For high-net-worth and ultra-high-net-worth families, leaving a lasting legacy through philanthropy is very often a central priority that spans multiple generations.
Many of my own clients – and their millennial children – exhibit a very strong desire to use their wealth to support a wide range of worthy causes, from racial justice to anti-poverty to environmental sustainability.
They are often surprised to learn, however, that setting up a foundation and making cash donations is typically not the best approach to supporting their cherished causes. For most wealthy individuals and families, making in-kind donations of shares via a donor-advised fund is the most attractive option for philanthropic giving.
Why not a foundation?
Setting up and maintaining a charitable foundation is, from an administrative perspective, very much like creating and maintaining a business.
The legal and accounting work that goes into establishing a foundation will typically cost in the neighbourhood of $10,000. And while foundations do not pay tax, they are still required to file an annual return. That means yearly accounting expenses, which come on top of the ongoing administrative work of managing assets held within the foundation.
If foundations were the only option for carrying out a philanthropic plan, they would be well worth the effort and expense. But there’s a better way.
A donor-advised fund is a third-party vehicle – offered by most community foundations and some asset management firms – that effectively outsources the functions that would normally be performed by a foundation, while achieving all of the same charitable goals.
Donor-advised funds offer tremendous flexibility and convenience, as they allow you to make a large donation in a given year, claim the donation tax credit for that year, but disburse the funds in later years to a variety of charities. With a donor-advised fund, you simply make the gift and provide instructions on how to disburse it, and the organization that runs the fund takes care of the rest.
The fee associated with this service is generally low – typically 1.0% to 1.5% for a $250,000 donor-advised fund. In some instances, the fee is based on the number of donation grants you request. In both cases, the fee is not tax deductible, but it does not reduce the amount your donation tax credit is based on.
In short, with a donor-advised fund, you’ll save time and money, and you’ll be able to focus your philanthropic efforts on the joy of giving, rather than on administration and accounting.
In-kind stock donations
One of the best ways to maximize the amount you give – and the tax benefit of giving – is to make in-kind donations of stock, rather than cash donations generated from realized gains. To illustrate, let’s look at a hypothetical example:
Geneviève is a 32 year old attorney living in Montreal. Five years ago, she used $500,000 in family funds gifted to her to purchase shares of Facebook.
The shares are now worth $1 million, but Geneviève just received a $5 million bequest on the passing of her grandmother. So she decides to use the full value of her Facebook shares to make
a generous donation, via a donor-advised fund, to the children’s ward of her local hospital, and a local organization that supports women victimized by domestic abuse.
Here are her options:
Sell and donate the proceeds
The sale of the shares would generate $1 million in cash, and 50% of the $500,000 capital gain – $250,000 – would be subject to a tax rate equivalent to Geneviève’s highest marginal rate, which
is about 50%.
This would result in a tax bill of about $125,000, leaving $875,000 to donate to her charities of choice. Her tax credit would then be calculated based on the donation amount of $875,000.
Donate the shares in-kind
Gifting the shares means Geneviève would not be subject to capital gains tax, as our tax code says that when you donate shares to charity in-kind, you don’t have to claim a capital gain.
This means the charity would receive a donation valued at $1 million rather than $875,000, and Geneviève would get a donation tax credit calculated on $1 million rather than $875,000
With the right planning, you can maximize the benefit received by your charities of choice, and increase the tax benefits of your generosity. Working closely with an experienced and knowledgeable Investment Advisor ensures that each component of your philanthropic vision is planned and executed as efficiently as possible, aligning all aspects of your intergenerational wealth plan – investment management, philanthropy and estate planning – with the values that define who you are.