Charitable foundations back in fashion

(August 12, 2004) Wealthy Canadians are increasingly looking for opportunities to give back to society and their financial advisors can be of great value in reaching their philanthropic goals.

A survey conducted by Ipsos-Reid for Scotia Private Client Group found 73% of affluent Canadians see private philanthropy as increasingly vital, as social concerns are met with funding cuts.

The survey also found 18% of affluent households have considered establishing private foundations to address this funding shortfall. While respondents acknowledged the importance of private funding for arts and cultural charities, healthcare and education were listed as the most likely to benefit from such a foundation, with 26% and 22% support, respectively.

“It represents a major shift in attitudes, because private foundations indicate that people are generous and they want to develop a program of giving,” says Malcolm Burrows, charities and gift planning consultant, Scotia Private Client Group.

Private foundations can be set up either as trusts or as not-for-profit corporations and must be registered as charities. Trusts tend to be more popular, however, since it is easier to appoint a single trustee than to find three volunteer directors for the corporate board.

The foundation structure allows the donor to contribute to several causes over time, adapting to the needs of society, rather than making one lump payment to a single charity.

Starting in the 1920s and continuing through the 1950s, private foundations were very popular among the wealthy, but their creation slowed to a trickle in the 1970s and 1980s. Burrows says it is very refreshing to see a resurgence of interest and he credits changes in the tax system for much of the renewed philanthropy.

“Between 1996 and 2002 we saw this explosion in giving and most of it was driven by gifts of assets,” says Burrows. “In the past 10 years, the Income Tax Act has been changed to support these gifts, so all of a suddenly we see people giving amounts closer to their net worth, rather than giving from their income as they go along.”

Tax laws used to penalize gifts of assets, such as real estate or stock, offering no credit for the donation. The wealthy donor was expected to not only absorb the loss of the donated asset, but then had to pay tax on it as well.

“Our tax laws really were quite punitive to generous individuals in the past, but now they’re really quite supportive,” he says. Since 1996, there have been at least 15 changes to the Act, making asset donation easier to swallow.

The survey found that 40% of respondents had no idea where to go for advice on setting up a private foundation, representing a large, untapped market looking for help. The most popular source of advice was found to be the banks, garnering 36% of respondents. Interestingly, none of the survey participants named their lawyers as a prospective source of advice.

“Financial planners are absolutely essential in this process. Having the discussion about philanthropy is really the first step,” explains Burrows. “You have to figure out if this is a priority in this person’s life. The advisors who don’t raise that question, never do any of this planning. There are many who don’t because they don’t feel comfortable doing this, as they feel it is disinheriting family.”

It is important to ensure there is adequate communication between the donor and their heirs, to avoid any surprises in the estate. If the heirs are brought in on the process, they will understand the wishes and motivation of the donor.

Charitable gifting will often benefit the heirs anyway, since it reduces the tax liabilities of the estate.

“You have to pay something to society, do you want to pay it to the government, or do you want to support charitable priorities?” asks Burrows. “Children don’t end up being significantly disadvantaged, since it would have gone to pay the taxes anyways. Clearly articulating that is important.”

While some advisors may not be interested in giving away their clients’ assets, Burrows says they are missing out.

“I always say I deal with people at their best,” he says. “It is deeply satisfying work and I find so many of my colleagues share in the joy and the passion of their clients. Talking about interest rates just isn’t interesting, but setting up someone’s permanent legacy is really a turn-on.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(08/12/04)

Steven Lamb