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Life can be like a boomerang in that what you put out into the world may come back to you, albeit in different ways.
When we think about being a “philanthropist,” many picture having enough wealth to see our name emblazoned on a new hospital wing or the doors of a university lecture hall.
But ideas around philanthropy, and more specifically how much wealth is needed to become a philanthropist, are largely misunderstood. That has led charitable giving to be often overlooked as a critical part of a wealth management strategy.
One of the biggest misconceptions among Canadians is that philanthropy is only accessible to people of a certain net worth. But advisors can play an important role in dispelling that myth so that money isn’t left on the table when it could benefit clients through tax refunds and personalized wealth management strategies.
Anyone, regardless of their net worth, can be a philanthropist by donating their time or making smaller contributions that can have a larger impact if directed properly.
At a time when socioeconomic inequities are becoming more prevalent due to the increased cost of living, incorporating giving into financial planning can be more impactful than ever.
How to start the philanthropic journey
Whether it’s discussed during initial meetings or factored into ongoing planning, charitable giving should be a vital consideration for clients.
While philanthropy is typically a long-term and strategic initiative that focuses on making ongoing gifts to further a cause over several years, charitable giving is usually focused on providing immediate relief.
Regardless of whether clients want to give to charity in the form of a one-time donation or incorporate giving into their long-term wealth or estate planning strategy, advisors can provide guidance on how to donate prudently by considering the client’s net worth, willingness to give, personal values, tax planning, and financial goals.
For more conservative clients, a good starting point could be committing to donate a small percentage of their income or wealth annually. For high-net-worth clients, or for those seeking a greater impact and commitment to philanthropy, including charitable organizations in wills, donating life insurance policies, starting a donor-advised fund or initiating a foundation can all be great options to maximize lifetime charitable impact.
However, clients should be made aware of the associated and ongoing operational costs and time required to run a foundation properly. That option is typically considered when the initial donation is $1-million or more.
Money aside, one of the best ways to give back is by volunteering. For most people, time is their most valuable asset. As such, donating time can sometimes be even more impactful than donating money.
Beyond doing good for communities, volunteering enables clients to see the true impact of their outreach and can result in feelings of gratitude and meaningful connection.
Lowering tax bills
Beyond the altruistic benefits of philanthropy and charitable giving, there are great tax advantages for clients who are generous. While the first $200 donated to charity attracts a relatively low charitable tax credit – depending on the province – any amount above $200 can provide tax credits of approximately 50 per cent of the value of the donation regardless of marginal tax rates.
While most clients assume the best way they can donate to charities is using cash or credit cards, donating appreciated stocks and investments may be more advantageous come tax season. If a client holds shares that have appreciated dramatically, they might be hesitant to sell and incur the associated capital gains taxes. Donating these shares in-kind to charity can eliminate the capital gains taxes while also contributing to causes clients are passionate about.
For example, if a client bought $10,000 worth of shares that have appreciated to $20,000, they would have to pay capital gains taxes on the $10,000 of growth, if and when the shares are sold. However, if they donate those same shares to charity in-kind, not only would the capital gains tax be eliminated, but the client would receive $20,000 in charitable tax credits, thereby lowering their tax bill significantly.
A trusted advisor can provide guidance not only on how to give but also where. If clients are new to charitable giving, advisors can support them by identifying what causes resonate based on their values and provide suggestions for getting started.
For example, if clients are interested in environmental sustainability or microfinance for female entrepreneurs, the advisor can bring forward several reputable charitable organizations for them to consider.
When considering making a charitable donation, it’s important to calculate the measurable impact. Just as successful investors analyze businesses before investing and during, charitable advisors should do the necessary due diligence to ensure donations are being stewarded toward initiatives that will have the greatest impact.
Clients should be aware of what percentage of their donations will go directly to the beneficiary of the charity versus the percentage that will go to administrative costs while keeping in mind that charitable efforts do have an associated cost. Regular status reports from charitable organizations may also be beneficial as it creates accountability.
Improving relationship with money
Irrespective of the motive to be philanthropic, it’s important to acknowledge that donating time or capital can be a powerful tool in evolving a client’s money mindset.
For many of us, the daily hustle to grow wealth can result in the feeling that accumulating money is the main goal. But when donating to causes one cares about, they may begin to feel more secure, empowered, and fulfilled. Clients may be pleasantly surprised that switching from a scarcity mentality into an abundance mindset may also draw more wealth to them.
Keeping in mind the boomerang analogy – regardless of whether clients have their own foundation or give a smaller and well-directed amount for the greatest good – giving while living, or as part of a legacy has many advantages. And that’s something we can all feel good about.
Alexandra Horwood is a portfolio manager and investment advisor with Alexandra Horwood and Partners at Richardson Wealth Ltd. in Toronto. She is also a member of The Globe and Mail and SHOOK Research’s ranking of Canada’s Top Wealth Advisors.