What is gift planning? It’s donor-centred charitable giving that supports an investor’s philanthropic goals while balancing personal, family and tax considerations.
Typically, planned gifts include things like bequests and the donation of appreciated securities. Planned-giving vehicles are things like private foundations and donor advised funds (DAFs).
Planned giving would be helpful to many donors, but wealthy investors see the greatest benefits because of the tax benefits. Planned gifts can sometimes even almost eliminate taxes owing.
But the best advisors also use planned giving to differentiate themselves from the competition by reframing the purpose of wealth and capital. Planned giving can indeed create transformational impact, and it needs to be in every great investor’s toolbox.
Here are the major gift-planning trends and challenges that donors and their advisors face today.
Fewer Canadians are giving
Historically, charities played a critical role in Canadian society by addressing needs unmet by free markets or government. However, as public attitudes toward competition and the role of government evolved, charities began facing new challenges. An increasing expectation for government involvement in social welfare, alongside rising skepticism toward charitable foundations, is reshaping the charitable sector.
The result is fewer Canadians are making charitable gifts. Specifically, only 17 per cent of all tax filers claimed charitable tax credits in 2022, and this number has been decreasing for years. By contrast, the amount of charitable donations by dollar volume is still rising. So, naturally, those donations are becoming concentrated among wealthy donors.
This trend presents both challenges and opportunities for gift planners. The average Canadian is giving less, while the demand for gift planning advice from wealthy donors is growing.
As this trend continues, gift planning advice is becoming more valuable.
Impact investing
Impact investing is becoming a critical new frontier for gift planning. Impact investments, which blend financial returns with measurable social and environmental benefits, challenge traditional views of charity versus profit.
Gift planners can leverage these investments to align donor values with financial stewardship.
However, impact investing should be embraced with caution. Enthusiasm is high, but many impact investing vehicles are untested and riskier than portrayed.
Impact investors should focus on ways to measure and report on their outcomes. Doing so will help them make better decisions in the future but also avoid “impact washing.”
In this environment, there’s an opportunity for gift planners to provide professional measurement and reporting services that help donor investors become more successful.
Foundations and DAFs
Lots of charitable foundations are being created in Canada, and wealthy donors are still creating private (family) foundations to leverage their philanthropy. However, there is a new and growing industry of DAFs that are competing with traditional family foundation models.
DAFs are typically charitable foundations providing investment and granting services to their donor clients. Some DAFs provide impact investing services and advice on where to grant philanthropic capital. Historically, these functions lived inside stand-alone foundations.
Today, donors are increasingly pooling their capital inside DAFs created by community foundations as well as in DAFs sponsored by wealth management firms and other new alternative structures.
Surprisingly, donors now have more than 200 DAFs to choose from in Canada.
Donating appreciated securities
Wealthy donors should rarely give cash to charity. Rather, they should be giving appreciated securities whenever possible. This is because the donation of appreciated securities provides special tax benefits compared to cash. These include the exemption from capital gains tax and certain additional benefits to donors with holding companies.
But donating these securities comes with specific requirements and strategies for success.
First, donors need to determine which securities to donate and how this will impact their asset allocation. Then donors need to decide the amount to be donated to maximize the desired gift and tax benefits. The alternative minimum tax (AMT) and other factors need to be considered with the help of a qualified tax advisor or accountant.
It also helps if donors have holding companies that may accrue other benefits of donating appreciated securities, such as adding to their capital dividend account.
In summary
With fewer Canadians giving but donations becoming more concentrated among wealthier donors, planned-giving advice is becoming more valuable. Whether through impact investing, donor advised funds or the donation of appreciated securities, planned giving provides donors with innovative ways to maximize their charitable contributions, tax benefits and charitable impact.
Smart Canadian advisors, whether they are accountants, wealth management professionals or family office staff, are using planned giving to differentiate their service and help more wealthy clients achieve their philanthropic goals.
James Dunne leads Markdale Financial Management, a Toronto-based family office. As a personal CFO, he helps wealthy families and private foundations organize and simplify their financial lives. James loves gift planning and is a proud member of the Canadian Association of Gift Planners (CAGP).
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