It’s likely your clients give to charity out of altruism. It’s also likely that they could benefit from using their charitable giving to rebalance their portfolio.
Whether the end of the financial year is coming to an end or just beginning, it’s always a good time to look at how charitable donations can help your clients manage their tax burden.
I’ll break down the challenges many clients face when it comes to donating strategically, and the solutions you can offer them to make sure they get the most bang for their charitable buck.
Challenges Your Clients Face
Chances are your clients have a couple of blind spots that are making their lives difficult.
Two common misconceptions:
- They think they need to know which charities they want to support before making donations.
Maybe your client has learned about a new cause they want to support, but feel like they need to do more research before they can confidently make a donation.
Or maybe they’ve had enough of supporting the same charities, day-in, day-out, so they want to try out something new—but they don’t know where to start.
You can soothe their anxiety by letting them know about the benefits of using a donor advised fund.
I’ll get into more detail about the donor advised fund shortly, but here’s the main message: when they use a donor advised fund to give to charity, they benefit from immediate tax savings, but can take as much time as they like deciding where the money will go.
- They don’t realize they can benefit by giving away appreciated securities.
Maybe, over the course of the year, you’ve helped your clients pick some good investments. Now, they’re ready to cash out or rebalance, but the end of the tax year is approaching, and they’re starting to worry about capital gains taxes.
You can help them reduce their capital gains tax by donating some of those stocks.
Even when clients know they can give away appreciated securities, they don’t have a giving plan in place. Meaning, they don’t see the connection between making this kind of donation, and the benefits of doing so.
Namely, they’ll get a break on capital gains taxes, while making their dollar (in the form of securities’ value) go further.
In the next section, I’ll look at how you can make this happen.
Solutions You Can Offer Your Clients
Here’s what you can do to make it easier for your clients to make an impact with their giving, while balancing their portfolio.
Set them up with a donor advised fund
Once you set your client up with a donor advised fund, they’re able to both better manage their charitable donations and the resultant tax receipts, and make their charitable dollar go further.
How the donor advised fund works
When they put assets in a donor advised fund, your client is issued a tax receipt. That’s because every donor advised fund is administered by a registered charity that holds the money for your client.
The money doesn’t go to charity yet—it sits in the donor advised fund, and remains on your book. When your client knows which causes they’d like to support, they can transfer the funds
Why a donor advised fund can be Better than a Private Foundation
Three important factors that can make setting up a donor advised fund a smarter move for your client than setting up a private foundation: time, money, and privacy.
Compared to virtually any donor advised fund available, a private foundation demands more overhead to register and then administer. Papers need to be filed. Records need to be kept. It means more time and money spent by the client, and more time and energy expended by you, for work that can be more easily managed through a donor advised fund.
One more thing: If your client doesn’t want the world to know which charities they give to, and exactly how much they donate, they shouldn’t set up a private foundation.
I know it sounds counterintuitive, but a private foundation is, in some ways, very public.
Once a private foundation has filed its T1236 Form—which lists every charity the foundation has donated to, and how much—anyone with an internet connection can access it through the Canada Revenue Agency’s website.
To be clear, the foundation that administers a donor advised fund also submits a T1236 that can be accessed by the public. But this form lists donations from the foundation—not the individuals whose donor advised funds are held by it. There are no public records of who gave to which charity, or how much.
When a private foundation is the right fit
If your client would like to bring on staff—perhaps family members—to administer a private foundation, they can. With a donor-advised fund, that isn’t an option.
At the same time, the fact that your client can’t hire staff to run their donor advised fund—as they might with a public foundation—means that all the the money in the fund will go to charity, and not to administrative costs.
Setting up a donor advised fund with Charitable Impact Strategies
Full disclosure: Charitable Impact Strategies, the group I help run, offers donor advised funds. We are a part of CHIMP (Charitable Impact), an online giving platform, and we use their interface. When you sign up with us, you and your client can add funds—and decide where they’re sent—automatically and online.
You can also manage transactions by phone, email, or in person, with help from the philanthropic advisors on our team.
Of course, Charitable Impact Strategies isn’t the only donor advised fund in Canada. But we do have the lowest fees. And while many donor advised funds set the minimum size of donations at around $1,000, ours is just $5.
We’re also the only one that allows your client to manage their giving account online. With other donor advised funds, you or your clients need to submit disbursement requests by filling out paperwork. With ours, when your client has decided where to send the money from their account, they can take care of it with a few clicks.
Teaching clients about donating appreciated securities
Through a donor advised fund, your client is able to donate securities that have appreciated in value over the course of the year. They save on capital gains taxes, and their charitable dollar goes further in the hands of the causes they’re supporting.
When your client donates appreciated securities, they don’t owe capital gains taxes. That’s because the securities are donated, not sold.
Suppose they do so. Your client sells $50,000 worth of stocks, and because of their tax bracket and the value that’s accrued on the security since they purchased it, they owe $7,000 in capital gains on it.
So, the after-tax donation to their charity of choice is $43,000. And they get a tax receipt for their $43,000 donation.
Now, suppose that, instead of selling the security and then donating the proceeds, they donate the proceeds directly, through a donor advised fund.
When they eventually send the money to a charity or charities, those charities receive $50,000. That’s $7,000 more than they would have received if the client had sold the security themselves.
Also, the donor gets a tax receipt for $50,000. In fact, they get that receipt the moment they put their money in the donor advised fund. So, even if they’re not sure where they want the money to go eventually, they can still benefit from tax savings for the year they earmark it for charity.
If you have questions about Charitable Impact Strategies, our donor advised fund, or just managing philanthropy in general, drop me a line.