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A hand puts a loonie into a donation tin. (Feng Yu/iStockphoto)
A hand puts a loonie into a donation tin. (Feng Yu/iStockphoto)

Estate planning

‘Forever’ falls out of fashion in charitable giving Add to ...

It’s an irresistible concept: Give your money to charity in perpetuity and help others … forever.

For the wealthy, that used to be the plan. They would set up a foundation or trust, often as part of their estate plan, and feel like they were leaving a lasting legacy.

That thinking is changing. Experts in philanthropy say perpetual gifts can be the least effective way to give. And they usually don’t provide the lasting legacy that people think.

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“It’s kind of fallen out of fashion,” says Malcolm Burrows, the head of philanthropic advisory services at the Bank of Nova Scotia’s Private Client Group. “I, for one, am very skeptical of the concept, because if you look at anything too long-term, it’s just not sustainable. It ends up creating burdens on the trustee and on the organizations that aren’t justifiable.”

“Perpetuity is definitely something to be frowned upon,” says Mark Blumberg, a Toronto-based lawyer at Blumberg Segal LLP who focuses on non-profit and charity law and runs the website www.smartgiving.ca.

Payouts are low

The first concern is impact. A donor could set aside huge amounts of capital, but the payouts – the interest on that capital, minus costs – will be relatively small. It’s inefficient, Mr. Burrows says. “You’re not achieving much from a charitable perspective.”

Donors are often businesspeople or entrepreneurs who are accustomed to getting immediate results. Mr. Blumberg cites the example of a client who came to him to set up a private foundation. He had given $100,000 to a university to invest, and it used the money to set up scholarships for perpetuity. “The amount of money coming out of it is nothing. So he’s very disappointed – he felt like it’s not a good use of the assets.”

If the foundation or trust is not set up properly, donors and trustees can have little room to manoeuvre should circumstances change later. Donors sometimes don’t understand what they’re doing when they give in perpetuity, Mr. Blumberg says. Often, they set up foundations and trusts that can’t be modified later – but their own interests or causes do change. A relative may become sick with cancer, for example, but the funds in a trust are dedicated to something else. “At a later time, they may question, ‘Why is all this money sitting here when there are real, immediate needs out there?’”

Givers want a role

Charitable giving is becoming more strategic, and how people are giving is changing, says Marvi Ricker, vice-president and managing director of philanthropic services at BMO Harris Private Banking.

Instead of just writing a cheque, people are becoming more involved, she says. They are considering how best to direct funds to have an impact. “You want to be part of the solution. You want the fun of making it right.”

And more people are donating while they’re alive and not choosing to incorporate giving only in their estate planning. With the right plan, they are not only able to see their money work but also reap tax benefits.

If you give money to a charity, whether directly or to your own foundation, you receive a tax credit. If the donation is especially large, it could be more than your taxable income for the year, Ms. Ricker says – and any excess can be applied over an additional five years. Theoretically, one donation could produce tax benefits for six years.

The same donation at death gives your estate a benefit that applies in the year of death and one previous year.

But, as Mr. Blumberg points out, for a lot of people – especially the middle class – giving huge amounts during their lifetime just isn’t possible. They do, however, give a lot when they die.

That takes strategic planning, too.

He cites the example of a retired couple who have a house worth $500,000 and funds in registered retirement savings plans. They may have no kids or their kids are doing well. They want to give, but also need to worry about their cost of living and future medical issues.

It is impractical to think that this couple would give during their lifetimes. Instead, Mr. Blumberg says, they should consider a bequest. They can arrange to give a certain amount of their estate to a charity or charities of their choice – a simple addition to their will. If their estate changes, the amount can be modified.

For people who would like a more long-term approach – for whom perpetuity holds great appeal – there are alternatives.

Set up a foundation

Setting up your own foundation is a good option if the person wants to accumulate a pool of charitable capital, Mr. Blumberg says. It’s not expensive and gives you the limited liability of a corporation. It also “gives you the control to make decisions and move quickly. You don’t have to wait for the next meeting to approve something, you can do it – have the board meeting that day and wire the money out that day.”

The one thing Mr. Blumberg doesn’t encourage, especially for people who want flexibility, is setting up your own charity. “We have 86,000 of them [in Canada] already.”

Other alternatives include setting up a fund at a community foundation or creating a donor-advised fund at a bank or financial institution.

Mr. Burrows advocates the midterm, spend-down fund – a 10-year commitment to a charity. “It’s a middle-ground option, where you say the money isn’t going to be there forever but it’s going to be significant enough to make major change.”

A lasting legacy – just not forever.

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