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The intelligent donation

Posted on: September 29, 2015 | Author: John Shypitka, CFA, CFP, Director and Investment Counselor

Are you at a stage in life where legacy planning has become a new priority?

I was recently in a client meeting where this became a topic of discussion after the clients had sold some valuable land. It is not uncommon for wealthy, or high net worth, clients of our Private Counsel service to find themselves the recipients of a sizeable amount of money from the sale of a business or other assets. The big question that tends to follow is what to do with the proceeds?

The investment portfolio of these particular clients, and their net worth in general, has been managed in such a manner to last for the rest of their lives and accomplish their estate goals. The discussion around the land sale proceeds therefore centred on how they might use these “surplus” dollars to benefit the charities they felt strongly about, rather than paying a lot of tax.

In other words, planning their legacy became a priority. As investment counselors, we often find that clients feel an emotional burden to make the most of this opportunity given the potential to positively impact the lives of others.

Through our discussion, it became clear that we were looking for an alternative to provide a large tax credit from a charitable donation in the current tax year to reduce the taxable gain from the land sale.

Ideally, the dollars donated could be invested for many years to create a legacy through annual grants. Investment options needed to be flexible, the fees reasonable and there’d be the option to include family members in the charitable decision-making to create continuity across generations. Finally, the solution couldn’t be difficult to set up and maintain.

We explored the options together. The highest level of control and expense was the setup of a private foundation. Generally, this requires $1-5 million to justify start-up and on-going expenses such as a board of trustees/directors.

A second alternative was a donation to a community foundation where the board of volunteer directors sets investment policy for the donation.

A third alternative was the use of a donor advised fund (DAF) with many of the benefits of a private foundation at a lower cost.

A deep dive into each revealed that the DAF alternative ticked off all the boxes on my clients’ check list. Donor advised funds include the following benefits:

  • The money is donated to a foundation set up to support DAFs. In partnership with Cidel Trust, the ATB Investor Services Foundation takes care of setup, administration, and tax reporting to Canada Revenue Agency.
  • A tax slip for the full transfer to the DAF is provided for use in the tax year in which the transfer to the DAF is made. Donors may claim a tax credit up to 75 per cent of their net income with the excess claimed in any of the following five years.
  • The donors retain a measure of control over how the money is to be managed, as it will be managed alongside their other investment accounts.
  • Each year, donors implement their charitable gifting plan by identifying registered Canadian charities to receive grants. The choices can change from year to year.
  • Generally, at least four per cent of the DAF value is granted annually to charities. One approach is to grant the investment growth to charities while preserving principal to generate future gifts.
  • The donor has flexibility in naming the DAF to allow for the level of privacy desired. There is the option to involve family members or other trusted individuals, allowing the DAF to continue beyond the lifetime of the donors.

The need to plan a legacy is an example of the niche topics that we enjoy helping wealthy investors with. Whether it’s a current priority for you or simply a future possibility, it’s worth asking your investment counselor or financial advisor about how a DAF might positively impact your future and the futures of others in our society.

This article was first published in Navigate, an ATB Investor Services publication that provides valuable insights for wealthy and institutional investors. To read the full issue, click here.

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