Elena Hoffstein is a partner in the law firm Fasken Martineau DuMoulin. Her practice includes personal tax and estate planning, family business succession planning, wills and trusts, corporate reorganizations, marriage contracts, and charities and not-for-profit law. This conversation focuses on philanthropy as part of an estate plan.
Brayley: How often do you discuss philanthropy with your clients as part of their estate planning?
Hoffstein: I sometimes raise the topic with my clients during the estate planning process but more often they raise it with me and have given their philanthropic aspirations some thought. In many cases they are involved in philanthropy (as volunteers, on boards, and as donors) and they want to incorporate their charitable initiatives in the estate planning process.
During the conversation about charitable giving we will discuss the tax savings that can be achieved through charitable giving, the result being to get the most money into the hands of the charity, in a tax effective manner. There are many ways to structure charitable giving that won’t have a negative effect on any family inheritance they wish to leave.
Brayley: What motivates people to think about creating a charitable legacy?
Hoffstein: There are different triggers. First, parents want to make sure the family is taken care of, but where there is significant wealth involved, many parents don’t want to leave too much to the children – they prefer to see them earn it themselves. Once the family is taken care of, surplus wealth is often earmarked for charitable purposes. Other circumstances, like an illness in the family, will lead to donations for the medical institution that has helped. Others have passions and areas of interest they want to see supported, like the arts or the environment. Some want to create a lasting legacy in honour of a family member.
Brayley: Have you seen those motivations change over the last few years?
Hoffstein: As my clients get older, they’re thinking more about charitable giving, and in a more strategic way. I see a definite interest in giving back to the community, not just in dollars, but also by donating their time. The evolution in motivation that I’ve seen is that as the wealth has grown, more high net wealth individuals are earmarking large amounts to charity often motivated by a concern expressed by Warren Buffet to the effect that they want to leave their children enough to do something with their lives but not so much that they will do nothing.
The whole not-for-profit sector is also becoming much more sophisticated. This leads to better education of different options for charitable giving, and the charities are working more closely with donors to develop a plan that’s tailored to their desires.
Brayley : What kinds of charitable gifts do you discuss with your clients?
Hoffstein: There are many ways to make donations. Many give cash, of course. Some give assets such as art collections. More people are thinking of designating charities as the beneficiary of a life insurance policy, RRSP or RRIF. There are also other tax-effective strategies for making gifts such as gifts of publicly traded securities.
Brayley: You deal with many high-net-worth individuals who might be thinking of setting up their own charitable foundation. When would you encourage them to do that?
Hoffstein: I usually encourage people to look at alternatives to setting up their own foundation, unless there’s a real commitment and ability to follow through on all the administration that’s required and some thought given to a sustainable succession plan. It’s very time consuming and can be more expensive to do it all yourself. It’s important for a family to assess the real reasons they want to have a foundation and determine if doing it on their own is the best option.
Families may go ahead and set up their own foundation if they want to use it as an opportunity to teach their children about giving back or managing their wealth and they’ll have active involvement. Some families also want to maintain control over all aspects of running a foundation, such as the investment management of the assets and the timing of donations.
When thinking about a private foundation it is important to think about succession planning. The founders may believe their children will carry on their charitable legacy with enthusiasm, but that may not be the case. Successive generations may not have the same passion as the founder, and often they don’t want to devote the same time to it. Much like a family business, family foundations may have generational transfer issues to consider.
Brayley: What are the alternatives to a private foundation?
Hoffstein: Establishing a Donor Advised Fund is the best alternative. These are set up under the umbrella of a charitable institution, often a public foundation like a Community Foundation. Donors can be actively involved in advising where they want their grants to be made, and the Community Foundation handles all the administrative and investment management responsibilities in a very cost effective way. The tax advantages are similar to those of a private foundation, and can be more advantageous in certain circumstances.
Brayley: Are you seeing any new trends in philanthropic giving?
Hoffstein: We are certainly seeing some of the inter-generational wealth transfer starting to take place. This is creating more conversation about philanthropy, because families may not want all their wealth transferred to the children. And that leads to discussion about what kind of charitable legacy to leave. Should it be through one-time gifts to charities, or leaving a legacy through an endowment fund or foundation? I also see more interest in strategic giving – ie: more donor involvement with a gift and more accountability expected by donors.
Brayley: What advice do you have for clients who are doing philanthropic planning?
Hoffstein: The most important piece of advice I can give is to have a well-structured estate plan in place. The tax benefits of charitable giving can be substantial, but they must be put in place properly through the estate-planning process and in particular a well crafted will. The CRA rules can be complex in this area, so it is important to ensure the planning is structured so that in addition to making a charitable gift, tax credits are available to offset taxes, such as the tax on death.
Anne Brayley is the vice president of Professional Advisory Services at the Toronto Community Foundation .