Helping Clients’ Endownment Funds

The 2010 Federal Budget has made changes to the disbursement quotas for registered charities, a change well received and considered long overdue by the sector.

As of March 4th, 2010, clients who are considering a donor advised fund should be happy to learn that the disbursement rules requiring the gift be held for a minimum of 10 years no longer apply. Clients will now be able to disburse part of the assets to help their cause meet short-term goals or fund specific special projects.

In addition, direct gifts to charities can stay with the charity for longer and enable them to save for significant future projects. This enables charities to do more with donated assets rather than being subject to use 80% of donations (the disbursement quota) in the next tax year. For charities that are looking to make larger investments in facilities, research programs, equipment or broad awareness campaigns, this will have a substantial impact on their immediate and future effectiveness.

This is a good news story for both clients who are giving and the registered charities they support – - especially donors that are considering establishing donor advised funds. Provided that the gift deed or agreement between the charity and the donor is correctly worded, donors can meet their own short term charitable objectives and still set up a fund that can help their cherished cause beyond their lifetime. Importantly, these changes also provide the advisor with an additional opportunity to further conversations about planned giving with clients, as well as potentially retaining and increasing client assets under management.

Disbursement Quota Reform Details

Until recently, the key indicator of whether a registered charity has fulfilled its charitable mandate under the Income Tax Act was if it had fulfilled its disbursement quota (DQ). The DQ was the minimum calculated amount that a registered charity is required to spend each year on its own charitable programs, or on gifts to qualified donees, such as other registered charities.

The purpose of the DQ was:

• to ensure that most of a charity’s funds were used to further its charitable purposes and activities;
• to discourage charities from accumulating excessive funds;
• to keep other expenses at a reasonable level.

Prior to March 4, 2010, the annual disbursement quota was made up of a number
of components including:

1. 80% of donations received and transfers between charities in the previous fiscal year (the charitable expenditure rule or the “80%” rule);
2. 80% (100% for private foundations) of amounts received from other registered charities in the previous year;
3. 3.5% of all assets not currently used in charitable programs or administration; if these assets exceed $25,000 (the capital accumulation rule  or the “3.5%” rule used for endowments and other restricted assets).

The budget reforms of February 2010 eliminated points 1 and 2 above of the disbursement quota expenditure rule for all charities with fiscal periods after March 4, 2010; modified the capital accumulation rule in point 3 from $25,000 to $100,000; and provide for additional anti-avoidance rules for charities. For more information on the disbursement quota changes and donor advised funds contact Benefaction Foundation.

Identify Gift Planning Opportunities

As a professional advisor, staying current and fully informed about gift planning and how it can fit within a financial plan is crucial. Gift planning presents opportunities to increase assets under management that are often overlooked.

Clients may be interested in giving strategies even if they have not asked the question. So educating yourself about the investment strategies for charitable giving is important because if you aren’t talking to clients about and the financial benefits of giving, some other advisor will.

Clients may have a wide variety of philanthropic goals and charitable causes they would like to support for all sorts of reasons. They many simply want to bequest assets in their will, make a onetime significant donation to a particular cause, or establish an endowment fund to help create a sustainable legacy of giving for both their family and the causes they choose to support. But you will never know their current or future aspirations if you are not prepared to have these important and sometimes personal conversations.

Who should you be talking to?

Gift planning is an important tax strategy in wealth and estate planning, most especially for boomer s and individuals over 60. While you are assessing your pipeline and building client profiles, consider this – individuals that likely need help planning a gift are often those over 60. They may be widowed or married with no children, owners of privately held companies, owners of appreciated securities or real estate, or individuals who are already actively involved with a cause. In fact, Canada’s 4.4 million pensioners already contribute almost 30 per cent of charitable donations and this number is expected to almost double by 2026. Look for the following trends in your client base;

Baby Boomers

• A portfolio with significant capital gains tax liabilities
• Approaching or in retirement
• Diminished responsibilities to other dependent family members
• Substantial disposable income
• A desire to delegate financial management including estate planning to a professional advisor

Anyone

• Already philanthropically inclined and involved with a cause
• Optimistic about fundraising
• Community minded and drawn to more traditional giving opportunities (commemoration, religion,
health care, education, and the arts)
• Know the importance of an effective tax planning strategy

It’s also important to uncover trigger events within your existing and prospect client list. The greatest opportunities occur when there is money in motion. These are the times when clients will look to you to navigate a new financial scenario.

• Estate Planning
• Writing or revising a will
• Retirement Planning
• Sale of a business or other major asset
• Divorce Death of a family member
• Inheritance

Benefits to Your Business

• Deepen and extend your relationships with clients by helping to structure and implement their
philanthropic aspirations.
• Generate recurring revenue by retaining client’s assets as AUM.

Partnering with a charitable foundation, like Benefaction, whose primary purpose is to connect investors and their advisors with worthy charities through the creation of donor advisor funds can help you achieve just that. This partnership will enable you to help your clients maximize charitable giving, minimize their tax burdens, help you to retain more assets and enjoy and a higher, and more positive, community profile.

