Protect philanthropic clients

When a wealthy divorced Montreal man died recently, his three children learned they’d only be sharing half of his estate. His offspring, all adults and living outside Canada, were taken aback by the news.

Why make such a gesture in his last formal communication with his heirs? Was he sending a message about their lifestyle choices?

“Good rational questions that only have complex human answers,” demurs the teller of this story, Malcolm Burrows, who heads philanthropic advisory services for Scotia Private Capital. In this case, Burrows adds, the will reading contained a second revelation: the man bequeathed half his fortune to a charitable foundation.

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In recent years, many charities have benefited from a growing interest in private philanthropy, and not just from the rich, observes CA Jason Rideout, a partner at Archambault, Neathnay & Rideout in St. Stephen, New Brunswick. Tax code changes during the late 1990s allow donation of share capital. That’s greased the wheels.

For some would-be heirs, a client’s desire to give to charity may look like a zero-sum game. And in a few instances, gifts can represent a bit of payback, says Burrows. “Occasionally, charities are used as a revenge position. But in 25 years [in the philanthropic sector], I can count those on one hand.”

Regardless of motivation, though, it’s an advisor’s job to ensure there aren’t any legal challenges when aging clients declare intent to make substantial charitable donations as part of their wills.

It remains difficult to disinherit family members, and recent wills legislation in British Columbia guarantees children and spouses a portion of an estate. Further, wills can be challenged if family members can show testators were incapacitated when they drafted the documents, or were unduly influenced by third parties.

Removing the element of surprise can also make large charitable bequests more successful. “Advising the family of charitable gifts,” observes Corina Weigl, a partner in the estate planning group at Fasken Martineau in Toronto, “goes a long way in ensuring there won’t be any challenge.”

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Document everything meticulously

When an older client revises her will to include a large donation to charity, possibly at the expense of family members, carefully document the shift in intention. The new will language isn’t necessarily sufficient.

Burrows advises assembling a dossier that includes correspondence with the charity, and even a biography of the client that outlines her goals for the bequest in non-legal language. These documents should be shared with family members and the charity itself, as they serve to further disseminate evidence of the person’s intent. Further, Rideout urges clients who want to donate signi-ficant amounts to charity to use specific dollar amounts in their estate documents rather than percentages, which can be moving targets.

Many private wealth advisors also convene family meetings so the person can outline her desire to make a big gift in the presence of witnesses, including an estate lawyer. Weigl points out such sessions aren’t meant to be negotiations. “I tell my clients, ‘You have to be strong.’ They have to be able to withstand pressure to do something different.”

Susan Fulford, an investment advisor at TD Wealth, says if you anticipate a challenge to a gift, it’s useful to have a lawyer draft a letter of intent to set up the donation, and then ask the next generation sign it to acknowledge that they’re aware of the planned gift.

If she’s proposing her client establish a philanthropic vehicle, such as a donor-advised fund, that client should formally invite family members to participate in making decisions about how those monies will be allocated.

Even if they decline, the formal invitation to participate “diminishes that ability to argue the gift later on. They can’t come back and say, ‘I didn’t know about it.’ ”

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Vetting the charity…and the client

While it’s important to accept a client’s wishes and smooth things over with the family, what’s an advisor to do if an announcement of a bequeathal raises red flags?

Scam artists love the elderly, who tend to be sentimental, and preoccupied by the notion of legacy. As such, the elderly often find themselves on the receiving end of high-pressure sales pitches, and some change their wills to make a significant donation to a dodgy charity.

For clients considering such a move, Rideout says it doesn’t take long to determine whether the charity is real or not. CRA has a complete listing of registered charities on its website. If the organization’s a scam, urge them to re-amend the will. (For charities that check out, advisors should determine whether they have the organizational infrastructure to accept large gifts of cash or stock.)

But bear in mind that a client’s decision to make sudden changes in giving plans late in life may not lie with a phony charity. Advisors should have a clear picture of their clients’ philanthropic history (e.g., the sorts of charities they’re drawn to), so they can recognize unaccountable shifts that may indicate a loss of capacity.

If an advisor suspects difficult-to-explain instructions for bequests stem from mental decline, Burrows says a lawyer may recommend a formal capacity test to determine whether the person is capable of altering her will in a way that will stand up in court. He adds the best way to broach this topic is to remind clients that if they really want their donations to be successful, it’s better to have that capacity test to ensure the will is watertight.

“As an advisor, you want to make sure there’s clarity of intent,” he says.

Read: When to talk philanthropy

Other forms of giving

Life insurance policies can be used to offset estate tax exposure, as well as to amplify charitable goals without cracking open a will, says Jack Bergmans, a CFP and principal in Bequest Insurance.

Advisors routinely propose life insurance policies to cover outstanding capital gains tax payable upon death as a means of reducing the survivors’ exposure. But when the policy beneficiary is a charity, a client has the opportunity to exercise philanthropic intentions while keeping the estate whole. Bergmans adds this approach avoids probate taxes and keeps bequests private because the insurance policy is not part of the will.

Another approach to tamper-proof a client’s charitable intentions is to propose lifetime gifts, observes Bergmans. Rather than load all the giving into a will, some clients donate the money while they are still alive, which is another way of short-circuiting charity-related will battles.

Some people, however, like to make multi-year commitments, as opposed to one-off gifts. While the donor is alive and has the capacity to write the cheque annually, for example, there are usually no concerns.

“I have yet to have a client who gives too much and has inadequate resources for personal care or family,” says Burrows.

And if a trustee with power of attorney takes over the client’s finances, and “there is a history of modest donations, these often continue,” says Burrows. “Big donations under a POA are rare and probably imprudent in most cases, as the primary duty of care is to the client during life, not to her heirs, family or charity. A trust document can provide powers for discretionary charitable donations, but without explicit powers the trustee is not able to make significant gifts.”

If a client has promised to give a specified amount for a certain number of years and then dies before the donation program is complete, the remaining gifts may not be legally binding, says Weigl. So, she says, clients should add instructions in the will on how the executors should satisfy outstanding pledges.

Involving the family

Marvi Ricker, vice-president of philanthropic services at BMO Harris Private Banking, says the best defense against family conflict is an approach that directly involves adult children in the planning and execution of their parents’ charitable goals.

This can be informal—as simple as a family discussion about the causes that would merit a contribution. For families that want to establish more active roles for members, advisors can propose charitable corporations, which are relatively easy to set up. Another option is a trust-based foundation, which requires more legal preparation but is less flexible and less open to changes by future generations.

Ricker says the corporate structure offers more flexibility, and the next generation gains the ability to alter its mission to reflect evolving philanthropic goals. Formal trusts, she adds, are best suited to elderly clients with no family.

“When kids find out that their parents want to set up a foundation, they’re generally thrilled and proud of their parents,” she says. “They know they’re going to inherit something. [In such circumstances], I’ve never heard anyone say, ‘I think I should be getting the money.’ ”

John Lorinc is a Toronto-based financial writer.