Some clients opt for donor-advised funds because of the flexibility they offer when it comes to choosing charitable organizations.CatLane/iStockPhoto / Getty Images
Most clients pick a loved one or their estate as the beneficiary for their investments, but fewer consider a registered charity.
Designating a charity as a beneficiary can be tax-efficient, especially for wealthy clients who don’t need the money and feel their heirs already have sufficient assets, says Alexandra Spinner, chartered professional accountant and partner in the tax and estate planning group at Crowe Soberman LLP in Toronto.
Here are three underutilized and tax-effective charitable giving strategies:
1. Registered accounts
Ms. Spinner points to registered accounts – specifically registered retirement savings plans and registered retirement income funds – as a solid strategy for philanthropic clients who want to give now.
Typically, when investments in registered accounts are sold, financial institutions apply withholding tax to the account’s balance and the investments are taxed as income.
But for clients who donate these accounts, Ms. Spinner applies to the Canada Revenue Agency for a waiver on the withholding tax. Doing so provides even more money to the charity.
“That’s a trick where you can preserve the full value of the retirement account when you’re alive and give the entire retirement account to a charity,” she says.
Abe Toews, chartered financial consultant at Beyond Wealth Management in Regina, says he often advises wealthy clients to donate their registered accounts to charity. He says they can either name the charity as a direct beneficiary or list the organizations directly in the will.
In some cases, he says clients provide their executor with an option in the will to donate all registered accounts to charity for tax reasons.
“Registered assets will likely be the largest taxable assets for singles and on the death of the second spouse,” he explains.
2. Life insurance policies
Donating permanent life insurance is another option for clients who regularly support a charity and wish to continue doing so after they die. Ms. Spinner says a policy needs to be structured so the charitable organization owns the policy while the donor (client) pays the premiums and receives an annual tax receipt.
This idea may work for affluent millennials and younger generations who are charitably inclined as insurance is still relatively affordable at those ages, she adds.
But it can also work for older clients with fully paid-up insurance policies. Perhaps they originally earmarked those funds to pay off liabilities or support surviving family members, but they became more prosperous and sold another asset to handle debts instead, Ms. Spinner says.
In these situations, the client will receive a tax receipt for the policy’s fair market value at the time of the gift, she says. The charity doesn’t receive the insurance money until the client passes away.
3. Donor-advised funds
More clients opt for donor-advised funds (DAFs) due to the flexibility in choosing charitable organizations and the fact they’re funded upon death, says Lydia Potocnik, national head, estate planning and philanthropic advisory services at BMO Private Wealth in Toronto.
Clients instruct their executor to establish a DAF and a specific dollar amount or percentage of the estate is specified in the will. They can also list types of charities they wish to see benefit from their donation, she adds.
That can be more effective than simply naming a specific charity in the will, Ms. Potocnik adds. She gives the example of a client listing her alma mater as a beneficiary in her will but then changes her mind a few years later. The client would have to pay legal fees to update the will. Using a DAF, in comparison, allows clients to set up charities as beneficiaries directly within its structure. Changes can be made at any time with no additional cost, she says.
Some clients also appreciate that many public foundations that offer DAFs have philanthropic advisors who help them evaluate and find charities that interest them, she adds.
The importance of open communication
Ms. Potocnik cautions that clients should communicate their intentions to loved ones in advance. Simply leaving the information in the will without discussion can mean gifts to charities could be contested by other beneficiaries.
“Sometimes relatives are surprised to find out that their loved one left a large gift to a charity,” she says, and they question whether the deceased knew what they were doing.
Another mistake is letting the charity know about the future gift but never formalizing the intent by updating their estate planning documents, she adds.
“Make sure you document those intentions in a will and consult with the charity to ensure that your wishes for how the gift is to be used can be carried out by the organization,” she says.