Resources to help you stay current about the latest gift planning strategies

Join a professional association like the Canadian Association of Gift Planners (CAGP), subscribe to newsletters and white papers on the subject, and take the opportunity to continue your learning by taking a gift planning course (while also fulfilling CE requirements) like Investment Strategies for Charitable Giving available May 15th from the Knowledge Bureau, www.knowledgebureau.com.

Don’t Wait! Plant the Seeds of Giving Early

Add gift planning to your next meeting agenda to start the conversation
• Let your clients know you are knowledgeable in the area of planned giving from the get go.
• Be open to numerous informational discussions on the subject as a strategy for future tax planning.
• Be confident that developing trust and deepening client relationships will entrench clients for the long-term and enhance referral opportunities.

Success Story: Intergenerational Philanthropy

Aligning priorities and philanthropic goals within a family giving strategy can be challenging even for the most skilled advisor. The family members involved will need to come to agreement and may have differing values, priorities and ideas about what philanthropy should be and how to truly do some good in the world.

The benefits of a planned giving strategy can often run much deeper than the obvious. As was the experience of Keith Thomson, a Certified Financial Planner and Managing director with Stonegate Private Counsel L.P. in Toronto. Gift planning for one of his most significant client relationships resulted in a unique benefit.

The desire to do something good for the community and create a legacy of giving in a family is obviously a good thing and the benefits include the joy and personal satisfaction of knowing that a you or your family are directly involved in supporting the cause through to future generations. But there are other benefits too, which can be much more subtle, yet just as impactful.

Keith recalls, “I had been working with all four generations of this family for some time and was involved in discussing their charitable giving options. A number of years ago, the first generation of the family had expressed the desire to create a legacy of charitable giving that was sustainable for generations to come. I assisted the family by suggesting and implementing a donor advised fund to enable them to achieve their giving goals.”

Aside from obvious benefits of the disbursements to the selected charities and the donation receipt issued to the family, the family has achieved something else just as significant.

“They have come together at regular gatherings to talk about what is really important to them in their giving strategy,” says Thomson. “The process has really brought the family together inter-generationally and has greatly strengthened their bonds.”

By assisting his client, Keith Thomson was able to play a role in strengthening this family, both emotionally and financially. As a result, his is entrenched as a trusted advisor with all four generations and has built a significant amount of goodwill with the client’s entire family. For Keith, success with this client can be measured in more than simple dollars and cents.

This example of success illustrates the benefits and opportunities, both direct and indirect that are achievable for financial advisors and clients when considering a planned giving strategy.

Donating Optioned Stock

Tax planning for each client can be as individual as they are. As part of a holistic wealth management approach, it is important to understand all the tax planning opportunities available, especially those that enable them to successfully achieve their charitable giving objectives.

Many clients will hold employee stock options which, when exercised, will result in cash proceeds that will be considered a taxable benefit or income.

As part of a giving strategy, a client can choose to donate part or all of their employee stock option cash proceeds, once exercised and then sold, to a registered charity or foundation. They must make the donation of the desired amount within 30 days of the sale.

Donating optioned stock cash proceeds is treated the same as if it were a donation of publicly traded securities by the Income Tax Act. The client will receive an income tax receipt for the donation. They will also have been able to maximize the value of their donation to the charity, while minimizing their tax burden.

Example: Gift of Cash Proceeds

Robert has been with the same rapidly-growing company for over 10 years. He has achieved many promotions and received performance-based bonuses annually. These bonuses as well as part of his annual base compensation have often been in the form of employee stock options in the company. Robert would like to make some renovations to his vacation property and he is considering giving a gift to his favourite charity. He has approached his advisor to understand the tax implications of exercising a portion of his options.

Robert owns 10,000 vested stock options. His marginalized tax rate is 45%. He would like to donate at least $50,000 to charity from the proceeds. After his advisor had sent him the following illustration, Robert proceeded with a $100,000 donation to his favorite charity.

Total proceeds = $300,000 net cash from sale – $100,000 cash donation – $54,000 takes on retained portion + $45,000 tax credit from donation = $191,000

Benefits to the Client

•Clients can make a significantly larger donation to their chosen charity or foundation.
•Tax is minimized in two ways: (1) a reduction in capital gains tax and (2) a tax credit is received from the donation which can be used to reduce income tax that year..

Gifts of Securities Acquired Under an Employee Stock Option Plan

Donors can also choose to donate the vested options directly to a registered charity or foundation. In this case, they would receive a tax receipt for the fair market value. None of the capital gain, if any, will be reported as income, and the capital gain is reduced to zero for the charity or foundation.

Correction Notice: Special thanks to tax expert Jamie Golombek of CIBC for pointing out an error on the table that was distributed in this newsletter. The deduction of the exercise price was omitted from the donated portion on that version, but has been corrected here.