Would-be philanthropists often find themselves confronted with a common paradox: the larger the value of their gift, the less likely they are to feel certain about the charitable beneficiaries.
In our experience, this paradox is especially prevalent with future gifts that are part of an estate plan, such as a bequest or life insurance. Clients often don’t know what they want their money to support after they’re gone.
This can mean avoiding estate planning. Conversely, it may produce a hasty embrace of a cause, a significant planned gift, and then lingering uncertainty or even regret. Buyer’s remorse may be an apt analogy.
There are three issues that commonly arise with clients considering a significant gift to charity as part of their estate plan:
Often the best solution to all three issues is a donor-guided “intermediate charity” such as a donor-advised fund. There has been a lot of promotion of donor-advised funds within the investment management world in the last decade. Here we explain how the structure helps clients plan their estates and become better, more confident philanthropists.
BEST OF BOTH WORLDS
The classic estate plan for clients with charitable intentions is to make a gift by will, or bequest, to individual registered charities.
Another common approach is to name specific charities as beneficiaries, or both owner and beneficiaries, of an irrevocable life insurance policy. Direct gifts are appropriate in many cases, but for some they can lead to planning issues.
In our experience, one of the most common practical planning issues for clients with significant philanthropic intentions is uncertainty about the charities to select. Choosing one’s estate beneficiaries is a major decision, and uncertainty and delays are natural parts of the consideration process.
We have found charitable clients may be reluctant to commit to individual charities, feel guilty about not giving (enough) to family, and may be unsure about where to access knowledgeable support on charitable planning.
With the value of estates growing and interest in philanthropy increasing due to a combination of demographic trends, social values and family size/structure, the number of clients facing these challenges is expected to increase over the next 15 years.
What charitable clients often require in their estate plans is a combination of planning certainty and philanthropic flexibility. The need for this combination is nothing new, which is why the wealthy have been planning their giving using intermediary charities, such as private foundations and charitable trusts, for centuries.
In the simplest terms, intermediary charities are simply “containers” that receive large gifts for future distribution for a variety of charitable purposes. The container offers structure and certainty at the planning stage and philanthropic flexibility going forward.
While there are a number of different types of intermediary charities, in this article we’ll talk about donor-advised funds. Donor-advised funds are “giving accounts” at certain public foundations that enable the donor and successors to make recommendations about the use of the funds.
While some foundations with donor-advised funds only pay out income from invested capital, others enable grants of both capital and income. A donor-advised fund is designed to mimic many of the qualities of a private foundation, but is easier to establish and operate due to hosting by the already-established parent public foundation.
An innovation of the community foundation movement, donor-advised funds are now available through a variety of public foundations, including some sponsored by financial institutions. Such foundations, such as Scotia Private Client’s Aqueduct Foundation, can enable grants of capital as well as income, which increases the donor’s options about how much goes to the intended charities.
While donor-advised funds are not a replacement for stand-alone private foundations in all situations, they are increasingly recognized as plan alternatives for their flexibility, simplicity and cost-effectiveness.
Elaine Blades and Malcolm Burrows – Advisor.ca
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