Advisor Forum update: Planned giving requires advice

(October 9, 2003) Older investors who’ve managed to build an estate, sometimes considerable, sometimes not, are concerned less with managing the buildup of their capital than with the appropriate reinvestment of their capital when they pass on. One could read that as a coded anti-estate-tax message. But it’s actually more complicated than that. It can range from direct giving to social entrepreneurship to something else again — whatever it is, advisors will have to consider this as their clients age.

What’s appropriate? Consider the relatives of Robert Young, the founder of U.S.-based software giant Red Hat and new owner of the Hamilton Tiger Cats. After he floated Red Hat in 2000, some members of his extended family were left with extraordinary legacies as a result of funding Young’s startup. One, Young’s aunt Joyce, donated her capital surprise — $40 million — to the Hamilton Community Foundation. Robert’s cousin, Bill, used part of his windfall to create Social Capital Partners, which seeds organizations that train traditional social services clients for jobs that have more profit upside than loss downside in the real world.

Defining social capital

Social capital has different definitions. In a North American context, social capital can mean planned giving to charity — not one-off tickets to police association baseball games, or even the United Way — but the commitment of substantial bequests to a particular organization. One-off events often produce less than expected, as Toronto Maple Leafs president Ken Dryden found in assessing the net benefit of the Easter Seals Skate-a-thon. The fundraising wasn’t ultimately cost-effective.

Giving help

There are associations, especially in Quebec, that are trying to raise the profile of systematic giving among financial and legal advisors — to tap the store of wealth and goodwill for those who are community-minded.

The Leave a Legacy campaign, which has roundtables across the country and in Quebec is known as “un héritage à partager,” mounted a presentation in Montreal at the Advisor Forum earlier this month. The Quebec roundtable supports some 140 local organizations, from the Salvation Army to the McGill University Centre on Aging to hospital and university foundations through to Les amis de la montagne (dedicated to preserving Mount Royal) and the Fondation Mira, which trains guide dogs. The sheer diversity of organizations supported is in consonance with a province where social investments, from socially responsible investing through to Quebec’s Solidarity fund receive much approbation.

The idea, says Lucille Grimard, head of planned giving for Quebec’s Heart and Stroke Foundation, “is to encourage individuals to make major gifts as part of their financial estate planning.” To do so, however, requires building links between donors, their financial planners and charitable organizations to create a “win-win-win proposition” that allows advisors to “maximize the gift both for donor and the organization.”

Giving more for less

How that can occur, explains Gilbert Lemieux, who coordinates the Montreal United Way’s (Centraide) planned giving program depends on contrasting “involuntary” and “voluntary” social capital. For involuntary social capital, read federal and provincial taxes, and voluntary means “giving more to the charitable organization and less to taxes.”

Planned giving, he says, is a stimulus for investors “to transform their involuntary social capital into voluntary social capital without having diminished their personal capital” upon which they depend. It’s also about more than “writing cheques on a bank account,” which do diminish personal capital. It also appeals to those who think “individuals are better in some cases in managing social capital than the government is.”

As an example of contributing to social capital without drawing down personal capital, Lemieux notes that charitable gifts can be made up to 75% of taxable income and attract tax credits — depending on the provincial marginal income tax rate — of up to 48%, while amounts over 75% can be netted against taxes over five years. Donations of stocks and mutual funds benefit from another tax advantage — the capital gains rate is sliced in half.

Life annuities

Donations can be made within a client’s lifetime, says Martin Massé, director of planned giving at the foundation that supports St. Joseph’s Oratory in Montreal. Two types of life annuity allow for investors to have a monthly income while contributing the capital value of their estate to a charity. A charitable life annuity issued by a charitable organization transfers the estate to the organization while paying out a fixed income to the donor for life. For tax purposes, the annuity payments are often counted as return of capital, while the client receives a tax receipt up to 80% of the gift.

With an insured annuity, the charity doesn’t fund the annuity itself but instead lets out the contract to manage the underlying investment. The tax law remains the same: the credit is calculated by comparing the difference between the single premium for the annuity and the capital value of the gift. In each instance, there must be a gift of at least 20% of the capital for the annuity to qualify.

“If a person gives $100,000, we would look to see what kind of annuity we could get for $80,000,” Massé says, warning there might be a taxable portion. Even if the annuitant must pay some taxes, he adds, tax credits may cancel out the taxes.

Insurance policies

Insurance policies can also be used to leave a legacy, says Chantal Thomas, director of planned giving at the Université de Montréal. But this must almost always involve a qualified life agent. There are three routes: donating an existing policy, giving a new policy or designating a charity as the beneficiary of a policy.

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In donating — or surrendering — an existing policy, the charity becomes the irrevocable beneficiary. The donor can claim the value of the policy plus any deposits within the policy. If the donor continues to pay the premiums, those can also be credited against tax.

Alternatively, a client could donate a new policy, particularly if younger, that is paid up over a short period, with a maximum of less than 10 years to fully benefit from the lower premiums. The premiums would be tax-deductible. Finally, a charity could be named a beneficiary of an existing policy. There’s no tax savings during the life of the client, but there will be tax savings for the estate.

Obviously, with these varied means of making a social legacy, “it’s not a matter of taking a phone book and trying to sell everyone on planned giving,” says Paul Meunier, an advisor with Chevalier, Meunier and Associates. In fact, it may take five to seven years of work, he advises. “It’s harder to bring a client to a donation than to get them to invest $100,000.”

Still, he suggests, “If you are yourself givers, it will be easier to convince others to give.”

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It’s not too late to sign up for future Advisor Forum conferences across Canada, where you can earn up to 10 CE credits and collect 85 tips and ideas for your practice. For dates and more session details on upcoming Advisor Forum conferences in Calgary, Vancouver, Toronto and Halifax, please visit the Advisor Forum Web site by clicking here.

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Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

(10/09/03)