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What is planned giving?

publication date: Sep 11, 2013
 | 
author/source: Mark Blumberg
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In certain circumstances, “planned giving” allows donors with average financial resources to achieve larger gifts than they ever thought possible. It takes into account all the complexity of an individual’s personal and estate situation, and typically involves professional advisors who attempt to balance the donor’s financial, personal, family, and philanthropic objectives.Mark Blumberg

Planned giving can be as simple as a bequest to your charity in a donor’s will. Some planned gifts, such as gifts of publicly traded shares, are immediate, while others, such as a charitable remainder trust, are deferred. Some are revocable, such as a bequest in a will, while others are irrevocable. In Canada, planned giving is sometimes referred to as “gift planning.”

Planned giving techniques used in Canada include:

1. Bequests (gifts in wills)

This is the most common type of planned gift and results in the vast majority of funds that charities receive from planned gifts. Your donors have several options: leaving you a specific dollar amount, leaving you a percentage of their estate, or in some circumstances leaving their whole estate to you and other charities.

Bequests have many advantages for donors. They are flexible – donors can later change either the beneficiary or the amount of the gift as their financial or personal situation changes. They allow donors to keep their savings during their lifetime to support themselves and their spouses, and cover unanticipated events such as extended illness. They are especially attractive for those who are older and do not have children or have children who are self-sufficient. Bequests can easily be added to wills while donors are doing their other estate planning. Charities should advise donors to discuss such bequests with their lawyer.

The disadvantage of a bequest from a charity’s point of view is that there are no immediate funds for the charity, and the testator may revoke the will by preparing a new will or a codicil. As well, a relative or someone else may attempt to set aside the will because they would receive a greater amount under an intestacy (when there is no will) or under a previous will.

2. Donating appreciated public company shares (marketable securities)

If a donor has public company shares that have increased in value, it is more tax-efficient to transfer the actual appreciated shares to a charity directly, rather than selling the shares and then donating the after-tax cash amount.

If a donor sold his/her shares and donated the after-tax cash amount, the donor would have to pay about 24% tax on the amount the shares have appreciated in value. But if the donor donates the shares directly to a registered charity, there is no capital gains tax. That gives the donor a greater tax credit for the donation. This special tax treatment does not apply to private corporation shares. The more that the shares have grown in value, the greater the benefit this type of planned gift provides to the donor.

The advantage of gifts of appreciated marketable securities, in addition to their tax effectiveness, is the ease with which they can be completed. If your charity does not have a brokerage account,  you can receive gifts of appreciated securities through CanadaHelps.

3. Transferring or donating life insurance to a charity

In some cases, a donor can, for a relatively modest amount, purchase a large life insurance policy to benefit a favourite charity. If the donor will have substantial taxes to pay at death, the tax receipt for the insurance proceeds donated to the charity can assist the estate.

4. Designating an RRSP or TFSA to a charity

Donors can designate your charity as a beneficiary of their RRSP or TFSA so that you receive the funds in the account upon the donor’s death. With RRSPs, the donor’s estate will have to pay income tax on the funds in the account, but the estate will receive a tax credit from the charitable contribution which will offset some or all of the taxes owing in respect of the RRSP. The advantage to donors of this technique is that the gift is outside the donor’s estate, not subject to creditors or the will being set aside.

5. Buying charitable gift annuities

Some charities sell either self-insured or reinsured annuities that provide the donor with a stream of income while they are alive. Note that self-insuring such annuities is a potentially risky proposition for charities. There are many complexities with charitable gift annuities for both the donor and charity that need to be carefully considered.

6. Charitable remainder trusts (CRTs)

Property, such as a house or investments or art work, can be placed in a trust, sometimes referred to as a charitable remainder trust, for the benefit of a Canadian registered charity. The donor can use the property during his/her lifetime, obtain a charitable receipt today for the present value of the residual interest and the property would upon the death of the taxpayer be used or sold by the charity.

While charitable remainder trusts are very popular in the United States, they are used far less frequently in Canada. Establishing a charitable remainder trust involves substantial time and expense, in terms of legal, accounting and valuation services and advice as well as the ongoing cost of administration. Although they are often discussed they are rarely used.

7. Shares in private corporations

Much wealth in Canada is tied up in private companies, and shares of private companies can be quite valuable. It is very difficult to arrange gifts of private company shares, but in very few cases, it can be the appropriate mechanism for making a large donation.

Some of the concerns include the difficulty of valuing the private shares, the need for the donor and his/her family to be arm’s length from the charity, potentially substantial capital gains without the benefits that marketable securities enjoy, sizeable professional advisor costs, the inability of many smaller charities to deal appropriately with the gifts, disappointment of some donors with the amount of the tax receipt, and disappointment of the donor that the process may take months or even years. For the charity, there may be a concern about becoming a shareholder in the company.

Often with private company shares it would be preferable to sell the shares and then make a donation by cheque to the charity! There are significant concerns as to the costs of setting up such a gift, the liquidity and value of the shares, and restrictions on the shares. For charities the donation must be in many cases substantial to be worth the effort.

Before the donor makes such a gift and the charity accepts it, both the donor and the charity should obtain significant legal and accounting assistance from lawyers and accountants who are very familiar with private companies and charity law.

For the vast majority of people an unrestricted bequest to a charity they care about is probably the best option. It is also the simplest kind of planned gift for a charity to handle, and the best place to start your planned giving program.

Mark Blumberg is a lawyer at Blumberg Segal LLP in Toronto, Ontario.  He can be contacted by email or at 416-361-1982 . To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit www.canadiancharitylaw.ca  or www.globalphilanthropy.ca




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