*Conversation has been edited for clarity and length.
In their new book, Squandered, Foster Family Office walks readers through fictionalized real-life stories of families who have built great wealth only to lose it. In all cases, there was a lack of communication and understanding between generations around the expectations and responsibilities that come with significant wealth.
In their own work with ultra-high-net-worth families, Foster Family Office sees philanthropy as an opportunity to create a more cohesive and aligned family view of wealth. “Philanthropy can help build a sense of stewardship, purpose and responsibility around money among younger generations,” says Victor Todorovski, portfolio manager and financial planner with Foster Family Office.
Victor sat down with Canadian Family Offices to talk about how families can get started on their journey to impactful philanthropy.
How should families approach philanthropy?
Start with the identity of your giving. What are you trying to achieve with the wealth that you are leaving behind? What does it represent? For example, is your giving based on gratitude to the country or community that has allowed you to attain your wealth? Or is it motivated by a desire to secure your family’s legacy and overall reputation? There is no right or wrong choice.
Understanding why you are giving is part of building a family dynamic and developing a sense of purpose among the younger generation.
Victor Todorovski
Just as with the family office, make sure the people that need to be involved are in the room, that there is buy-in, and that you build governance into the process. Similar to an Investment Policy Statement for investing, create a Philanthropy Policy Statement that spells out your purpose and what you are trying to achieve. Build a reporting structure to ensure you are achieving what you set out to do. Decide on the cadence–monthly performance reviews, more detailed quarterly reviews, strategic annual reviews–for example. Remember, this is an opportunity to bring young people in early to create a sense of ownership, purpose, and financial literacy. We recommend getting high school-aged children involved in philanthropy.
What are the most common mistakes you see families make when it comes to philanthropy, and how can they avoid them?
The most common mistakes are not having a plan, or a clear sense of purpose around philanthropy. You don’t want to be in a situation where you are just doing reactive giving; someone comes and asks for money and you write a cheque. You want to be proactive and understand what you are trying to achieve. Without a clear sense of purpose, it can be tempting to view philanthropy as a way to avoid paying tax, but this is a missed opportunity. While being strategic and tax effective with your philanthropy is important and can free up more money to drive greater impact, tax-led philanthropy will not impart family values or engage the next generation. Another common misstep is not including the next generation early enough. Children in their teens are open to learning, and this is a great opportunity to reinforce family values and connect wealth to something bigger.
What role can the family’s advisory team play in the process?
The advisory team can help establish the appropriate architecture for giving that is aligned to the family’s overall estate planning. They can make sure all the right people from the family are involved and that the right governance process, voting structure, and reporting metrics and cadence are in place to maximize impact. They can also implement effective strategies, such as using life insurance or flow-through shares to minimize tax and multiply giving.
What are some of the structures families can use to advance their philanthropy?
Having a family foundation is the most direct way of giving. It is also the most complicated because it means having to put administration in place to manage all of the activities around giving. This includes research and vetting charities, record keeping, disbursements, CRA compliance, etc. However, for families with significant funds to direct to philanthropy, say $5 million or more, or perhaps have gone through a major liquidity event, establishing a family foundation can be an effective and structured way to engage the next generation.
The most popular–and much simpler–structure for philanthropy are donor-advised funds (DAF). These are charitable giving accounts held by public foundations such as Canada Gives, for example, and they provide all the administration around giving. Donors put funds in the account, receive a tax receipt, and the money is disbursed via grants to CRA-qualified charities they select. As a DAF is relatively inexpensive to administer, they are attractive for donations that are too small to be economic for a foundation (the average DAF in Canada is $200,000). Another option is to establish a charitable trust. There are many types of charitable trusts, and they are typically used to fund a specific charitable organization or cause.
How can getting philanthropy right help families with their estate planning?
It’s a chance to get the families’ kids engaged and build a sense of purpose around wealth rather than entitlement. They can learn that their family built this money through hard work and the help of the community and as a family they want to give back. Involving younger family members in philanthropy will also introduce them to working with advisors and dealing with investments. More strategically, philanthropy is an opportunity for efficient tax and estate planning, allowing families to use their wealth to have a positive societal impact and ensuring that it will carry on. The key is to have a vision.
Disclaimer: This story was created by Canadian Family Offices’ commercial content division on behalf of Foster Family Office.
Mary Teresa Bitti is an award-winning journalist, content creator and entrepreneur who works with media, corporate and not-for-profit organizations to tell their stories.