One of the unexpected upsides of the pandemic has been that many Canadians built up significant savings – to the tune of $220-billion, according to a recent BMO Economics report. As a result, some are now in a position to make substantial gifts to family members or charity and want to see the impact of those gifts while they’re still alive. However, some financial advisors say there are risks to giving while living that need to be considered.
Tracey McLennan, leader and senior wealth consultant, client consultant group, at Edward Jones in London, Ont., cites a study, “The Four Pillars of the New Retirement,” that her firm conducted in partnership with Age Wave last year, which found that 63 per cent of Canadian retirees aged 50 or older were willing to offer financial support to their families even if that jeopardized their own financial future.
Almost half of Canadians – 46 per cent – said that being generous or giving back was a personal source of purpose, meaning, and fulfillment. Yet, 67 per cent acknowledged that becoming a burden on their families was one of their greatest fears. So, how can advisors help these clients satisfy their desire to give while protecting their long-term financial well-being?
Ms. McLennan says the process has to start with a financial discussion that calculates how much clients need to preserve their financial independence until death, including having a cushion for the unexpected – from medical expenses to the costs of aging in place and long-term care. Then, the discussion can move on to the “emotional joy and purpose bucket,” and advisors can help clients gain greater clarity on what they want to give and why.
For example, rather than simply writing a cheque, grandparents may want to fund a pool in an adult child’s backyard so they can watch their grandchildren learn to swim. Or they may want to pay for an adult child’s retraining in a new more fulfilling profession. Exploring the “why” can help advisors figure out the “how.”
However, because the desire to help either family or a charity is so personal, advisors may avoid bringing up a subject that can feel “intrusive,” Ms. McLennan says. The key is to start from a place of “genuine curiosity” to gain a deeper understanding of what clients wish to do with their money.
Lydia Potocnik, head of estate planning and philanthropic advisory services at BMO Private Wealth in Toronto, has noticed an increase in questions about giving while living over the past year. If comprehensive financial planning demonstrates that clients can afford these gifts, advisors can play an important role in helping them decide what form the transfer should take – for example, cash, investment assets, or real estate such as a family cottage.
“Depending on who the [recipient] will be, and what the gift is going to be used for, structuring it and documenting it is very critical,” she says.
Furthermore, it may also be necessary to update a client’s estate plan when a gift is made to one sibling to preserve equity and family harmony among children, she adds.
In the case of philanthropy, Ms. Potocnik advocates a strategic, long-term approach that may include establishing a donor-advised fund or private foundation. That approach “allows [clients] to experience living philanthropy … and then also allows that legacy to continue when they’re no longer there. [Furthermore,] it allows them to involve the next generation in their philanthropy as well by passing on those values and allowing family members to carry on giving,” she says.
Keith Masterman, vice-president, tax, retirement, and estate planning at CI Global Asset Management Inc. in Toronto, also sits on the board of directors of United Way Perth-Huron. He has noticed that fewer people are donating to charity during the pandemic, but those who are giving are being more generous. And as gifts get bigger, he urges advisors to recommend that their clients get the charity involved.
“If you contact a charity … it’s not going to tell you about one opportunity. It’s going to say, ‘There are seven opportunities in this area [and] here’s how each one of those can be tailored to your specific charitable or philanthropic journey,’” he says.
In the face of increasing unconventional competition for philanthropic dollars, such as GoFundMe campaigns, he adds that “advisors can help people by asking, ‘Okay, that’s an important cause, [but] does it really reflect your long-term philanthropic goals?’”
While charitable giving can be advantageous from a tax perspective, especially when donating appreciated securities, giving investment assets to family members can leave a client with a significant tax bill, Mr. Masterman points out. “You might see it as a gift, but [the Canada Revenue Agency] is going to see that as a distribution at fair market value.”
After clients work with an advisor to answer three important questions – Can I afford this? Will I need this money in the future? What are the tax ramifications of giving? – Mr. Masterman says they should talk to family members about who will pay that tax bill and, if necessary, to a lawyer about how the gift can be protected from creditors or a marriage breakdown.
“A lot of it is just to make sure [giving] is part of their financial plan and part of the discipline – [and] that [the plan] provides them peace of mind to know that they have enough money to live for the rest of their life,” he says.