor-advised funds

A giving account at a public foundation, which lets donors make recommendations about where monies go and for what purpose. Offers many of the advantages of a private foundation, without the costs and hassles associated with setting one up.

Pros – Donors can change beneficiaries after the will is written or life insurance policy is placed. Allows ongoing control over donations. Avoids the accounting and legal expenses of private foundations.

Cons – Not all public foundations offer donor-advised funds. Not all assets qualify as donations. Structure doesn’t permit some forms of individual charity (example: named scholarships).

Private foundation

The most complex giving structure is best suited for the truly wealthy. In the most basic scenario, the giver establishes a private non-profit organization, and assigns assets to that organization in exchange for a tax receipt. The giver appoints a trustee to oversee assets and a group of directors to oversee ongoing grants.

Pros – Total control. An excellent way for those with substantial donations (say, $1-million or more) to establish a lasting charitable legacy. Assets within the structure grow free of tax, so foundations can be an excellent way to ensure charity lasts far beyond the donor’s lifetime.

Cons – Complicated, expensive and time consuming. You’ll need a lawyer and accountant to help set a foundation up. Ongoing costs and administration fees can be a drain on assets. And foundations require regular input and participation from founders and board members.